Once again, the rhetoric and reality of the Budget do not meet. The Government would like us to believe that it has attacked the deficit by hacking government spending and sparing taxpayers from further impost. No so. In fact, the sum of government outlays were left unchanged, though there have been big cuts in some places and largesse elsewhere. All the attack on the deficit came from the revenue side, which is up 4 per cent in real terms. Most of this is in natural growth and bracket creep by individual income-tax payers.
That said, the Government has had to face an underlying deficit of substantial proportions. A decade of figure juggling has meant that Australia has been deluding itself thinking that the Government can go on providing without us having to pay for it. The deficit had to be dealt with, the question was whether it was to be sooner or later. The Government elected to do it sooner. It wants to deal with the pain early so it can bask in the gain later.
Overall there has been an unwelcome income redistribution from the very poor to the lower middle … cynically, from people who would mostly vote Labor to people the Government wants to convert to Liberal voters.
Lot of well-targeted programs, especially in welfare areas, have been targeted in a different way … for the chop. Program by program some of the cuts and tightening up look reasonable, but the overall effect is an income redistribution. That said, it may be hard to argue against some of the cuts on labour-market programs which were not working well and were due to be phased out anyway.
Overall, the budget is fiscally responsible. Though the same overall result might have been achieved with slightly less pain for very low-income people if the Government had thought about some new revenue measures. The Government should start laying the groundwork for broadening the tax base, with a well-thought-out GST, for example.
The main part of the Budget’s income-redistribution came with the family tax cuts. Essentially, they were a break for middle-class “”battlers” with children, particularly families with a child under 5 and single-income families … in this context read, wife staying at home, a notable Liberal Party constituency. That said the way those cuts were delivered were reasonably fair. Rather than delivering tax deductions, the Budget raised the tax-free threshold, so lower-income people get the same benefit as higher-income people. Moreover, the benefits rightly cut out at around $70,000.
The fairness of the new superannuation arrangements cannot be questioned. For too long high income earners have had used superannuation more as a vehicle for tax avoidance than as a genuine means of funding retirement. It means, of course, an effective end of superannuation for people on incomes over $85,000. They will be hit with a 30 per cent tax as the money goes in and a 16 per cent tax on the way out, effectively bringing superannuation into a similar tax regime as ordinary income. Many will prefer the flexibility of investing independently.
The Medicare arrangements, on the other hand, are ideologically driven and will do nothing to fix the essential problem. That problem began when the Labor Government pretended that a levy of between 1 and 1.5 per cent of income would pay for health cover. Private funds could never compete with that subsidy, so people fled from them. And they still will not be able to compete under the new arrangements that bribe or cajole people into private funds. The Government admits this, saying that they will entice only 1.5 per cent of people back to private funds. It is a drop in the ocean. Only a small amount of extra money will come into the system through these measures and there is no guarantee that the steady slide away from private insurance will stop.
Ultimately, the Government will have to increase the Medicare levy and perhaps introduce a co-payment to realistic levels and allow total exemptions for those with private cover so there is genuine competition without eroding universality.
A very commendable part of this Budget is the promise of a Charter of Budget Honesty. It will provide regular updates of the Commonwealth’s fiscal position. Before elections the Treasury will produce an independent state of the account. Both the Opposition and the Government will be able to use the Treasury to cost each other’s programs. It will not guarantee an end to fiddling the books or the traditional cry of the cupboard is bare after a change of government, but it will certainly provide a more certain base for voters to judge the performance of governments. It better be put in place soon … before the rot sets in.