Thursday, September 27, 2012


Governments love announcing they're going to spend money. It's just raising taxes they don't like.

At some point, however, the mis-match between revenue and expenditure becomes just too great.

This column suggests that point was reached long ago . . .


A good story captures its audience: it’s believable. Whether a film, novel or TV show, the first necessity is to get everyone to accept the premise. Inevitably, this means simplifying or ignoring some of the gritty aspects that surround us in real life. Too much clutter is distracting. The drive is to reduce the narrative to its crucial elements.

It’s just the same in politics. Most voters can’t be bothered with detail; except, perhaps, in areas they particularly care about. We do, however, follow the grand narratives each side construct about themselves – and, in particular, which party is best equipped to manage the economy.

What we really mean by that, of course, is ‘whose policies will be best for us personally?’ Recently, Julia Gillard’s promised to increase spending on education and disabled people. This fits in with Labor’s narrative – the party’s investing in the future. It cares for those who can’t care for themselves. This is also about building constituencies that will have a vested interest in the government’s re-election. But another story is working directly at cross-purposes to Labor’s narrative. When Tony Abbott’s not harping on about asylum seekers he likes to move the focus to the economy. He asserts the government is wasting money. Let’s see.

Perhaps the most obvious place to start is by examining government revenue as a percentage of GDP. The way Joe Hockey talks you’d think it’s greater now than when he was a Minister. But guess what? As a proportion of the economy, it’s lower. The Budget shows quite clearly that, under Howard, the tax take since 2000 was greater than 25 percent of GDP. Then, after Labor was elected, it fell as low as 22 percent.  This is a low-tax government.

So are the wealthy being slugged in some other way? Well, no. Tax ‘expenditures’ benefit particular activities by providing deductions. Capital gains exemptions for housing and superannuation are examples. The idea is to encourage people to invest there, but it’s those who are wealthy who benefit the most. How much do such concessions cost the budget? This year exemptions for housing and superannuation combined will cost us $67.7 bn. That is more than the entire health budget ($61 bn), overwhelmingly directed back to the rich.

Health consumes the second-largest allocation of expenditure – the biggest is social security and welfare. Ah, perhaps that’s where we can save money. Well, yes, but where exactly do you want to start? An incoming coalition government would be unlikely to cut benefits for disabled soldiers, for example. The trouble is that when you comb through the other major lines of spending it’s difficult to see where the axe would fall. Income support for seniors ($34.8 bn)? Disability support ($14.4 bn)? Pharmaceutical benefits ($ 9.6 bn)? Perhaps not. There are so many good causes. Slashing income support for carers would recoup $ 5.72 bn and eliminating the fuel tax credit scheme would provide another $5.73 bn, but no government would be prepared to wear the political pain of these actions. Neither cut would provide enough money to solve the budget problems. It’s the same when you look at other areas where savings might be made, such as childcare fee assistance ($ 4.17 bn). Rather than complain about such programs the Liberal party has attempted to extend them (often derided as “middle-class welfare) to the better-off. So the question remains; where would the cuts actually fall?

Last week Hockey told the party room he expects the mid-year statement to show the budget is at least $20 bn behind schedule. The implication: he could manage much better. But consider our growing sense of entitlement, nowhere greater than amongst the well off who believe their taxes are financing government benefits. If government spending is really to be curbed, this is an obvious area to attack. However it’s difficult to believe the Liberals would assault their own supporters and there’s no way the Nats would permit the cuts. The poorest electorates in Australia aren’t Labor’s – they return National Party MP’s.

As we age, the cost of health services is expected to grow by 4.5 percent over the next three years. How would a Liberal government stop this increase? By refusing to treat people over 92 or by increasing the Medicare levy? The Opposition could save just under $5 billion by completely scrapping the Aid budget – but even a drastic action like this would merely provide breathing space for a couple of years. Soon the old, dangerous mismatch between expenditure and revenue would reassert itself. Costs are growing faster than revenue – particularly in health. And the sense of entitlement is nowhere greater than amongst some of the (coalition) supporters who are most vocal about the need to slash spending.

The rumour is the coming mid-year financial statement will further slash defence spending. Most of the big programs are already scheduled for the ‘out’ years. But when the government announces a faster drawdown in Afghanistan, what will the coalition say? Would they keep the troops there longer? What if Stephen Smith announces we’ll make do with a smaller submarine? Abbott will make a lot of noise about it – but he won’t commit to overturning the decision. He knows he can’t afford to.

I suspect the opposition will be very keen to capitalise on the pain from any further attempts to cut spending. It assumes Labor is so on the nose already that there’s no way this government can claw its way back. The situation might be different if the public could be bothered to do some basic maths. It’s evident that nobody’s sums add up.

Labor’s problem remains centred on the sales team. Despite Labor’s recent ‘bounce’ in the polls, the reality is that politicians of both persuasions fail to inspire. Wayne Swan has proved himself completely incapable of linking Labor to our economic miracle. Lovely bloke; utterly out of his depth. Coupled with Julia Gillard’s on again, off again performance style, it’s amazing that this government even appears to be still in the game.

1 comment:

  1. Labor's problem is also the widespread perception that they are operating with policy initiatives only as knee-jerk populaist reactions, one of the points raised by Lindsay Tanner.