While the government is looking for any distraction it can find from the economy, it is banking on unlegislated budget cuts hidden beyond the next election. By Mike Seccombe.

The government's $14.2 billion budget fantasy to sell an election

Treasurer Joe Hockey confers with Prime Minister Tony Abbott.
Treasurer Joe Hockey confers with Prime Minister Tony Abbott.

Prime Minister Tony Abbott calls it a “very clear commitment”. Richard Denniss, chief economist of progressive think tank The Australia Institute, calls it an “outrageous lie”.

Whatever you call it, it represents a big loss for people who can ill afford it.

We’re talking about Abbott’s oft-repeated recent assertion that there would be “no adverse changes in superannuation under this government in this parliament”.

Denniss says, quite correctly, that Abbott in fact promised quite the opposite before the 2013 election: that he would make adverse changes to superannuation. “What’s more,” Denniss says, “he passed them.”

Denniss is referring to a worthy initiative called the Low Income Superannuation Contribution scheme, under which lowly paid workers – those earning less than $37,000 – currently have their super contributions modestly supplemented by up to $500 a year.

The previous Labor government introduced the measure in recognition of the fact that low-income earners were being penalised by the superannuation rules, which tax contributions at a flat 15 per cent. This amounted to a big tax break for high-income earners, but meant those at the bottom of the income scale were actually paying a higher rate on their super contributions than they paid on their other earnings.

Abbott went to the election promising to scrap Labor’s superannuation supplement, and he kept his promise. The repeal bill passed the parliament on September 2 last year.

So why should we not all share the Denniss view that the prime minister’s assertion is a lie, when legislation has already passed that will clearly adversely affect the poorest workers?

Because of the last three weasel words in his denial: “in this parliament”.

Under the terms of a deal brokered with the Palmer United Party, the lowest paid workers will continue to get their super topped up through financial year 2016-17. Given that the last possible date for the next election is January 14, 2017, it is technically true to say they will not be adversely impacted during the life of this parliament.

1 . Cuts delayed till post-election

It’s a similar story with the schoolkids bonus, a payment made to low-income families to defray education costs – $422 for primary school children and $842 for secondary school children.

For now, it continues to be paid, in biannual instalments each January and July. Low-income families with school-age kids are getting their midyear payments at the moment. They won’t be getting them for much longer, though.

The last payment will be in July 2016. By the time January 2017 comes around, when the next payment would have been due, we will have a new parliament.

Ditto cuts to the pension, that are expected to save $2.4 billion over four years, from January 2017.

The trend across almost all portfolios is this: people will lose money, but they won’t lose it until after they have voted. No doubt the prime minister is hoping they will be so focused on the much-hyped threats posed by “death cults” and asylum seekers and a national broadcaster that is “not on Australia’s side”, they won’t realise they are about to be dudded.

But it’s not just low-income contributors to superannuation and recipients of pensions and the schoolkids bonus whose votes the government is hoping to harvest before they realise that life is about to get tougher. Life is likely to get a lot tougher for most Australians, which is why we’re apt to find ourselves going to an election sooner rather than later.

The economic cognoscenti overwhelmingly suggest things are about to get pretty ugly, fiscally speaking. The end of the mining boom, the chaos in Europe and China, the collapse of government revenue – all are combining to hasten the exposure of the inadequacy of the government’s economic management. Or, more correctly, its non-management.

In the face of the challenges confronting the economy, they see a government resisting serious policy change, clinging to a Micawber-like hope that “something will turn up”.

Ross Gittins, the economics editor of The Sydney Morning Herald, put it pithily when he suggested Abbott was fanning a scare campaign on national security as that was all he was good at, “because he’s discovered he’s not much chop at leadership … because he wants to divert our attention from the hash he’s making of managing the economy”.

The Abbott government, Gittins wrote, “had one go at fixing the budget, got themselves into terrible trouble in the polls, then gave up”.

Even within the government, some have started calling it policy paralysis. But it’s better described as stubborn inertia than paralysis.

Having come to power dramatising the structural problems in Australia’s budget as being far more pressing than they actually were – Labor’s apparent “debt and deficit disaster” – the Abbott government brought down a first budget replete with big cuts to spending but which did little about revenue. The cuts were immediately seen as grossly regressive, hitting low- and middle-income Australians.

2 . Budgetary projections a mirage

According to a recent accounting by the Grattan Institute, the 2014-15 budget included measures projected to save $14.2 billion in 2017-18.

“Of these,” it said in its recent report, “Fiscal Challenges for Australia”, “$5.9 billion have been passed, $5.8 billion are stalled in the senate (but are included in the budget projections) and a further $2.5 billion have been abandoned.

“The government has booked another $2.3 billion in savings in the 2015-16 budget. If all the measures passed, they would only restrain spending growth by about 0.8 per cent a year. Even on these forecasts, spending will remain a larger share of the economy than at any point between 2003 and 2008.”

And revenue continues to tank. Yet there is no more sloganeering about debt and deficit. The government would have us believe it is tracking surely and steadily back to balance. The wildly exaggerated pessimism has been replaced by wildly exaggerated optimism, as expressed in a budget of deep hopefulness.

The hard business of governing has been deferred as Abbott runs on distractions, with his 10-flag press conferences, his appearances kitted out like George Bush on a US warship, his stage fights with TV panel shows.

“In the last budget, the government raised the white flag on serious reform,” says Danielle Wood, Grattan Institute fellow and one of the authors of the report. “I think they were still reeling from the political reaction to the first budget. They made the choice not to take any difficult new measures either on the tax side or the spending side.

“Instead they’re relying on some pretty optimistic projections to deliver a surplus in five years’ time.”

Those optimistic projections, Wood suggests, are likely to be proven foolish sooner or later. “I think 2017 is when people will start to see these things play out.”

First among them is the assumption that the government will collect “an awful lot more” in personal income tax over coming years as a result of bracket creep – the process by which people move into higher tax brackets as their wages and salaries inflate over time.

The government would have us believe that in the next three years, the budget position will improve dramatically, going from a deficit of $41 billion to only $7 billion.

“Of that,” Wood says, “$25 billion comes from their expectation of personal income tax collection above GDP growth – bracket creep.”

There are two problems with this. The first is that this means of raising extra revenue is inherently inequitable.

The average tax rates for people in middle-income groups will increase by between 1.5 and 2.5 percentage points. For example, a person 60 per cent up the income scale, earning $50,000 a year, will go from paying an average tax rate of 17.1 per cent in 2015 to 19.1 per cent in 2019.

The top 10 per cent of income earners, however, will see their taxes go up only about 0.4 per cent, one-sixth as much as middle-income earners.

The second problem is that people might not creep into higher tax brackets as fast as the government is hoping. The budget relies on reasonably strong wages growth in 2017-18, says Wood.

“But when you look at the current reality of wages growth, it’s very subdued. In real terms last year it was basically zero. So the chance is they will not collect as much through bracket creep as they are predicting.”

The budget is also predicated on a number of other pretty heroic assumptions. One is the terms of trade – the value of the nation’s exports relative to imports. Australia’s terms of trade zoomed upwards during the mining boom and have been falling back down since its end. But the budget assumes they will soon stop falling.

“Any terms of trade boom in Australia’s history has been symmetrical. That is, prices go up and then ultimately go down to their long-term average,” Wood says.

“But the prediction is the terms of trade will fall another 9 per cent and then stabilise at levels well above the historical average. If that doesn’t occur it will have some pretty sizeable impacts on the budget bottom lines.”

And then there are the forecasts of economic growth – 3.25 per cent growth for 2017, increasing to the historical average of 3.5 a couple of years down the track.

But there is a growing view that the historical average might not be a good guide to what is likely to happen in coming years.

In a speech in Canberra 10 days ago, former treasury secretary Martin Parkinson cast doubt on the budget forecast prepared by his old department, and suggested economic growth might be heading to a new normal of 2.75 to 3 per cent.

“On the basis of the current forecasts, seven of the last eight years saw GDP [gross domestic product] growth below potential,” he said.

If he’s right, and the economy continues to grow more slowly, the government’s prediction of a very narrow deficit in 2019 and a small surplus in 2020 goes out the window.

3 . Shifting costs to states

John Hewson, former Liberal leader and economist, now at the Australian National University’s Crawford school, has no doubt “the budget forecasts are going to unravel”.

In his rapid-fire fashion, he enumerates a range of pressure points on both revenue and spending.

“They only get to surplus by hanging onto bracket creep. I think they’ll be under pressure on that between now and 2017-18, to hand it back [in tax cuts]. There are expenditure commitments that are yet to cut in. You’ve got the NDIS [National Disability Insurance Scheme] and National Broadband Network. Despite what they say, they’re not actually funded.

“They’re going to have to do something about school reform. On climate change, they’ll either have to spend more money on Direct Action or give ground on emission targets. They won’t achieve much against multinational profit shifting and [company tax] base erosion.

“You can go through each area, big or small, and see where things have been pushed out, deferred, delayed, not addressed.”

One thing the government is doing is a lot of duck-shoving, attempting to shift costs to the states. As Hewson puts it, the government’s “simplistic” solution to the problem is to hand it off to the states “and say, ‘Here, you come up with a solution.’ ”

Once again, however, the effects will not be felt until after the next election. But they will be felt “seriously”, says Hewson. And more seriously as time goes by.

This cost shifting is happening in a range of areas. Funding for legal services is one. But the big two are health and education.

There was a government publication released at the time of the 2013-14 budget that talked of an $80 billion reduction over 10 years for schools and hospitals under the terms of a new Commonwealth–states funding agreement.

The cuts have already been factored into budget projections, even though the states have yet to sign up to the new agreement. As has been widely recorded since, the states are aghast for reasons evident in the figures from a recent report by the non-partisan Parliamentary Budget Office.

Growing healthcare costs, the office says, are the most significant spending pressure on state governments, now eating up about 25 per cent of their budgets. And over the past two decades these costs have grown much faster than the general economy, as medical services became more advanced and expensive, and as the use of these services grew. The ageing population was also a factor.

At the same time, state revenues are under big pressure. The GST is the single largest revenue stream for state governments, about 20 per cent of their total income. But it has been growing much more slowly than the general economy.

Likewise, state government spending on schools is forecast to rise faster than GDP in years to come, partly as a result of increased funding for schools with disadvantaged students between 2014 and 2019 under the National Education Reform Agreement.

As Ian McAuley, of the Centre for Policy Development think tank, emphasises: because they are intrinsically labour intensive and, in the case of health, ever more technologically intensive, “the cost of those services will always rise faster than inflation”.

But the Abbott government has determined it will in future – after the next election, of course – only increase funding to the states in line with inflation.

Thus the states are left with an ever-bigger share of the cost of providing these services, and less revenue.

“No doubt Abbott is waiting for a joint push from the states to raise the GST,” McAuley says.

“But there are lots of other things we can do first to address our economic problems. Like reform superannuation, trusts, private health insurance, capital gains tax, negative gearing. In our present tax mix, simply raising the GST – that would be inequitable.”

On the matter of inequity, it is worth returning to Abbott’s vigorous assertion that his government will make no “adverse changes” to superannuation, or at least to superannuation for higher-income earners.

4 . Inquiries a distraction

Every person spoken to for this story echoed McAuley on the matter of superannuation.

So did the government’s financial system inquiry, headed by David Murray. It found the existing tax concessions were “poorly targeted”. They overwhelmingly benefited the well-off, with almost 60 per cent of the tax breaks going to the top 20 per cent of income earners, and about 37 per cent going to the top 10 per cent.

The cost to the government of the tax breaks on superannuation, which will support the well-off in their retirement, is now almost equal to the cost of the pension, and is growing much faster.

But Abbott has ruled out addressing this, just as he has ruled out any action to address other obvious flaws in the system, such as excessively generous capital gains tax and negative gearing provisions.

His government has called inquiries into these things, such as the Murray review and the white paper into prospects for tax reform, but then pre-empted them.

Says Danielle Wood: “It’s a good thing to take a step back and have a comprehensive look at the tax system every five or 10 years, but when you start ruling things out midstream, it’s very unhelpful, particularly when the things you are ruling out are the most obvious things that need to be done, like tax concessions for negative gearing, capital gains, superannuation. You wonder what’s the point of having the inquiries.”

A cynic might suggest the point is to give the impression of activity, to use inquiries as a substitute for action.

This government has initiated dozens of them. Only this week the education minister, Christopher Pyne, announced an inquiry into how to better incentivise the commercialisation of scientific research.

It’s a good idea to inquire. Australia has a poor record in the area. Except that, as scientists promptly noted, the government has previously slashed funding for agencies that were working in just that area.

Another example: last November the government received a comprehensive, four-volume report from the National Mental Health Commission. It had taken 18 months to compile. It amounted to an indictment of the existing regime and recommended major changes.

The government sat on it for five months, only releasing it in April, after it had been leaked to the media. Health minister Sussan Ley promptly announced there would be a taskforce set up to report on how to implement the first report. It is expected to report back by October. That clanging sound you hear is another can being kicked down the road.

As John Hewson says, wherever you look, you can see the same thing: all problems pushed out to a future date. Government deferred.

And with a little luck, it won’t all unravel until after the election.

This article was first published in the print edition of The Saturday Paper on July 11, 2015 as "The $14.2 billion election fantasy".

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