Catallaxy Files

Wayne Swan at a presser today.

I’ve had a brief look at that material from the Parliamentary Budget Office and what it shows is that the structural deficit started as far back as 2001-02.

Such a pity that isn’t actually what the PBO report.

Poor Wayne – obviously didn’t understand the graph. It starts in 2001-02 but the structural budget deficits don’t start till much later.

(HT: Noodle)

Chris Berg, writing in The Age, tears Wayne Swan a new one:

… almost every major problem of the Gillard government can be traced back to the Treasury and its Treasurer.
…
The role of the Treasurer has an oversized place in Australia’s political culture. Australia is obsessed with its economy. In no other country do minor shifts in interest rates dominate the political conversation as they do here. For the past few decades budget surpluses and deficits have been the measure by which we judge our governments.

Perhaps we’re too obsessed with the economy. But the obsession serves us well. If you want to see what a lack of interest in public finance fundamentals leads to, then have a look at the United States … or Greece.

So no surprise the roll-call of prime ministers is filled with former treasurers. John Howard, Paul Keating, Billy McMahon, Harold Holt, Ben Chifley and Joseph Lyons have all occupied the post. Other long-serving treasurers (read Peter Costello) have been prime contenders for leadership.

Then there’s Swan. Among all Labor’s leadership buffoonery, Swan’s name has been missing. He is not just Treasurer but Deputy Prime Minister. He ought to be at the front of the queue. Wayne Swan is the only long-serving Treasurer in living memory who has been diminished, rather than enhanced, by his job.

On the Bolt Report today, in responding to questions about the budget deficit, Anthony Albanese (who at least should receive credit for turning up) said at least two things that are false.

• First, that the difference in the write down of $12 billion claimed by the Prime Minister before the budget and the close to $20 billion at budget is due to timing differences (ie: the former is from MYEFO and the latter from budget).
• Second, that the revenue writedown (misforecasting) was due to the ‘high Australian dollar’.

Let’s examine these claims. The reconciliation table for last week’s budget shows a parameter variation of negative $19.936 billion. This comprises $13.7 billion in overestimated revenue and $5.6 billion in underestimated expenditure. Importantly this is the variation since last year’s MYEFO, not last year’s budget. To compare with last year’s budget we would add the parameter variation between that budget and last year’s MYEFO, which is negative $1.7 billion.

I think that they (Gillard and Albanese) confused revenue write down (since MYEFO) of $13.7 billion with the forecast deficit. With Wayne Swan trying to explain things, I can excuse them for making that mistake.

On the second issue, the writedown due to the ‘high Australian dollar’ we only need to look at the exchange rate assumption used at last year’s budget, MYEFO and this year’s budget. In last year’s budget, the assumption used was for a USD exchange rate of 103 cents. For MYEFO it was 102 cents. For this year’s budget it is 103 cents.

Therefore it cannot be the ‘high Australian dollar’ causing the revenue writedown – the same exchange rate assumption was used in last budget as this budget.

More likely it is the carbon tax revenue estimates. Here the Government backcast the price (clearly way too high) to meet the expected abatement objectives. Then that price was used to estimate the revenue the government would receive. That’s why I think it is a bit rich for the Government to claim that the carbon price wasn’t a forecast – it was intrinsic to its economic forecasts.

Peter Costello is right with his analogy. The government can only jump 4 1/2 feet consistently in high jump. In a fit of ambition it ‘forecasts’ that it will jump 6 feet. When the jump is made, it makes 4 2/3 feet. Rather than celebrating the increase in the height jumped compared with the past, it despairs that it jumped 1 1/3 feet less than expected.

Finally in defending the appalling inaccuracy in the forecasts, Albanese stated

 Treasury figures that are done by the same people who did the figures for the Howard Government.

That’s wrong – I know the people who did the forecasting in Treasury under the Howard Government and they have long since left Treasury.

Budget Statement 4 (in Budget Paper 1) has traditionally been a ‘think piece’ by Treasury looking at contemporary economic concerns principally from a macroeconomic perspective, but also microeconomic.

The practice commenced in the 1997-97 budget as Budget Statement 3 (Structural Change: Recent Developments, Benefits and the Role of Policy)

The various topics since have been:

1998-99: The Current Account Deficit: Structural Improvements

1999-00: Economic Policy Reform and Australia’s Recent Economic Performance

2000-01: Maintaining Low Inflation and Strong Growth

2001-02: (Budget Statement 4): A More Productive Australia: Policy and Technology

2002-03: Australia’s Terms of Trade: Stronger and Less Volatile

2003-04: Sustaining Growth in Australia’s Living Standards

2004-05: Maintaining Low Unemployment in Australia

2005-06: Prosperity and Sustainability

2006-07: Australia in the World Economy

2007-08: Australia’s Labour Force Utilisation

2008-09: Boosting Australia’s Productive Capacity: the Role of Infrastructure and Skills

2009-10: Assessing the Sustainability of the Budget

2010-11: Benefiting from our Mineral Resources: Opportunities, Challenges and Policy Settings

2011-12: Opportunities and Challenges of an Economy in Transition

2012-13: Building Resilience through National Saving

A noticeable change occurred from 2009-10. The statements became far more polemics and political documents. Previous statements, including Swan’s first, were in the traditional analytical mould, eschewing partisan politics.

But starting from Swan’s disgraceful attempt to show faster spending growth under the Coalition in the 2008-09 Budget by using the CPI rather than the accepted non-farm deflator to calculate real growth in spending (which failed), Swan has moved to capture BS4 and turn it into a highly partisan and political document (he of course also started to refer to tax increase as ‘savings’.

So, for example, the 2010-11 BS4 was an attack against the mining sector in pushing for the RSPT. And the 2012-13 BS4 was to push for the increase in the superannuation guarantee from 9 to 12 per cent.

But the latest BS4 takes the cake in gutter politics. Titled “Fiscal Policy in the Current Economic Environment” it is an unashamed defence of Swan and attack on Costello and Howard.

There is no sign of humbleness when it comes to forecasting, or admitting any errors in the policy since the 2007 election.

Take for example

Australia is much better placed to achieve the right balance in setting fiscal policy, due to a track record of prudent fiscal policy, robust financial regulation and strong macroeconomic management and performance, in particular during and since the GFC.

…

In hindsight, while Australia’s fiscal position in 2007-08 was clearly strong by international standards, the structural position was less robust than the headline numbers implied as these were based on economic, commodity and financial market conditions that were not sustained and are unlikely to be repeated in the foreseeable future. Tax cuts and new spending, funded by temporary increases in the terms of trade and capital gains, led to deterioration in the structural budget position in the lead-up to the GFC. Moreover, by not allowing budget surpluses to increase significantly as revenues surged, government decisions prior to the GFC meant that interest rates had to be higher than otherwise to control inflation in an economy that was showing signs of over-heating.

…

Policy changes can also affect the tax-to-GDP ratio. One series of policy changes that is
having a particularly large impact on the tax share is the successive large cuts to
personal income tax rates implemented between 2005-06 and 2009-10. The average
personal income tax rate fell from over 23 per cent of taxable income in the early 2000s
to less than 20 per cent in 2009-10 — which meant that the personal income tax system
delivered around 15 per cent less revenue for each dollar of taxable income.
While personal income tax collections as a share of GDP are expected to return to early
2000s levels by the end of the forward estimates period, revenue forgone in the interim
will have been substantial. For example, tax receipts would have been $14 billion
higher in 2012-13 had the average personal tax rate remained at its 2005-06 level,
abstracting from any impacts the tax cuts may have had on the personal income tax
base.

Most of the statement attempts to justify the deficits and stress how important the present government’s efforts to fiscal sustainability have been – including the many ‘savings’ (ie tax increases such as the increase to the medicare levy).

This is a poorly written document with high-school level research and analysis. It will be a pleasure for Joe Hockey as the new Treasurer to order Treasury to write BS4 for the next budget. A title such as

Correcting five years of policy error

might be appropriate.

So Julia Gillard has attacked Tony Abbott’s budget reply

And what he has chosen to do is to take an axe to working people’s superannuation

by delaying the increase of the 9 per cent SGC to 12 per cent.

That’s absolute balony. The increase in the SGC was coming from the workers’ paypackets in any case. I only hope that the deferal to the increase is made permanent by a Coalition Government. As I wrote previously, it is a very poor policy. Let’s stop this further incursion by the nanny state.

In a sign of desperation, perhaps under the advice of John Hewson, Labor is about to embark on a scare campaign on the GST.

But all Tony Abbott has promised is a wide ranging tax white paper which would then lead to a second term agenda. Amongst those changes might, theoretically, be a change to the GST with the concurrence of the States. But such changes (if any) would be taken to the electorate prior to the next (2016) election. Exactly how John Howard and Peter Costello took their tax changes to the electorate in the 1998 election.

This is the honest way of making major changes of position.

Labor’s way – Gillard’s way – is to make a solemn promise (eg the carbon tax) and then break it.

I hope Tony Abbott takes heart from these words of Lex (Financial Times, 16 May 2013):

The luxury (or curse) of large modern offices is that so many people can spend so much time in meetings or on Facebook. This also explains the curious phenomenon that mass firings do not tend to do any damage. What on earth did the 30-odd thousand bankers eliminated from HSBC since 2011 do all day long? The same question might be asked about the potential 14,000 new job cuts announced yesterday by chief executive Stuart Gulliver.

What on earth do many of the hundreds of thousands of public servants do all day?

Last month Luke Malpass asked the tough questions (pdf here):

How exactly is it that New Zealand – a country that went into recession in early 2008, had a collapsed non-bank finance sector, didn’t have a mining boom, has a historically high dollar and had its second-biggest city basically levelled by an earthquake – is on track to record a budget surplus as scheduled and on time in 2014-15? This question raises a second one: why is Australia not in this position?

This graph answers that question.

Luke Malpass has an op-ed in the AFR today where he expands on the NZ budget success story.

To put this into context, whereas English has had no money and cut back, beating a credible path to surplus, since Wayne Swan became Treasurer, Australian tax receipts have increased by more than the entire New Zealand budget ($NZ60 billion revenue, $NZ69 billion expenses). Wayne Swan has literally had enough new revenue to run a small country and has delivered a whopping deficit.

Read that sentence again: “…Australian tax receipts have increased by more than the entire New Zealand budget…”. Wow. Yet Swan has still managed to run a deficit.

The government like the pooh pooh the New Zealand experience pointing to the fact that it did go into recession in 2008, and did increase the GST, and is a lot poorer than Australia. But here is the thing – this is an economy that was in worse position than Australia going into and during the GFC, without a mining boom, without the massive increases in revenue that the Rudd-Gillard government enjoyed and they have managed to get their budget in order.

(H/T The New Zealand Initiative)

Tonight, I want to directly address you, the Australian people.
While it’s easy, and understandable, that you should be pessimistic about this government, everyone should be optimistic about our country.
Our health researchers have saved hundreds of millions of lives through breakthroughs in everything from infectious diseases to cancer vaccines to ulcer treatments.
Our military personnel stand ready to protect people in some of the world’s worst trouble spots.
Our universities are educating the future leaders of our region.
Our musicians, artists, actors and film-makers are making their mark all over the world.
Our resource exports have helped hundreds of millions to move from the third world to the middle class.
And, with the right product, our manufacturing, too, is capable of competing with the best in the world, even with the high dollar – as demonstrated by Cochlear, Blackmores, Murray Goulburn and RM Williams, whose boots I’m wearing tonight.
We are a great country and a great people let down by a bad government.
Bad governments always pass.
What should never dim is our faith that Australia’s best years are ahead of us.
So my purpose tonight is to assure you that a Coalition government will do what’s needed to restore the hope, reward and opportunity that should be your birth right.
Our Real Solutions Plan will build a strong and prosperous economy for a safe and secure Australia.
Margie and I know the pressure that every Australian – that each one of you – is under.
We’re not crying poor but we run a household with power bills, rates, health and education costs to be paid all the time.
Margie runs a community-based occasional care centre which has to live within its means just like every small business and every family.
Governments’ first job is not to make your life harder.
But this government has – with its carbon tax, broken promises, and skyrocketing debt.
Australian families are paying for this government’s mistakes yet all you ever hear from the Prime Minister and the Treasurer are excuses and promises to do better next time.
Should the Coalition win the election, there will be no nasty surprises and there’ll be no lame excuses.
No surprises and no excuses.
The Coalition’s Plan has two objectives: first, to take the budget pressure off Australian households; and second, to strengthen our economy so that, over time, there’s more to go round for everyone.
Only by delivering a strong economy can government deliver a sustainable National Disability Insurance Scheme and better schools.
You need certainty to plan your future and you need cost of living relief.
So tonight I announce a major initiative to ease the financial pressure on Australian families.
A Coalition government will keep the current income tax thresholds and the current pension and benefit fortnightly rates while scrapping the carbon tax.
The carbon tax will go but no one’s personal tax will go up and no one’s fortnightly pension or benefit will go down.
So with a change of government, your weekly and fortnightly budgets will be under less pressure as electricity prices fall and gas prices fall and the carbon tax no longer cascades through our economy.
This will strengthen our economy – because there’ll less tax hitting Australian businesses but not their overseas competitors.
And it will help families – because you’ll have tax cuts funded by smaller government, not by taking money out of one pocket to put it in the other.
Our plan starts with recognition of economic reality.
Government doesn’t create wealth; people do.
Government doesn’t spend its own money; it spends your money.
This year’s spending is either this year’s taxes or it’s this year’s borrowing – that’s next year’s taxes.
Government spending is not a free gift but something that everyone is paying for, now or in the future.
That’s why good governments are at least as careful spending the money they hold on trust from the people as you are when making decisions that affect your family’s budget.
Parents don’t mortgage their children’s future and neither should government.
Last year, the Treasurer began his budget speech declaring, and I quote: “the four years of surpluses I announce tonight are a powerful endorsement of the…success of our policies”.
Well, surpluses would have been a vindication.
But there are no surpluses.
Not this year.
Not next year.
Not the year after that.
The Treasurer now says that there will be a surplus in four years’ time.
That’s four years after the Treasurer and the Prime Minister said that it had already actually been delivered and spent tens of thousands of your dollars boasting about it in letters to their constituents.
If a public company made these sorts of claims its directors would most likely face serious charges rather than asking to be re-elected.
If this had been the only dodgie promise, they might have got away with it but this government never gets it right.
It got the mining tax numbers wrong.
It got the carbon tax numbers wrong.
And last year’s budget commitments to boost family payments and to cut taxes didn’t even make it to this year’s budget.
This year’s supposed revenue shortfall went from $7 billion, to $12 billion to $17 billion in just two weeks – so how can ministers possibly predict a decade ahead?
The Prime Minister guaranteed there would be no carbon tax – but there is.
She guaranteed there would be a surplus – 165 times she guaranteed there would be a surplus – but there isn’t and there never will be under the government.
After seven deficits totalling $220 billion, the Treasurer can hardly congratulate himself over an almost invisible surplus, if nothing goes awry, if he’s still there, in four years’ time, in his ninth budget.
The government originally said that the deficit was “temporary”.
With seven in a row, the Second World War was more temporary than this government’s deficits.
The government promised a surplus over the cycle but this isn’t a cycle – it’s a spiral, deeper and deeper into debt which is now surging towards $400 billion even on the government’s own figures.
The last time a Labor Treasurer stood in this parliament to deliver a surplus was way back in 1989 so it’s hardly surprising that this year’s Labor surplus promises are no more believable than last year’s.
In the second line of this week’s budget speech the Treasurer said that it was a budget for jobs and growth.
In fact, unemployment increases and growth decreases.
The Treasurer spent much of his speech complaining that he was the victim of a sudden collapse in government revenue.
In fact, revenue is up 6 per cent this year and will be up 7 per cent next year.
Next year, revenue will be up $80 billion on six years ago.
That’s right, the Treasurer has $80 billion more to balance his budget than Peter Costello ever had – yet Costello delivered surplus after surplus.
We have a $20 billion deficit now rather than the $20 billion surplus then not because revenue is down but because spending is up: by $120 billion.
Madam Speaker, in 121 days, there will be an election.
It will be a tipping point in the life of our country.
The choice could hardly be more stark: three more years of broken promises, nasty surprises and weak excuses.
Or change for the better with an experienced team that will not just rebuild the economy but also the bonds of trust that should exist between you and your parliament.
The last Coalition government grew GDP per person by well over two per cent a year – under this government it’s limped along at well under 1 per cent.
The former government grew jobs by two and a quarter per cent a year – or enough to create over 2 million new jobs within a decade.
Since then, they’ve grown by just 1.6 per cent a year.
With the Coalition, you could trust government to save.
With Labor you can be sure government will spend which is why worried households are saving at the highest rate in a generation.
During the Howard years, real wealth per person more than doubled – since then, it’s actually declined thanks to weaker growth, subdued house prices and lower share prices.
Change won’t come overnight but a Coalition government will do what’s needed to strengthen economic growth and prosperity.
All the Coalition’s main policies are designed to make it easier for you to get ahead and for businesses to be more productive.
We will abolish the carbon tax – because that’s the quickest way to reduce power prices and take the pressure off cost of living and job security.
Let me repeat: We will abolish the carbon tax – because it’s a kind of reverse tariff that hurts local businesses but not our overseas competitors.
There is no mystery to how this will happen.
What one parliament legislates, another parliament can repeal and the carbon tax repeal bill, should we be elected, will be the first legislation that a new parliament considers.
We will reduce emissions with targeted incentives, not clobbering business with the world’s biggest carbon tax.
We will abolish the mining tax – because that’s the quickest way to support investment and jobs.
We will cut red tape costs by at least $1 billion a year – to give small business a much-needed break – and we’ll have parliamentary days dedicated to repealing laws, not passing them.
By cutting tax and regulation, we will boost productivity.
That will give Australian manufacturers the more level playing field they need to remain at the heart of a five pillar economy along with services, education, agriculture and resources.
We will have a once-in-a-generation commission of audit so that government is only as big as it needs to be to do what people can’t do for themselves.
We will set up a root and branch review of competition policy to ensure that small business gets a fair go and small business will be a cabinet portfolio within the Treasury department.
There’ll be an affordable and responsible Paid Parental Leave scheme because women should get their full wage while on maternity leave just as men should get theirs while on annual leave.
We will revitalise work for the dole because people who can work, should work, preferably for a wage but, if not, for the dole.
Within three years, the Coalition’s NBN will deliver broadband speeds at least five times faster than the current average for $60 billion less than Labor’s version.
We will start work within 12 months on Melbourne’s East-West Link, Sydney’s WestConnex, Brisbane’s Gateway Motorway upgrade, Adelaide’s South Road, and Tasmania’s Midland Highway, as well as key roads in Perth and parts of the Bruce Highway, because when you’re stuck in traffic jams, you aren’t at work or at home with your family.
We will duplicate the Pacific Highway, finally, well within this decade.
We will establish a one-stop-shop for faster environmental approvals so that new projects can get up and going more quickly.
We will re-establish a tough cop on the beat, the Australian Building and Construction Commission, to deliver (as it previously did) $6 billion a year of productivity improvements in a troubled industry.
We will return the workplace relations pendulum to the sensible centre, under the existing Fair Work Act, with fairer rules for right of entry and for new projects.
And we will establish a new, two-way street version of the Colombo Plan taking our best and brightest to the region as well as bringing their best and brightest here.
It will be part of a foreign policy that’s focussed on Jakarta, not Geneva.
All these commitments are affordable and deliverable.
We will deliver them in our first term of government, if we win, and will provide all the funding details after the pre-election fiscal statement is released.
But tonight, I set out specific savings to cover keeping tax thresholds and pension rates without a carbon tax to fund them.
The Coalition has already announced that we will rescind the increase to the humanitarian migration intake because – until the boats are stopped, and we will stop them – it’s the people smugglers who are choosing who comes to Australia.
We’ve announced that we’ll reduce by at least 12,000, through natural attrition, the size of the Commonwealth public sector that’s now 20,000 bureaucrats bigger than in 2007.
We’ve also announced that we’d scrap Labor’s green loans scheme for projects that the banks won’t touch.
Tonight, I confirm that we won’t continue the twice a year supplementary allowance to people on benefits because it’s supposed to be funded from the mining tax and the mining tax isn’t raising any revenue.
As well, we won’t continue the low income superannuation contribution because that’s also funded from the tax that isn’t raising any revenue.
I announce that we will delay by two years the ramp up in compulsory superannuation because this money comes largely from business – not from government – and our economy needs encouragement as mining investment starts to wane and new sources of growth are needed.
These measures alone will produce nearly $5 billion a year in savings which is more than enough for tax cuts without a carbon tax.
The Coalition won’t shirk the hard decisions needed to get the budget back into surplus.
Living within your means is not mindless austerity – it’s simple prudence.
It’s recognition of the reality that you can’t spend what you don’t have.
Households know this and it’s time governments did too.
At least for a first term, until we’re on an honest path not just to surplus but to re-paying debt, an incoming Coalition government will resist new spending commitments that aren’t fully funded, nearly always by offsetting expenditure reductions.
As far as the Coalition is concerned, the next election won’t be an auction.
Talking to people all around the country, the last thing you want is more “historic” announcements or so-called “revolutions” that never justify the hype.
Let me be clear.
Many of the measures in this budget are objectionable, the attacks on Medicare; the abolition of the baby bonus which the government had promised never to touch; robbing Peter to pay Paul on education; and forcing more businesses to do the tax paperwork monthly, not just quarterly.
But thanks to Labor’s poor management over five years, there is now a budget emergency.
Hence the Coalition may decide not to oppose any of them; doesn’t commit to reverse any of them; and reserves the option to implement all of them, in government, as short-term emergency measures to deal with the budget crisis Labor has created.
Far from cutting to the bone, we reserve the right to implement all of Labor’s cuts, if needed, because it will take time to un-do all the damage this government has done
By keeping, if needed, all Labor’s budget cuts – and – by not implementing any of their budget spending measures unless specified, we will achieve the first duty of every government: namely, to preserve the nation’s finances.
We will keep the announced spending on the National Disability Insurance Scheme and we’ll ensure that the scheme reflects the Productivity Commission’s recommendations rather than becoming just another big government bureaucracy.
I would not have ridden 1000 kilometres, the week before last, to raise money for Carers Australia if I was half-hearted about the NDIS and would never claim for just one side of politics this reform that should be an achievement for our whole nation.
On the other hand, the key to better schools, at least as much as more money, is better teachers, better teaching, higher academic standards, more community engagement, and more principal autonomy.
So that’s what we’ll work with the states to deliver.
We won’t back a so-called national education system that some states don’t support especially as this government has a history of spending more while schools’ performance actually goes backwards.
Regardless of normal political allegiance, Australians are sick of leaders who play politics ahead of governing the country and who blame everyone but themselves when things go wrong and the numbers don’t add up.
You want a grown up government like the ones that John Howard and – yes – Bob Hawke too used to run.
As soon as people know there’s a government with an economic strategy to build the country rather than just a political strategy to save its own skin, confidence will start to return to our economy.
Tax reform starts with immediately repealing the carbon tax and the mining tax and giving a modest company tax cut as soon as it’s affordable – but it doesn’t end there.
Within two years, an incoming Coalition government will consult with the community to produce a comprehensive white paper on tax reform.
We’ll finish the job that the Henry review started and this government squibbed.
We want taxes that are lower, simpler and fairer and will take proposals for further tax reform to the following election.
Right now, the blame game between the Commonwealth and the states that Kevin Rudd promised to end has become worse than ever.
Typically, over the past three years, the Prime Minister has announced massive new programmes in areas that are the states’ responsibility so she can claim the credit but the states have to pay.
It’s no way to run the country and it’s no way for adult leaders to behave.
Within two years of a change of government, working with the states, the Coalition will produce a white paper on COAG reform, and the responsibilities of different governments, to ensure that, as far as possible, the states are sovereign in their own sphere.
The objective will be to reduce and end, as far as possible, the waste, duplication and second guessing between different levels of government that has resulted, for instance, in the Commonwealth employing 6000 health bureaucrats even though it doesn’t run a single hospital.
Again, a Coalition government will seek a mandate at the subsequent election for any proposed changes.
One of the best ways to ensure that governments don’t make mistakes is to have a proper cabinet process.
That’s how Bob Hawke and John Howard ran their governments but that’s not how government is run now, as the four former ministers now sitting on the backbench have testified.
My ministers won’t need to learn how to be a good government because they’ve been one before.
Sixteen members of the Coalition shadow cabinet were ministers in the last government that actually delivered surpluses, as opposed to just promising them.
Those surpluses weren’t just John Howard’s and Peter Costello’s.
They were my surpluses and Joe Hockey’s surpluses and Julie Bishop’s and Warren Truss’s and Malcolm Turnbull’s because we were all part of the last government that Australians knew was competent and trustworthy.
Unlike the current government which never makes an announcement that isn’t supposed to be the most important thing ever, what I’m proposing is not unprecedented and shouldn’t even be remarkable.
I’m offering what should be normal: careful, collegial, consultative, straightforward government that says what it means and does what it says.
That would be change for the better.
The next election, to which this budget is a mere prelude, should not be about who becomes prime minister.
It should be about who can do more for our country – because our country is more important than any of us in this parliament.
My colleagues and I have a Plan to build a strong and prosperous economy for a safe and secure Australia.
It’s not about us.
It’s about you, the Australian people.
We pledge ourselves to your service.

The Conversation asked me to write about the budget and corporate tax.

The other corporate tax policy that particularly caught my eye related to so-called “thin capitalisation”. This is also called profit shifting. What happens is that foreign subsidiaries operating in Australia are burdened by high levels of debt by their parent company and required to pay interest on that debt. This has the effect of reducing their liability for Australian corporate income tax.

The important issue here is whether this is primarily a tax avoidance mechanism (something that is already illegal the general anti-avoidance provisions of the Tax Act) or whether there is some economic logic that underlies the practice. I am of the view that the economic logic is two-fold. First it is a mechanism whereby foreign investment is facilitated.

It is important to remember that foreign investment is risky and debt provides some security to foreign investors that they would be in a position to recover some of their investment. Then we should consider that debt has good corporate governance characteristics – viable firms with high levels of debt are less likely to squander funds on frivolous expenditure.

All up there are very good reasons why foreign investors are likely to employ high levels of debt. It allows them to have greater control over their foreign operations while reducing the risks that they may face. Reducing taxation is an added bonus.

Increased economic activity is far more valuable to Australians than the marginal increase in taxation that multinational corporations may pay if this policy were implemented. So it sounds good, but will we be better off for it? I suspect not.

Please click through and read the whole thing.

What secrets does the ABC know about Labor? Or, what promises has the ABC made to Labor?

In this Budget we find an efficiency measure for the Department of Foreign Affairs and Trade (BP2, page 160)

The Government will achieve savings of $88.4 million over six years (including $11.7 million in 2017-18, and $7.7 million in 2018-19) from a temporary reduction in Canberra-based positions in 2013-14, and more efficient management of Australia’s overseas owned estate and the Department’s capital budget. The Government will also close the Australian Embassy in Budapest, Hungary.

We also know that the ALP is soft on national security. Labor’s deficits would be higher if it funded Defence at a more appropriate level.

 Yet not only is the ABC spared any efficiency measures, but it  receives additional funding. From Managing Director Mark Scott (see page 97-98 of BP2 for further information on these measures)

I am pleased to let you know that last night’s budget delivered additional funding for the ABC in three critical areas

On top of the one-off $10m delivered to the ABC for news and current affairs earlier this year, we have been allocated an additional $59.4 m over the next three years as we seek to expand the depth and quality of our news and current affairs in the digital era. This provides on-going funding for the news initiatives, such as the establishment of the fact-checking unit, the expansion of specialist rounds and the recruitment of reporting and producing staff in new centres outside the CBD…

Recognising the ABC’s expansion into digital media services, the Budget allocates an extra $30m over three years towards the delivery of these services to our audiences. Until this budget, the ABC had been funded only to deliver services on radio and television, but not for the costs associated with delivery online and through mobile.

So there you have it. The Government is prepared to cut funding for national security and diplomatic relations, but thinks that there is no scope for efficiency gains at the ABC.

While I think we could do more in both Defence (with nuclear-powered submarines for example) and Foreign Affairs (which I have blogged about several times) within existing resources, the ABC is the poster child for inefficiency, waste and bias.

Defence, national security and diplomacy are key functions of a national government. A public broadcaster is not.

In putting the case for deferring an increase in Australia’s foreign aid, Bob Carr rightly said that we should not borrow more money to increase aid.

The same argument applies to the ABC. The Government should not be borrowing yet more money to increase funding to the ABC.

Increasing funding to a public broadcaster which is hopelessly conflicted and overwhelmingly biased to Labor and the Greens is a crude attempt to influence the election. The fact that Scott boasts of the funding increase shows he has no shame.

And therein lies the fundamental problem with the public broadcaster. It relies on the goodies provided by Labor and expects cuts under the Coalition. This is a primary factor leading to its bias. It is an intractable problem – either the ABC should be privatised, or else statutory measures should be imposed that force it to remove all commentary and analysis from its broadcasts.

Christopher Joye in the AFR:

The bottom line for defence from the budget is that Australia is still not taking it seriously. Much better to free-ride off the United States, which the budget cheekily reveals is spending twice what we do on a per capita basis. And that’s after their financial crisis!

Despite a tripling in public debt between 2007 and 2012, and what the Treasurer says will be six consecutive deficits, investment in the military, our national catastrophe insurance policy, will remain at its lowest level since 1938.