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Federal Budget 2004

'Long haul' Costello shortens government's horizon

'The imminent prospect of hanging concentrates the mind wonderfully' - Samuel Johnson

When Mark Latham became ALP leader six short months ago, Australia's political landscape changed overnight. A government cruising comfortably to an inevitable fourth term suddenly found itself with a real fight on its hands. The polls have had Labor in a winning position ever since.

So nobody should be surprised that Peter Costello's near-record ninth budget is the most election-focussed in living memory. The treasurer may be 'there for the long haul' - as he insisted this week - but his budget is all about the next six months. Ironically, while he is clearly keen to see the prime minister go, Mr Costello has now made a Herculean effort to delay Mr Howard's departure, at least until 2005. Opposition is not the legacy he wants to receive. He has worked hard and skillfully to cut down the Opposition's options for plausible, costed alternative policies.

The centrepiece of the treasurer's re-election bid is a bold attempt to show that - contrary to accepted wisdom - you can make a silk purse out of a sow's ear. Approaching the election, the government's only obvious economic Achilles heel was current taxation levels. Average earnings now attract an alarming effective tax rate of 43.5 per cent. Australians on just 1.3 times the average found themselves pushed up to the top rate of 48.5 per cent. In the process, for most people the much-heralded GST tax cuts have already been devoured by the monster that is bracket creep. Community resentment over rising tax and diminished services has been palpable.

So, awash with funds from the surging tax take, what better way to neutralise rising criticism than to give some back - but only to a carefully-targeted group. Tax benefits go primarily to higher-income earners. Those at the bottom - especially those without children - get very little. And there is no indexation of tax rates. So wage increases will once again quickly reduce the benefits announced, just as they did with GST tax cuts. Despite these shortcomings, middle-income families will certainly see plenty of attractions in the package, however.

In case the electorate really does prefer more services to tax cuts, as polls suggest, the government has also gone to some lengths to change course dramatically in this area to steal some of the Opposition leader's social policy clothes. Just a year ago, the eighth Costello budget was utterly silent on measures to help Australians balance work and family, despite immense community debate and the prime minister's own 'barbecue stopper' comments of two years earlier. Maternity leave lobbying was similarly ignored. But nothing drives policy flexibility like the possibility of defeat. So this budget is positively overflowing with new family policies. New maternity benefits, increased family tax payments, additional child-care places - they are all there.

If all this good news material sounds just too good to be true, the risk may lie in that old bogey - policy contradiction - which seems to bedevil all governments, especially those in heavy electioneering mode. The levers of Australian economic policy are operated by two drivers: the federal Treasury and the Reserve Bank of Australia. For two years now, the Reserve has tried delicately to stop the economy overheating by damping down a rampant housing market, without creating too sudden a slowdown. To that end, interest rates were increased four times by small increments totalling one per cent. In its last statement just days before the budget, the Reserve explained why it had decided not to lift rates again. 'The amount of monetary stimulus to the economy' was now 'significantly reduced', it said. In that context, what then will the Reserve make of the treasurer's decision to take the economy in a diametrically opposite direction with the most expansionary budget in memory? A fiscal stimulus of this magnitude must surely make higher interest rates more likely.

Moreover, on a longer view, Mr Costello's choice to spend the bulk of his surplus on election sweeteners right at the peak of the economic cycle risks difficult times when the inevitable downturn - already long overdue by historical standards - finally arrives. At a time when things are likely to be as good as they get, a projected $2.4 billion surplus is not a particularly strong position to be in, especially given the near-certainty of additional outlays in the government's election campaign. The volatility of projected budget outcomes can be easily seen from the experience of the past twelve months. Just a year ago, Mr Costello predicted a surplus of $2.2 billion for this financial year. The actual result appears to have been almost five times that amount. Volatility of this kind can operate just as easily in the opposite direction. As the Australian Financial Review has recently demonstrated, Australia's long-run budget position still looks unhealthy and vulnerable to renewed debt build-up when a slowdown occurs. At that point, Australia may regret the absence of a solid rainy-day 'nest egg', which could have been secured from the current surplus.

The government, however, will be happy to leave such considerations for another day - after it has been re-elected. As for the treasurer, he will be banking on most voters not seeing his budget gifts as merely partial return of their own surging tax payments. He seems willing to risk the resentment of 70 per cent of taxpayers who receive no relief. Looking further ahead, he will hope a prime minister Costello does not have to explain why the budgetary cupboard is bare when hard times come.

In a nutshell

Tax cuts: $14.7bn
Family assistance: $19.2bn
Super: $2.1bn
Security: $0.755bn
Science: $5.3bn
Land transport: $5.3bn

Growth: 3.5%
Inflation: 2.0%
Unemployment: 5.75%
Household consumption: 4.25%
Investment: 7.0%
Exports: 8.0%
Imports: 9.0%
Current account deficit: 5.0% of GDP, down from 5.25%

Cash surplus: $2.4bn
Fiscal balance: $0.7bn
Revenue: $194.0bn
Expenses: $191.0bn
Net debt: $24.5bn

Employment

Employment growth is anticipated to be levelling out at around 1.5 per cent, yet the unemployment rate is expected to remain at 5.75 per cent. The participation rate is predicted to dip slightly to 63.5 per cent.

Wages

Average earnings are expected to remain steady at 3.75 per cent, and Treasury expects that wage costs to be contained. It is anticipated that tax cuts by moving tax thresholds upwards (which were promised but never fully-delivered when GST was introduced) will offer a real increase in accessible income, though bracket-creep will still affect those earning more than $60 000.

Superannuation

The superannuation co-contribution scheme is an incentive for low-income earners with spare cash to save for their future. The superannuation surcharge is still to be levied on high-income earners, but progressively reduced to 7.5 per cent. Those with self-managed funds have had two significant options removed in an attempt to deny tax evasion tactics.

Families

The centrepiece of this year's budget, various measures have been designed to appeal to families. Those receiving the Family Tax Benefit Part A will receive a one-off $600 lump sum payment per child, plus a yearly $600 increase, but calculated after the family has determined its yearly tax return. Income tests for Family Tax Benefit Part B have also been relaxed. More family day care places (1500 extra places, and an extra $147.5m over 5 years), $3000 to everyone who has a baby, and Costello's encouragement for families to have more babies signal that this is a 'budget for breeding'.

Education and training

An increase of 5.4 per cent to more than $17.0bn demonstrates the government's initiative to ensure that all Australians have the opportunity to participate in education and training at the level they choose.

Higher education

$2.6bn of new funding over the next two years is provided as part of the government's higher education reform package, Our Universities: Backing Australia's Future, announced in last year's budget. As part of this, more than 34 000 new university places, including dedicated places for medical and nursing studies, will be funded from 2005. Apart from base funding of $838m, a further $146m will be made available to support regional campuses and more than $100m is dedicated to equity initiatives for indigenous students, those with disabilities, and those from disadvantaged backgrounds. Rounding out the package, $320m is dedicated to teaching and learning in universities and $119m is offered to support workplace productivity in universities, collaboration and structural reform.

Student support

From July the HECS threshold will be set at $35 000, up almost $10 000 on the current level. This will immediately benefit 185 000 people who are now repaying the cost of education. A further increase in the threshold to $36 184 planned for 2005-2006 will mean this benefits flows to more people repaying HECS. A scholarships program worth $327m will be available to help students with education and accommodation costs and two new loans schemes will provide assistance to full-fee paying students and those wishing to undertake part of their studies overseas. Further, scholarships paying students tuition fees will no longer be included in income from social security and Veterans' Affairs.

Indigenous education

Some progress in improving education outcomes for indigenous Australians has been achieved since 1996 with Year 12 retention rates rising from 29 per cent to 38 per cent but this is still well below retention rates for non-indigenous students. Continuing its commitment to providing enhanced opportunities from preschool through school, training to higher education for indigenous Australians, the government will increase funding in 2004-2005 by 4 per cent over the current year to $484.8 million to support the following program: ABSTUDY, Indigenous Education Strategic Initiatives Program (IESIP), Indigenous Education Direct Assistance Program (IEDA), Indigenous Support Fund, Indigenous VET Infrastructure Program, Indigenous Higher Education Advisory Council, and Indigenous Staff Scholarships.

Vocational education and training

The government has made significant progress in developing a national system of education and training since 1996. Each year about 13 per cent of the working age population participates in some form of vocational education and training with increasing rates among people in rural and remote areas and also indigenous Australians. 7500 new places for older workers, parents returning to the workplace and people with a disability will be made available in vocational education and training. Places will be allocated over a range of occupations and training will be delivered by Registered Training Organisations, including TAFE and private providers. New Apprenticeships will attract $725.5m in 2004-2005, continuing to provide skills development and employment for both young and mature-aged people. Currently 406 900 people are training in New Apprenticeships.

Schools

The government has allocated record funding of $7.6bn, representing an increase of $555m or 7.9 per cent over 2003-2004. Of this, $2.6bn is earmarked for state schools and students. Possibly the most important of the initiatives for schools is the Literacy, Numeracy and Special Needs Program which will attract $2.0bn over the next four years. While aiming to increase literacy and numeracy rates amongst all school children so that they can achieve the education outcomes they aspire to, this program will specifically target the most disadvantaged students, including those with disabilities. Other important initiatives for Australian schools over four years include the continuation of the National School Drug Education Strategy and support for values education and civics and citizenship education. Piloting of the Career Transition and Partnership Outreach Education Model will continue in 2005. This program provides career and transition advice to young people in the 13- to 19-year-old age group and assists those who have left school early to re-engage in mainstream education and training.

Australian National Training Authority (ANTA)

In 2004-2005, the total Australian Government appropriation funding available for ANTA is $1.2bn. This represents an increase over 2003-2004 by approximately 1.7 per cent. These funds are allocated for ANTA's operations and programs, including Training Package Development; Industry Skills Councils; Group Training; and Equity Development and Training Innovations. In 2004-2005, ANTA will manage $1.1bn of funds for the Vocational Education and Training Funding Act 1992 - funds which will be allocated to the states and territories for particular national projects.

Science and innovation

The 'Backing Australia's Ability - Building our Future through Science and Innovation' is a new $5.3bn package. It focuses on strengthening Australia's ability to generate ideas and undertake research, accelerating the commercial application of ideas and developing and retaining skills. Support for university research through the Australian Research Council will increase by 16 per cent to $481m. CSIRO will receive the largest increase in funding for decades: $1.8bn over the 2004-2005 to 2006-20077 triennium - an increase of 15 per cent compared with the last triennium funding agreement. More funding over the next several years for the following initiatives: $11.4m to continue and expand Questacon - Smart Moves program; $25.8m for the Science Connections program; $38.8m for a new program to strengthen science, technology and mathematics education in Australian schools; and $373m to continue building stronger scientific, mathematical and technological skills of Australian students and to encourage school-based innovation.

IT and security

The IT sector will benefit from a $200m boost to border control with the creation of a new computer system to screen visa applications, as well as other projects to develop systems to provide better security intelligence to government departments. The new Australian Government Information Management Office will receive just over $20m to oversee computer projects previously managed by the now-defunct NOIE. Centrelink will also receive a boost in funding to expand its call-centre activities. In the overall scheme of things, spending on defence-related and anti-terrorism initiatives is at an all-time high (intelligence agencies get a further $270m, and even Parliament House will benefit from increased security measures).

Research and development

Three R&D tax concession schemes, worth about half a billion dollars a year, will be extended for five years to encourage additional business R&D. The 175 per cent Premium R&D Tax Concession, the R&D Tax Offset and effective life treatment of R&D plant or equipment will continue with a funding allocation of $390m over five years.

The arts

'Steady as she goes' is the only way to describe funding for the arts in the 2004-2005 budget. Institutions such as the Australia Council, National Library of Australia, the National Museum of Australia, the National Gallery of Australia, and National Archives will all receive base funding, with no additional funding for staff increases. The NLA received a capital injection to build a storage facility that is earmarked for shared use by other national institutions. A continuation of funding is to be made available to the Educational Lending Right Scheme, allowing writers and publishers to receive payments for books held in lending libraries.

Overseas aid

The Australian Government will provide $2.133bn as Official Development Assistance (ODA) in 2004-2005, an increase of $239m over the 2003-2004 Budget figure of $1.894bn, and a real increase of 9.9 per cent. The ratio of Australia's ODA to Gross National Income for 2004-2005 is estimated at 0.26 per cent. This places Australia slightly above the donor average which, in 2003, is 0.25 per cent. Five guiding themes shape the program's efforts - promoting improved governance, assisting countries to access and maximise the benefits from trade and new information technologies, supporting improved delivery of basic services, strengthening regional security, and promoting sustainable resource management.

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