Petty savings

For all the tough talk before the Budget, the cuts announced on Tuesday night were small scale and posed no risk to Wayne Swan taking the title ‘ Australia’s highest taxing and spending Treasurer’, which has traditionally gone with the job. As Tim Colebatch says in The Age this morning:

IF LABOR made no policy decisions this year and put the budget on automatic pilot, federal spending next year would have been $287,828 million. Instead, after months of work by the razor gang, federal spending estimates have been cut to $287,764 million.

Spot the difference? In net terms, Labor cut federal spending by 0.02%. Its net cuts totalled $64 million — $1 for every $4500 the Government spends.

As Treasury’s historical data shows, there have been eight budgets since the fall of the Whitlam government with lower increases in real spending, four of them under Labor.

Though I am pleased that the FTB B and the baby bonus are to be means tested, this is more a symbolic change than a big saving, with only $173 million less spending in 2008-09 as a result. Those two programs between them will still increase their spending by $707 million, of the nearly $2 billion in total increases to official family payments. The Education Tax Refund, which is effectively an extension of FTB A, adds another billion.

And though I hate to criticise any effort to cut spending, no matter how minor, some of their cuts were very low quality cuts. As Andrew Leigh has already pointed out, the cuts to the ABS will reduce the quality of important labour market information. Among other cuts, the Year Book will not be produced next year. While the information in the Year Book is available elsewhere on the ABS website, it is difficult to find for people who don’t know their way around the various statistical series. Members of the public just wanting a quick fact or figure – many of them from ‘working families’ – are the losers here. This is all to save a trivial $22 million, which on my quick calculation is equivalent to about one morning of family handouts.

I think the cutting of Ministerial and Opposition staff by 30% – saving about $27 million and taking us into the early evening of our day of family handouts – is also shortsighted. Staff burnout is a big issue in politics, and with a man as PM who famously has no regard for work-life balance wit ill be an even bigger issue for Labor than it was for the Coalition. (A Rudd government ministerial staffer recently responded to to my information request in an email timed at 1.23am).

It isn’t a terrible budget, but it is a disappointing one, because the first budget in the electoral cyle is usually the best of the three. It’s downhill from here.

19 thoughts on “Petty savings

  1. Agree about the ABS cuts – the Year Book was one of the dozen or so essential resources that even the tiniest public library in WA was provided with. Even an untrained clerk working for the local council could become familiar with what was in those dozen books, and from them, answer a lot of your everyday reference questions.

    It looks like the National Library hasn’t fared very well either – users in the future will find a few more gaps in the collections.

    I think I must be a Whitlamite financial conservative: much as I would like a new billion $ sports stadium, and a half-billion $ museum etc I don’t want them if it means that, according to last week’s WA state budget, even in this boom, state debt is going to double over the next 4 years. I would love to apply a razor to the WA state government – problem is that managment is now so poor in the public sector you need to spend twice as much as you should to just get even mediocre output.


  2. It seems the issue here is not what they cut, but what they added on. Of course, Labor’s made a big thing about keeping their (mostly expensive) election promises- and most of those have now been accounted for- so maybe next years budget will be a little more conservative.
    You’ll notice a lot of their rhetoric is basically just different ways of arguing a basically Liberal agenda: economic responsibility, family values and all that follows.
    This makes a lot of sense for a government just getting on its feet. They have actually looked into scrapping or cutting various unneccessary spending measures, but every time the idea gets leaked to the public there’s been a huge backlash, lead interestingly enough by the “small government” Coalition.
    I think next years budget with be a better indicator of their economic mettle. The circumstances will have been shaped almost entirely under their management so they’ll have no excuses when it comes to tackling real challenges facing Australia that require serious reform and all the unpopularity that comes with it.


  3. Not sure where Colebatch got his stats. According to Budget Paper 1, Statement 6 (spending), table 2… the PEFO estimate for 08/09 is $294.2b and the latest estimate is $292.5b.

    That looks like a bigger decrease. But that’s misleading. The ALP actually introduced $1.3b of new spending, which was offset by parameter variations.

    So the impact of policy decisions (the “razor gang”) was actually to increase spending, and increase tax.


  4. Andrew, one could legitimately argue about the quality of some of the cuts in spending but it is ridiculous to look at absolute spending and revenue figures (as Colebatch and now Nelson have done) and claim or imply that this is “high taxing, high spending” government.

    In a growing economy the only sensible benchmark is the ratio to GDP. Now look at Table 2 Page 10-9 of Budget Papers no. 1.

    You will see that government tax revenue as a % of GDP rose under Howard from 22.3% in 1995/6 to 24.7% in 2007/8. Under Rudd, taxation revenue is projected to fall from 24.7% of GDP to 23.9% in 2011-12. Government spending will fluctuate but basically resume the downward trend that we saw under Howard in his first two terms (but not the last two)..

    When you consider that the Swan budget is likely to be quite deflationary – reducing domestic demand by 1/4 to 1/2 per cent – and that his will happen at a time when unemployment is likely to rise by up to 1 percentage point, I consider this very “brave’ and the Government deserves praise for its courage. Fortunately it has left itself an opening to draw on the three investment funds (capital and income) from 2009-10.

    As for Brendan Nelson’s address in reply, I was very Impressed with his delivery and style but as to policy substance I thought it was fiscally irresponsible and environmentally stupid. What do you think?


  5. Fred – From a macroeconomic perspective, share of GDP is relevant. But government spending can be judged according ot the purposes it should fulfill, where the appropriate benchmark is unlikely to be GDP, which is a poor proxy for health, education or social security needs. Indeed, to some extent these needs should be negatively correlated with GDP growth, since greater private wealth should reduce reliance on the state (not that is has, due to government policy, but at least in theory that is what would happen all other things being equal).

    Though I wasn’t so keen on Nelson’s Ruddesque pretending he is PM despite being Opposition Leader, I thought his speech generally hit the right notes. It was as much about trying to convince Liberal supporters that the Opposition still stands for the things they believe in as anything else.


  6. Regarding your last paragraph, we’ll just have to wait and see about future budgets. You don’t know what’s in the future budgets and to make a judgement that it’s ‘downhill from here’ is pretty laughable. Who knows, you may be right. I for one will be judging each budget as I see it.


  7. Andrew, Nelson’s rhetoric was fine but did the Coalition live up to its own “mall government” principles? The answer is they did worse than Rudd is proposing. Indeed, the comparison is much more unfriendly to the Coalition if you look at absolute levels of public expenditure because GDP was rising strongly under Howard (thanks to a booming world economy) than it is projected to grow under Rudd.


  8. I agree. I am a working family and I used to read the ABS Year Book every night, with an Alcopop, alas no more!
    What this discussion really points out is all budget cuts are unimportant unless they directly impact on ME.


  9. Fred – We should be careful not to overstate the Coalition’s ‘small government principles’ – with the exception of John Hewson and perhaps Howard for a while in the 1980s this has never been a serious ideological commitment. ‘Smaller than Labor’, perhaps. My critique of them as ‘big government conservatives’ wasn’t just a cheap shot, it was taking seriously a Liberal ideology of big government that was in fact broadly consistent with long-standing Liberal commitments, such as to the family, private health, and private education. They can consistently attack a Labor version of big government if the divide is not big/small, but how the money is spent.

    Alastair – Of course I don’t know for sure what will be in future budgets, but I know what the incentives are – to make any decision that will upset people as long as possible before the next time they will get to vote, and to hand out the electoral bribes just before they will vote. And there is still plenty of pent-up demand for more spending from Labor’s constituencies.


  10. Andrew

    Re 7. You have argued previously that you prefer to look at spending in real terms. However, in fact there are lots of reasons why this is not the appropriate benchmark. A large share of public spending on health, education etc is related to wage costs while age, disability, and service pensions are wage-linked as is parenting payment single, and unless they have changed the legislation so is Family Tax Payment Part A in an indirect way. Demographic change is also likely to put an upward pressure on real spending on health and pensions. Really, only unemployment payments could be expected to behave in the way you say – fall in real terms in good economic times – and isn’t unemployment predicted to increase?

    So unless we expect falling real wages, we should also expect increasing real spending in a large part of the budget. Now you can argue that the Government should do more cutting, but you should also recognise that spending as a share of GDP is usually regarded a the appropriate benchmark for assessing the size of government.


  11. Peter – I would not claim % of GDP measures to be irrelevant, but the previous Treasurer used them to claim that his spending record was much better than it actually was. Family benefits, the second biggest item in the budget, should not increase in step with GDP as more families should be capable of self-reliance during periods of prosperity. Similarly, while health and education wages will be bid up during periods of prosperity more people will also go private, which though subsidised is much less expensive to the state than the public alternative.

    In my original big government conservatism piece, I used a demographic measure, spending per person, on the grounds that this was closer to the underlying spending drivers than GDP.


  12. Andrew — that was the wrong chart to look at if you want to see revenue & spending decisions. It is inappropriate to call a tax a “saving”. The traditional term for higher tax and higher spending has been “higher tax and higher spending”. It has a certain ring to it.

    Change is the spice of life. I’ve changed most things in my life since birth… so I thought I’d extend that theme to my name.


  13. Temujin – I agree that calling a tax a saving is incorrect, but that table does separate out genuine savings from new taxes. It says that there will be $5,338 million less spending and $5, 274 million in new spending, leaving spending $64 million lower on a new measures basis (of course higher spending on continuing programs means that total spending is well up). On top of this, there are $1,918 million in new taxes.


  14. The actual budget documents are also clear. There will be more revenue ($2.4b) and more spending ($1.3b) in 2008/09 resulting from policy decisions, compared with the PEFO estimates.

    Higher spending on continuing programs is considered a “parameter variation”. The budget documents clearly say that new policy will lead to higher tax and higher spending. Check BP1, statements 4 (revenue) and 5 (expenses).


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