JUST to help you next Tuesday I am going to list 13 Treasurer’s tricks. I am sure there are more of them, but these are the main ones I have seen being refined at several dozen Federal and ACT Budgets lock-ups over the past couple of decades.
1. The Out Years. Budgets these days cost programs over the next four years. The idea is to ensure Governments take the responsible long view. In reality it leads to distortion.
Treasurers and other Ministers will say this Budget provides $X million for ABC. It sounds like a lot because it is over four years, and it soothes a lot of whingers, especially when TV and press headlines says $X million for XYZ. But only a small amount will be spent in the first year and the Government can always change its mind by the time the Out Years arrive.
2. In Real Terms. This is one to watch. It sounds like the Government is not tricking you because it is making an adjustment for inflation. But if you want to keep up with the rest of the economy, adjustments for inflation are not enough – ask any old age pensioner or anyone on those defence pension schemes that get adjusted for inflation rather than average weekly earnings.
If you want to maintain your position or if a government program is to maintain its position, it has to be adjusted along with everyone else’s increase in wealth – by average weekly earnings, not just inflation.
So “real terms” means “unreal terms”.
3. Percentage of GDP. The Government can cut spending in an area, even in real terms, but can describe it as an increase by describing it as a percentage of GDP. This is especially true for long-term comparisons when government has an obvious increasing responsibility — like health in an ageing population.
4. The biggest deception by Governments at Budget time is the failure to adjust for population increases. It is no good increasing spending in an area in real terms or even as a percentage of GDP unless you adjust for population growth.
If you increase spending on, say, education by one percent but the population rises by two percent, then you have in fact cut education spending, not increased it.
Big-growth economists argue that there is not need to adjust because you get economies of scale, but overall you don’t. You might get some temporary economies of scale but there comes a time with population growth when you need a whole new classroom, a whole new school, a duplicated highway or a whole new hospital. So while some items get some economies of scale in the short term, eventually they all reach critical mass in an expanding population and get diseconomies of scale.
With infrastructure, a two percent population increase means you have to double your efforts – two percent of total infrastructure to replace what is wearing out roughly every 50 years and two more percent for the extra population.
5. Ignoring long-term cost, or false economy. Sometimes governments tighten the belt too much. Apparently, the Government is to ignore the advice of the Parmaceutical Benefits Advisory Board and not put some cancer and schizophrenia drugs on the PBS list. It will save a small amount in not subsidising these drugs in the first year, but at what cost in the “out years”.
It is dumb. Many short-term savings come at greater long-term cost as patients without access to the subsidized drug get greater hospitalization, higher carer costs and so on.
Further, Budgets are made up of a series of departmental silos. So who cares if a little saving in the health Budget costs a larger increase in the law-enforcement Budget because a schizophrenic who would otherwise live a useful life goes out of control?
6. Tax cuts. This is a favourite of the Federal Government. Every now and then the Government changes the tax threshold at which a higher tax rate comes in. So you start paying 30 cents in the dollar (instead of 15 cents) after $40,000 instead of $35,000. The Government calls this a $750 a year tax cut. In fact, all it does is bring the higher tax rate in at the same earning power as it did five years ago.
7. No increase in taxes. This is a favourite of state and territory governments. The rate of land taxes, rates and stamp duties and the like stay at the same rate in the dollar as before the Budget. But as land values rise every property owner and buyer and the people who rent from them may pay the same rate in the dollar, but there are a lot more notional dollars they are paying it out of. No increase in taxes means in fact and increase in taxes.
8. Salami slicing or the efficiency dividend. Most Budgets now require agencies to deliver an efficiency dividend of 1, 2 or 3 per cent a year. Originally this was because industry experience revealed workers were up to 3 per cent more efficient each year. It might well work for some industries where better machinery, more powerful computers, better communications and so on mean workers produce more. But much of the public sector is just not like that.
9. Let the managers manage. Let us achieve across-the-service savings. In some Budgets governments say if we allow the managers to manage, to decentralise and to source goods and services themselves, they will be more efficient and more cost conscious and save money. Then the trend goes the other way. Government should use its massive purchasing power to get the best deal on goods and services which can be delivered efficiently across the public service with great economies of scale, the new argument runs.
Can we tell which view is correct? No. But we know that both cannot be right.
10. Currency fluctuations. The rising or falling dollar puts enormous pressure on government. The Treasurer/Ministers/Government have astutely managed the position under great difficulty. Which causes the greatest difficulty – the rising or falling dollar? We can’t tell, but, again, we know both don’t.
11. New initiatives. An erudite Chief Sub-Editor once told me that “new initiative” was a tautology because all initiatives, of their nature, had to be new. Have you ever heard of an “old initiative”, he argued with some conviction. Well, alas, yes. An “old initiative” is something that was funded last year that everyone has forgotten about, and the “new initiative” is the same thing regurgitated this year.
In the ACT a decade or more ago, the Belconnen pool was a new initiative in several successive Budgets and the “first sod” was turned several times.
12. The white elephants in the room. While shock jocks carry on about waste and welfare, and philistines express outrage about public art, the Department of Defence’s Budget goes quietly unscrutinised — $50 billion for a jet fighter here, $30 billion for a submarine there, a few more billion for tanks everywhere. Endless sums of money to buy machines that don’t work, with money we haven’t got to defend us against enemies we don’t have.
The best that can be said of some of it is that it ends up as public art in Holbrook or the War Memorial.
13. Lastly, the things in cement. When all said and done, perhaps 95 percent or more of the Budget is in cement before the Razor Gangs and the special pleaders have even begun. Nearly all the revenue and nearly all the expenditure is virtually untouchable.
So ignore Treasurers who talk about “far-reaching” measures; setting future directions; or changing economic frameworks.
They are just tinkering around well-established edges.
Enjoy your Tuesday.
CRISPIN HULL
This article first appeared in The Canberra Times on 7 May 2011.