The Deferral of Choice by Tim Brailsford

15 May 2008

This budget was potentially one loaded with choice, but what sort of choice? The Rudd government effectively hand-cuffed itself through its election promises of last year when it sought to win voters' hearts through matching the tax cuts and spending promises of the Howard-Costello platform.

Add to these election promises, the Prime Minister's determination to be seen to be economically responsible while improving the financial lot of the working family. The result is that the Rudd-Swan combination had already dealt most of its cards before the first draft of the budget. At the macro level, the budget surplus of almost $22 billion is massive, driven mainly by increased corporate tax collections and the booming resources sector. History will probably judge the last few years as a period of wasted opportunity as successive budget surpluses have been flittered away on policies and programs with little long-term impact. Perhaps this is a bit harsh as the Future Fund has been established, public service superannuation liabilities have been funded and money has been spent on infrastructure projects. Nonetheless, projects of truly national significance have been stalled or dismissed, genuine tax reform has dropped off the agenda and deep social reforms such as health, indigenous affairs and education have not been tackled.

The question lingers as to whether the current budget continues this trend. The key message that Treasurer Swan wants to impress is one of economic responsibility. The spending cuts of around $7 billion have financed the new expenditure of around $5 billion and this will please the financial markets. However, falling GDP growth at 2.75% pa combined with increased unemployment and near-term forecast inflation remaining around 4% pa indicate a rocky road ahead.

Much debate will ensue on the inflationary impact of the budget. However, the reality is that this budget is unlikely to have a significant effect on inflation in either direction as there are many other forces at play. While government spending has been reeled in, the personal tax cuts and some tax increases are inevitably inflationary. The politicised debate over inflation will unfortunately detract from some real analysis of the budget. There are some encouraging signs of longer term planning with the announcements of the infrastructure, health and education funds. However, there is little immediate expenditure and scant detail on the operations of these funds. As any business will attest, the key to successful strategy is implementation and we will have to wait to see how the government handles these expenditures.

As time progresses, this government will find it increasingly difficult to tackle the big challenges. First, there is little doubt that the global slowdown and a deteriorating domestic economy will impact on government revenues. Second, there is evidence of a concerted push by the unions for wage claims that will exert upward inflationary pressures and make it more difficult for the government to spend. Third, the inevitable political machinations will create difficulties in managing the interests of various lobby groups. The obvious winners in the budget are the working family, which is a concept now defined relative to an income level, and there will be much made by both sides of politics about exactly who is the working family.

Other big winners are foreign investors through the reduction in the withholding tax, and Defence which despite some cuts and deferrals will still receive over 7% more than last year. The losers, at least in a relative sense, are the high income wage earners but this will go down well with the electorate. However, local communities also stand to suffer as many of the spending cuts have been in niche programs and discretionary grants. While program cuts have been identified, these will inevitably flow through to specific projects. So be prepared for local councils to start to feel the pinch as communities look to keep projects alive through council funding. This budget presented a new government in its first year to make some choices. The Rudd-Swan government had an opportunity to make some politically sensitive decisions without the looming spectre of polling booths. However, it has chosen to defer such decisions under the guise of long-term planning.

The jury is out as to whether these plans will genuinely eventuate in some much needed nation-building. A longer term question for this government is how it will draw the connections between the various reviews it has instigated, many of which are still some way from reporting, and the budget initiatives. Do we interpret hints as to the future outcomes of the various reviews from the budget announcements, or indeed the lack of announcements in some areas? Where are the connections between laying the groundwork for the future and the ideas arising from the 2020 Summit? As but one example, the cuts to various innovation-led programs do not sit easily against the backdrop of the Cutler Innovation Review. Despite the enthusiasm for the new government, its ideas and the talk, the reality is that very little reform can be implemented without budget support.

While it is early days, Mr Rudd has created high expectations for next year given the humdrum nature of this budget. Can the Prime Minister and his Cabinet deliver on their vision for the nation? We will have to wait until next year.