Debt

Former Howard Government Minister Amanda Vanstone has written an excellent op-ed piece for the Age on the state of government debt in Australia.

Forget about the Treasurer's pea-and-thimble surplus.  It is a farce and everyone, probably including him, knows it.  With a bit of paper shuffling he is promising to spend a bit less than he receives next year.  The real issue in Swan's budget is net government debt.

In 2009 Labor sought to lift the Commonwealth statutory borrowing limit from $75 billion to $200 billion - a 133 per cent increase.  With the global financial crisis looming, the Australian economy needed a cash injection.  Whether it needed quite as much is a moot point.  That billions of it was wasted in lousy programs and lousy management is undeniable.

One of the practical problems with stimulus spending is the task of retracting the extra funds from the economy when they are no longer required.  Theoretically, there should be a sharp short term boost in government spending to stabilise the situation, followed by a consolidation to pre-stimulus spending levels.

To implement such a strategy in practice requires a combination of political mettle and willpower.  It means prioritising some expenditures over others, and having the mental fortitude to reject many worthy but unaffordable spending initiatives.  On top of this, it requires deep cuts to the very programs that received significant funding increases as a part of the stimulus.

Unsurprisingly, many governments struggle to achieve this - they find it very easy to splash the cash around in response to a crisis, but very difficult to cut back afterwards.  Thus many 'temporary' stimuli are never properly withdrawn.

The Treasurer has often highlighted his two per cent cap on real annual spending growth as a mark of amazing fiscal rectitude.  But he uses as his baseline post-stimulus spending levels.  His idea of fiscal conservatism is to inject a huge stimulus into the economy, then limit further spending increases from those already meteoric levels and hope that revenues will eventually catch up.  True discipline would demand real cuts to nominal spending, returning the budget to something approaching pre-crisis levels.

The year that then-Opposition Leader Kevin Rudd declared "this reckless spending must stop", government expenditures were forecast at $235.6 billion.  Labor was elected just weeks after that famous speech.  In Wayne Swan's latest budget, spending was predicted to reach $376.3 billion. The debt continues to pile up, and the government continues to raise its own borrowing limit.

Last year Swan decided that rather than put our house back in order it would be a good idea to borrow more again.  He went for another $50 billion.  Now, he wants us to borrow more again.  Another $50 billion!  That will take the Commonwealth borrowing limit to $300 billion.  Swan wants to borrow four times what the Howard government was allowed to borrow.

The interest bill is more than $7 billion a year.  Let's put that in perspective.  When Swan was asked just last month why last year's bottom line forecast was out by more than $20 billion, he replied: "Six billion dollars for the reconstruction of Queensland was a pretty big hit."

So there you have it.  Every year we throw down the drain in interest "an unexpected disaster", more than the cost of rebuilding Brisbane after the floods.

Many commentators have argued that the current weakness of certain economic sectors demands continued deficit spending.  They assert that, compared to the rest of the world, our level of debt is relatively small.

By that logic, we will continue to be in fantastic fiscal shape until our debt to GDP ratio hits eighty per cent.  It took the Howard Government a decade to repay the $96 billion of net debt bequeathed to it by Paul Keating.  How long will it take to cancel out Wayne Swan's deficits?  How many billions of dollars will be squandered on interest payments?

The longer the government waits to begin paying down the debt, the more difficult and painful the task will become.  It is far too easy to become complacent about debt, particularly if you are leaving the hard decisions to the next government.

Money Down the Drain

The Opposition has rather missed the point today with its response to the SchoolKids Bonus policy, set to appear in Tuesday's budget.  Under the means-tested proposal, parents will receive $410 from the government for every primary school student and $820 for every teenager in high school. Shadow Treasurer Joe Hockey sought to link the policy to public dissatisfaction with the carbon tax:

"This has got nothing to do with education and everything to do with a carbon tax and the fact that people are about to be hit with a great big whack on their cost of living expenses," he told ABC TV on Sunday.

"The Labor Party is panicking about the impact of the carbon tax on everyday Australians and they are trying to give people a sugar hit with an upfront payment."

Mr. Hockey is not necessarily incorrect.  This policy is a transparent bribe, designed to pump some life into the government's ailing poll numbers.  But instead of seeking to link this proposal to the carbon tax, the Liberals should have been highlighting the remarkable fiscal irresponsibility of the policy, particularly within the context of an allegedly tough budget.

The SchoolKids Bonus, which will replace a Howard-era tax refund, is nominally designed to assist parents with education costs.  But the money is not targeted, nor is it conditional - the government will essentially just be sending a blank cheque to hundreds of thousands of households.

Consider, as an example, a relatively poor family in Sydney's western suburbs, with two children at high school and one in primary education.  This family would receive $2,050 from the government under Julia Gillard's proposal.  Does the Prime Minister really imagine that every cent will be spent on education costs?

Of course not.  The government has no idea how this money will be spent.  It could pay for the groceries, or new rims for the car, or even a few six packs, and Wayne Swan would be none the wiser.  There are surely many better, more targeted ways to assist parents with the costs of education.

This is yet another example of the sort of egregiously undisciplined fiscal policy that we have come to expect from this government.  The Treasurer will no doubt project a surplus on Tuesday, using all manner of financial trickery.  But if not for schemes such as this one, that surplus could have been real.

Incentivising Super

A report in the Australian yesterday detailed looming government plans to weaken superannuation related tax breaks in next month's federal budget.  The existing arrangements were designed to incentivise voluntary saving, particularly among higher earners, so as to reduce the pressure on government finances in future decades.

The finance sector has reacted swiftly to the news, with a number of industry leaders warning of potential damage to the budget bottom line in the future.  The measures currently under consideration by the expenditure review committee would aim to increase revenue by several billion dollars in the short term, undoubtedly in an effort to achieve Labor's promised budget surplus for the coming financial year.

Financial Services Council chief executive John Brogden had this to say:

"It would be very short-sighted for the government to try and pull out more tax now," Mr. Brogden said last night.  "All they'd be doing is leaving future governments with a bigger bill for pensions, healthcare and aged care."

Mr. Brogden has hit the nail on the head.  The objective of these tax breaks has always been to increase the number of self-funded retirees, thereby lowering the financial burden on future governments as the population ages.

Without unambiguous incentives to contribute voluntarily to their super, more Australians will elect to keep their wages in full.  This will inevitably mean more retired individuals on the pension, unable to fund their own care and draining money from other government services.

One could even make the argument that existing incentives for super contributions should be boosted, rather than weakened.  For example, the current system includes a cap on annual concessional contributions - the lower tax rate for voluntary super only applies until a certain point.

If you are fifty years or older, the current cap on annual concessional contributions is $50,000 ($25,000 for younger workers).  It had previously been double that, prior to changes enacted by the current government in the 2009-10 financial year.  So once you have invested $50,000 in your super for the year, the tax incentive disappears and any further contributions are taxed at the regular wage rate.

Why is this?  Surely a government with true foresight would implement policy settings with the intention of maximising voluntary superannuation investment.  All politicians seem to enjoy a good whinge about the difficulties of Australia's ageing population - well, here is a chance to do something intelligent about the situation.

This government has previously demonstrated that it does not quite understand the power of tax incentives, particularly as they apply to wealthier individuals - think of the private health insurance rebate.

David Crowe reports:

Shaping the government strategy is the belief that the investment industry will gain greatly from the increase in the super guarantee levy from 9 per cent to 12 per cent by 2020, letting all workers save more for retirement.

The increase in the levy, incidentally, is funded by employers, which means that it will be subtracted from workers' future wage growth.  But leaving that aside, this increase in the guarantee, coupled with decreased tax incentives, can only lead to greater complacency and a reduction in voluntary contributions.

In reality, the compulsory level of super investment is vastly insufficient to fund anyone's retirement, particularly as the average life expectancy continues to increase.  It is of crucial importance that workers take the initiative and save aggressively for their autumn years, even as that means sacrificing some of their take home pay in the present.

This will not happen if they see no clear, unambiguous incentive.  The tax system should therefore prompt individuals to contribute as much to their own retirement as possible.

Governments should remain eternally mindful of the fact that when they tax super contributions, they are effectively taking money from future retirees.  The less they take now, the less they will be required to fork out in the future.

Milne's First Foray

Christine Milne has quickly dipped her toes into the already thriving business of blaming Tony Abbott for everything that ails the Labor government.

New Greens leader Christine Milne says Opposition Leader Tony Abbott is to blame for creating an environment where Labor feels it is locked into delivering a budget surplus in the May budget even though economic circumstances have changed.

Have the Liberals been keen to highlight the government's fiscal excesses over the last four years? Yes. That is the opposition's job, after all.

But the reason that Julia Gillard and Wayne Swan are so politically wedded to the delivery of a budget surplus in May is very simple. They promised it. Over and over again.

When the government's fiscal credibility was thrown into jeopardy by billions of wasted stimulus dollars, Labor told the electorate that it would prove itself.  The budget would be returned to surplus in 2012-13, and that would put the government's economic credentials beyond doubt.

The government will be judged by the measure of performance that Wayne Swan himself has repeatedly laid out. Tony Abbott did not promise the Australian people that Labor would deliver this surplus. Labor did.

Swan's Surplus

Wayne Swan has been more prominent in the media lately, as he has begun to lay the rhetorical groundwork for his fifth budget, to be delivered on May 8.  The Treasurer is talking a tough game:

Yesterday, Treasurer Wayne Swan told a Sydney business breakfast that Australia should expect a tough budget in the face of lower-than-expected tax revenues and the need to reach a surplus.

"We will need to cut and cancel existing programs if we are to meet our targets and we'll need to redirect some spending to where it is needed most," he said.

This all seems a little too familiar to me.  Every year, Mr. Swan spends the month in the lead-up to his budget emphasising the need to engage in fiscal restraint.  In the past he has inevitably failed to cut spending in any truly significant way - and any cuts at all in recent years have been entirely neutralised by new expenditures.

The 'lower-than-expected tax revenues' to which Mr. Swan referred yesterday are also a recurring theme, and there is a very simple explanation as to why.  The government has staked so much of its economic credibility on a 2012-13 budget surplus that it has been forced, each year, to manipulate Treasury's forecasts in order to make the promise seem attainable.

Thus we saw some ridiculous assumptions in last year's budget.  Mr. Swan then promised that 500,000 new jobs would be created by mid-2013, yet in the last twelve months we have witnessed the Australian economy add just 10,000 net jobs.

Last year's rosy prediction of GDP growth reaching 4% over 2011-12 has been replaced by actual growth of just 2.5%.

The forecast 2011-12 budget deficit of $22.6 billion has already ballooned out to nearly $40 billion.

Mr. Swan last year predicted that the unemployment rate would drop to under 5% during 2012, and fall further in the following year, but it remains above 5% and is assuming an upward trajectory.

And of course, last year's budget predicted that tax revenue would shoot through the roof just in time to deliver a 2012-13 surplus.

The Treasurer can use 'lower-than-expected tax revenues' as an excuse if he likes, but he and his department must have known, even at the time, that last year's assumptions were wholly unrealistic.

Mr. Swan now finds himself facing a monumental task - a required turnaround of roughly $40 billion in the nation's fiscal condition within a twelve month period.

This is a problem of the Treasurer's own creation - he has consistently put off the tough decisions, choosing instead to manipulate the figures and hope for an unrealistically optimistic scenario.

When he hands down his fifth budget, Mr. Swan will undoubtedly again find a way to predict a razor-thin surplus for the coming financial year.  New taxes, with surprisingly high revenue streams, will be implemented to boost the bottom line.  Revenues will be moved into 2012-13, and expenditures shifted into the forward estimates.  Certain spending will remain off the books - the NBN being the most prominent example - and some programs will need to be cut, if belatedly.

Of course, we can also expect to see one or two overly optimistic assumptions.  The final fiscal outcome for 2012-13 may not be revealed until after the next election - so Mr. Swan's true day of reckoning may never come.