Random thoughts on the budget 2015

This is a shit budget, and I’m pretty disappointed in the media swallowing the line from the government that this is a dramatic about-face from last year.

Let’s recall last year’s budget. Australia was apparently facing a budget emergency. That was bullshit, but it was (and still is) facing structural pressure on the budget. There were two key drivers of these structural pressures: the mining boom was tapering off and Chinese demand for resources was never going to be the same; and an aging population meant that the current approach to means testing the pension and taxing superannuation was unsustainable.

The government’s response was to eliminate the carbon and mining taxes—not insignificant sources of revenue—and make deeply unpopular changes on the spending side that almost invariably affected the poor. The most obvious examples are the GP co-payment and no welfare benefits for those under 30 for six months. The charitable sector was shaved bald. No changes to anything that would affect Liberal paymasters in the finance, property and mining industries.

What’s the situation this year? It’s the same. Without China to buy our minerals we are going to need to change our economy. The dollar is coming down and with it the prospects for our manufacturing and service industries are looking up. Population aging remains a fiscal issue looking forward.

So what did the government do? Pretty much nothing: the deficit is going to come down from 25.9 to 25.3 per cent of GDP, there are no changes to superannuation taxation, no changes to the pension (indeed, the government doubled down against pension reform) and no policies that would affect Liberal paymasters in the finance, property or mining industries. 

The only substantial policies announced are an attempt to tackle the offshoring of profits by large multinationals and a change to childcare funded by reductions in the family tax benefit and parental leave. I have mixed feelings on the second policy but I mostly think it’s piss-weak.  

In what sense is this ‘dramatic change’ on last year? Sure, last year was one of the most egregiously partisan, unpopular and stupid budgets ever presented; this year they’ve given the media a smaller target. That was inevitable. More importantly, that’s the politics of this budget; the economics is exactly the same—trimming at the edges with no effort made to address long term issues.

The Liberals define the deficit as the long term issue rather than the deficit as a symptom of deeper problems that need big ideas to redress.

What could have been done?  The first thing is what every commentator not working for The Australian been saying for the past year—fix the revenue side of the budget. Improve means testing of the pension and get the family home in there. Tax superannuation in a manner that makes it difficult for rich old folk to stash income there and then draw down soon after without paying any tax (#killallboomers). Announce the grand-fathering out of negative gearing.

On the expenditure side, end the completely ludicrous fuel subsidy to the mining sector.

Then show some leadership and get to work on re-routing the Australian economy. There are a few things to be done here.

First, build infrastructure. Global interest rates are incredibly low right now, and Tony Abbot claimed on election night that he would be infrastructure Prime Minister. So far he’s only built himself a suppository. Complete the rail links Sydney has needed for decades. Drop more rails into Melbourne. Improve rural freight (using the money from the axed mining subsidy). Roll-out the NBN in urban areas.

Second, fix the funding system for education. Pretty much every economist with any sort of profile recognises that prosperity in the future is going to be all about having a skilled workforce. In this context, the government has axed the Gonski reforms and slashed university funding while encouraging tertiary education providers to charge more, happily assuming away that price increase have discouragement effects. The government also persists with its lavish funding of private education despite the wealth of papers now in existence rigorously showing that private schools produce no better test scores than public schools once you control for parental income and education level.

Fixing education would not be hard. Bring back Gonski by funding it with the money currently being pissed away on private schools. Request the productivity commission to produce a report on the higher education funding model chaired by Bruce Chapman. Make sure the review is sufficiently broad to allow for recommendations of deep changes. Too narrow a scope critically limited the Norton Review and essentially made a recommendation of fee deregulation a certainty. A proper inquiry would almost doubtless find a need to go back to some tiered approach to research capacity.

Finally, encourage the industrial transition Australia needs away from mining and finance to high tech manufacturing. We’re not talking cars here we’re talking medical equipment, high end green technology and mining machines. Australia has enormous comparative advantages in all of these industries. How can government encourage such a transition? Not industrial policy—that is a myth. Instead, the government needs to focus on the quintessential public goods that compliment a knowledge economy, notably publically funded fundamental research. They could stop sucking funding out of our premier research institutes like CSIRO and threatening to shut down our premier research facilities.

In summary, like the previous budget, this one shows a complete lack of leadership and policy nous on the part of the government. Cabinet, bar a few notable exceptions, is packed with exceptional politicians but very light on competent governors. Certainly there isn’t much new in this budget and that is a departure from last year, but that doesn’t mean there isn’t lots to criticise in terms of what is absent from this budget.