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Federal Budget 2000

'Political circumstances ride ruthlessly over doctrine'

[John Kenneth Galbraith]

Analysis

What a difference a year makes. Just 12 months after a cocksure treasurer rejoiced in an almost unprecedented conjunction of fortunate political and economic circumstances, Peter Costello was tonight reduced to plucking projected revenue from thin-air to protect a rapidly diminishing surplus. He is not the first federal treasurer to use asset sales to balance the books. But his resort to virtual assets, in the shape of the G3 mobile telephony spectrum, to shore up the surplus takes dodgy accounting to new levels, and out into cyberspace for the first time.

Where is the treasurer who revelled in wearing the cloth of fiscal rectitude? What happened to the man who positively flaunted his determination to cut and cut again? How did a projected $11 billion surplus just three years ago collapse to the point where, without mobile phone chicanery, it would now barely exist at all? How did the government fall so quickly from the heights of 1997, when political cartoonists sketched its leaders floating joyously in a pool of limitless money, to tonight's depths of respectable commentator assertions of structural deficit?

The answer is simple: politics.

The economic wheel of fortune has turned decisively against the government. In the days leading up to the Budget, disturbingly soft economic indicators on jobs growth, retail spending and business confidence appeared. Interest rates are rising, growth is slowing, inflation is increasing. The dollar has fallen by more than 10 per cent in the past three months. Lagging in the polls throughout this year, and facing open revolt in the bush, the Coalition Government knows it is now in trouble. Political re-packaging began in earnest with John Howard's late-in-the-day rhetorical rejection of economic rationalism. It gathered pace when he discovered foreign affairs and identified himself as protector of the Anzac spirit. Now the Budget is clearly intended to complete a trifecta of transformation and produce a new, concerned and caring image of a government listening to the electorate and responding with social policies to meet its needs. But always with a keen eye on the marginal seats it must win to retain power.

Thus, the Budget makes targeted overtures to disillusioned country voters, emphasising regional services spending. Some of the Opposition's pre-occupation with health and education is pirated, but with a carefully-limited application to those bush voters the government needs to bring back into the conservative fold. There are small increases in spending on single-income family support. These are very modest measures in the broad scheme of things. They will no doubt be quietly welcomed by recipients. But as political circuit-breakers, they are likely to be swamped by bigger issues. They may fade quickly from view.

The big threats to the government's future prospects will be any market perception of its declining economic performance - and the most obvious cause of that slide: the GST. In the 1996 Budget, the newly-elected government slashed $19 billion in public spending, to the delight of financial markets. Now observers are beginning to ask the obvious question: 'Where has it gone?' Some of the savings were certainly wasted by a succession of band-aid decisions to placate noisy interest groups. But, overwhelmingly, the fall off in the Budget's bottom-line results directly from the politics of the GST, and specifically from the $12 billion tax-cut sweetener to soothe the electoral pain of its introduction. That massive outlay dominates this Budget. And it is likely to dwarf every other political issue during the next year.

As Galbraith put it more than 25 years ago: 'some economists can make a living from the infinitely interesting gadgetry of disguise'. And so can federal treasurers when survival instincts are called upon. The smoke-screen on this occasion looks thin, however. If the market sees through it - as seemed likely even before the treasurer sat down tonight - the result could be a swift and savage marking down of the Australian dollar. Coupled with the pressures already looming from rising American interest rates, this could quickly unravel many of the budget's central forecasts, with negative effects for inflation, growth and employment.

Further political diversions will be desperately sought in coming months. And the biggest show on earth - the Olympic Games - may offer the government welcome relief soon. But any pause will be short-lived. Electors will very quickly return to hip-pocket normality. Spending initiatives aimed at vulnerable electorates may retain only peripheral attraction for the Coalition's alienated constituencies. Overall, the Budget's social-policy fledglings are unlikely to prove a match for the GST cuckoo which will share the political nest with them.

In a nutshell

A budget surplus of $2.8 billion, heavily reliant on a cash injection of $2.6 billion from the sale of the new mobile telephone spectrum. Reduced (but still robust) GDP growth of 3.75 per cent. GST-fuelled inflation rising to 5.25 per cent. Unemployment down to 6.25 per cent. A $1.8 billion program of expenditure on regional and rural Australia, featuring health and education initiatives. A $2 billion new apprenticeship scheme. A small, $124 million increase in funding for universities and higher education. Modest increases in single-income family support. Reduction in foreign aid. Stronger means testing for welfare payments. Further crackdown on illegal immigration. No Timor tax levy.

Employment

Mr Costello's assumptions on employment are among those fairly described as 'heroic'. With current job-vacancy data weak and the economy slowing, his estimate of unemployment at 6.25 per cent by June 2001 - down from the current 6.75 per cent - will be difficult to achieve. The latest unemployment data - due this week - are likely to be heading in an opposite direction. Mr Costello's assertion that historically-low unemployment rates are within reach will be tested in the year ahead. But years of public sector savagery may at last be over. Employment in the federal public service and related areas is tipped to rise by 3150 jobs. And the boost to spending on apprenticeships will be seen as a positive move.

Wages and industrial relations

The treasurer's sanguine comments tonight about 'moderate' wage growth are similarly questionable. With inflation rising sharply, there is likely to be pressure on the wages front. Many current industrial agreements contain clauses which permit unions to re-open wage negotiations if the effects of the GST are greater than the government has forecast. And, in any event, the Budget's own figures confirm average wage growth of 4.25 per cent for 2000-2001, compared with the estimated 3 per cent for the current financial year. Moreover, rising interest rates will do nothing to dampen wage pressures.

Retirement policy

The imminent GST poses enough planning questions in itself for employees close to retirement. So the complete absence this year of any changes to superannuation rules will be welcomed by most older workers. For superannuation, the year's most significant event will be the super guarantee levy rise from 7 per cent to 8 per cent from 1 July 2000. Perhaps the only negative, for some contributors, is the continued failure to make real progress on the promised superannuation choice for employees.

What's in it for libraries?

While the shadow treasurer may describe this Budget as a 'phoney' - a good pun if ever there was one - it is all only too real for libraries. The implementation of the New Tax System from 1 July moves libraries into the position of tax collectors for the goods and services tax and withholding tax. This role shift brings with it new administrative and reporting requirements. It also has the potential to change the nature of many of the resource-sharing arrangements which have served the sector well for many years.

The treasurer's delight in reducing public debt to 7 per cent of GDP (compared with the United States and the United Kingdom's 50 per cent) is of little comfort to libraries as they watch their purchasing power decrease and existing or potential budget deficits increase as the value of the Australian dollar erodes against the American dollar (half a cent during the speech) and British pound. Those economists who argue that the level of public debt is not necessarily an indication of the strength (or perceived strength) of the economy have a point.

On a more positive note, funding for research and literacy and numeracy programs is ongoing.

Book Industry Assistance Plan

At the program level, the Department of Communications, Information Technology and the Arts will receive a total of $47.2 million over four years, to administer a number of components of the Book Industry Assistance Plan. 2000-2001 will see the long-awaited introduction of the Educational Lending Right scheme (ELR). Eight million dollars is provided in the financial year for payments to eligible publishers, authors, editors, illustrators, compilers and translators in recognition of their literary contribution and to acknowledge that income is lost from the free multiple-use of their books in educational libraries. The ELR scheme builds on the existing Public Lending Right Scheme.

The Association is a member of the steering committee for a campaign administered by the Australia Council to promote books, reading and literacy. Funding of $2 million a year over four years will be provided.

The Plan also includes an allocation of $300 000 to contract the Australian Bureau of Statistics to collect annual statistics on book publishing and retail sales over this four-year period.

National cultural institutions

Australia's national cultural institutions will receive a total funding package of more than $500 million for this financial year.

The government has allocated $1.6 million over the next four years for the National Archives of Australia to make the official papers of former prime ministers more accessible to the public.

Education

The budget offered little to inspire although there will be some assistance for universities and schools.

After several years of severe cuts, universities will receive extra funding in the next financial year, although the increase of $124 million is unlikely to do more than cover the cost of inflation.

Within the $461 million allocated to research, infrastructure and research training, initiatives include:

continuation of the Strategic Partnerships with Industry - Research and Training (SPIRT) Scheme to improve links between universities and industry;
$10 million per annum from 2001 for projects addressing rural and regional issues;
annual funding from 2001 to the Research Infrastructure Equipment and Facilities (RIEF) Scheme to enable purchase of large items of research infrastructure for collaborative use by universities, research organisations and industry.

A National Biotechnology Strategy will be funded over four years from the Industry, Science and Resources budget to assist commercialisation of Australian biotechnological research, gene technology research and other initiatives.

Non-government schools again benefit from the federal government's policy to strengthen the non-government schools sector in order to give parents 'greater choice' in education for their children - receiving approximately 64 per cent of total funding allocated for schools.

The Australian Student Traineeship Foundation which assists work placements for students undertaking vocational training while at school has been extended for another four years. The Jobs Pathway Programme which provides a broad range of support, including literacy and numeracy training, to prevent 'at risk' young people from becoming unemployed will receive $10.3 million in funding for 2000-2001.

Injections of funds into the Assistance for Isolated Children Scheme and other related schemes indicate that the government is addressing issues identified in the National Inquiry into Rural and Remote Education, in particular issues of access to education.

Vocational education and training

Vocational education and training is boosted with increased funding to institutes of technical and further education and to employer incentives under the New Apprenticeships Scheme. In a further expansion of the scheme which currently provides training for more than 250 000 Australians will enable:

skills shortages in some areas to be addressed;
innovative approaches to recruitment of new apprentices;
pre-vocational courses for the most-disadvantaged in the labour market to be offered;
wide dissemination of information about the benefits of the scheme.

The Language, Literacy and Numeracy Program, a new program resulting from the amalgamation of the Advanced English for Migrants Program and the Literacy and Numeracy Program, will be offered for unemployed people, including migrants.

Continued funding over the next four years has been allocated for the Job Placement and Employment and Training Programme. Last year under this scheme some 14 000 students were placed in 138 projects.

Information technology for all?

Budget papers and speeches are curious things: so much data and yet so often little information to distil. Whilst it is obvious to most analysts that the windfall sale of the mobile phone spectrum (one must ask why digital television did not go under the hammer in the same way) created a comfortable environment for reducing debt, it is also clear that the wave of information technology (spectrum sales notwithstanding) has primarily passed, and that more serious effort is spent in other areas, such as biotechnology, remote education, the GST, and preventing submarines from sinking.

Digital television is upon us, which will have far-reaching ramifications for communications around Australia (and not just in the entertainment/broadcasting arena) - although it is hard to judge if the push to get digital services to regional and remote areas is as successful as the ALP promise to deliver optical fibre to every household.

The digital push is all-pervasive, but the methods by which governments around the world promote such activity (through auctions of the various spectra) is of some concern to countries with a high level of investment in communications per capita. Australia, with not only great physical distances between communities, but also vast distances between us and our neighbouring countries, must have highly-efficient and competitive communication infrastructures to help drive the information economy on which we will thrive. Extracting top dollar values from the auctioning of spectra may be seen as pork-barrelling from a purely cynical perspective, yet these funds - windfall or not - could have been used to improve the overall quality of communication services that Australians will need to remain globally competitive.

Alas, the 2000-2001 budget does not indicate a significant level of commitment to the improvement of our communication infrastructure. In all fairness, it could be said that the reduction in our overall debt should come first. However, in the world of communications, most governments are moving too slowly to have a real impact - and without a large social investment, the communication revolution will make the information poor/information rich divide even larger.

Financial picture

Treasurer Costello has brought in a budget with a cash surplus of $2.8 billion which contains the tax cuts promised under the GST. The introduction of the new tax system on 1 July will deliver income tax cuts worth $12 billion a year.

From 1 July:

company tax will drop from 36 to 34 per cent. It will drop further to 30 per cent after the 2000-2001 income tax year;
wholesale sales tax will be abolished;
income tax will drop to a top rate no higher than 30 per cent for 80 per cent of taxpayers [the new scale of income tax rates puts a zero rate on incomes up to $6000 a year; 17 per cent on incomes from $6001 to $20 000 a year; 30 per cent on incomes from $20 001 to $50 000 a year; 42 per cent on incomes from $50 001 to $60 000 a year; and 47 per cent on incomes above $60 000];
capital gains tax will change - individuals will pay tax on only 50 per cent of net capital gains [for individual small businesses, 75 per cent on any capital gain on active business assets owned for at least 12 months will be exempt from capital gains tax].

All of the GST funds will go to state and territory governments. In return, from 1 July, the states and territories must start to remove narrow and inefficient taxes on which they now rely. The first taxes to be abolished will be bed taxes, followed by stamp duties on shares and financial institutions duty after 12 months.

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