Budget challenge unavoidable

LABOR and the Greens must one day face fiscal reality.

WHETHER or not it was politically wise, Joe Hockey was at least right to suggest that the budget could have been much tougher. As this newspaper has revealed, the net impact of budget changes in this financial year is only $1.7 billion, rising to $5.9 billion the next. Significant improvement in the bottom line doesn’t occur for another four years; after the next election. To match the severity of Peter Costello’s first budget in 1996, for instance, the Treasurer would have had to tighten fiscal policy by a further $12 billion this year and $20 billion the next. In the 1980s Paul Keating delivered budgets that were tougher still. Granted, the Coalition this time has come in at a different stage of the economic cycle and it doesn’t have a lot in prospect when it comes to asset sales, but these facts put the current fiscal task into perspective. By forestalling the major consolidations until 2017-18, however, Mr Hockey has ensured that the government wears political pain in the short term by announcing the measures but won’t see the budget benefits until and unless it wins a second term.

Sadly, from the point of view of proper structural reform of the budget, the area where the Treasurer has pinpointed the government could have been tougher was in the new debt levy and having it kick in at a lower income level. Yet as Mr Hockey and Mr Abbott said when they campaigned from opposition, it is the expenditure side of the budget that needs repair. This doesn’t preclude some sensible revenue reform — such as the reasonable proposal, rejected by Labor and the Greens, to reinstate indexation for fuel excise — and serious debate about more substantial taxation reform in the medium term. The so-called easy solutions spruiked by the class-envy brigade on the Left are illusory. Removing or quarantining negative gearing, for instance, was tried before and shifted investment away from rental accommodation, putting upwards pressure on rents. Likewise, suggestions that the removal of superannuation concessions would reap an extra $30 billion fail to take account of the mobility of investments. Although there is merit in some retirement income reform, such as including the family home (beyond a set value) in pensioner asset tests and placing a cap on the amount that can be invested in individual super accounts.

At its most stark, the national fiscal challenge is akin to the household task of curtailing spending to match earnings. Unlike households, trying to increase income is not an easy option; raising taxes can hurt prosperity. So, reaching back to Mr Hockey’s crucial London speech about ending the age of entitlement, the Coalition is on the right path. Labor and Coalition budgets have fallen into the trap of allocating too much middle-class welfare — like a form of charity in the boom times — that has burdened us with a recurrent spending problem. Winding it back was never going to be easy. But the first Abbott/Hockey budget has made a modest start. And Treasury Secretary Martin Parkinson has underscored the need for “structural savings” in health and education spending.

As political correspondent David Crowe details today, modelling for a single parent family with two children on a salary of $45,000 shows they are set to suffer a 15 per cent reduction in government payments over four years. Crucially, they would still receive $12,317.97 annually (down from $14,178.58), which is about double their $6500 income tax — so they are clearly net recipients from the tax system. When governments attempt to curtail the welfare spend, obviously it is those in receipt of payments who feel most pain. The key is to ensure the system provides an adequate safety net, maintains sufficient incentive and is affordable. Mr Abbott and Mr Hockey were unwise to use fairness as a justification for their debt levy because it invited critics to compare how much extra some taxpayers paid to how much less some welfare recipients received. Tax that net contributors give up is money they have earned and pay to the government; whereas money net tax recipients receive is money other people have earned. We must always steer the budget, the economy and the population towards self-reliance.