Here is my submission for the federal budget: Dear Mr Swan, please ensure that the return to surplus is done with smoke and mirrors.
I don’t agree with Ralph Norris that the commitment to provide a surplus next year is mindless: the politics of it and the international symbolism are both very potent. Having promised it, you must deliver and since you and the prime minister are both still going on about it three weeks out from budget night, you must know it’s in the bag.
But don’t tax mining companies or superannuation to achieve it, or sack a few thousand public servants or, God forbid, attack middle class welfare so they pull in their spending horns even more than they have already.
Yes, you should definitely trim here and there, but please focus your attention on fiddling the economic parameters to conjure up a bodgie 2012-13 surplus. No one will mind, really, and by the time we find out the numbers were all wrong you’ll be well in retirement anyway, or definitely heading there.
I certainly won’t attack you on budget night if the growth and commodity price forecasts underpinning the surplus look silly and unachievable. Promise. I’ll nod sagely and say: “Well, they do look a bit robust and all that, but who are we to second guess Treasury’s modelling? Those chaps have bulging foreheads and vast whirring computers. Must be correct.”
And if, after Ralph Norris’s outburst, you’re feeling a bit weak in the knees about the economics of rushing to surplus, as opposed to the politics of it, may I suggest you pick up a copy of last week’s Spectator magazine and read a piece in there by Fraser Nelson about Sweden’s pony-tailed, earinged finance minister, Anders Borg.
I suspect you’ll be passing to Mr Borg the glorious mantle of Euromoney’s finance minister of the year later this year. You won last year (oh the sheer joy of the memory, especially since Costello never did) because your stimulus and debt kept Australia out of recession; Anders Borg was recently named Europe’s most effective finance minister by the Financial Times because he did the opposite.
As the The Spectator’s Fraser Nelson writes: “What marks him out … is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not.” His only stimulus was a permanent tax cut, and he cut welfare to pay for it.
Sweden is now in surplus, and Anders Borg is a hero because Sweden had the fastest growing economy in Europe last year. Meanwhile the stimulators — Spain, Portugal, UK, etc — are mired in debt and recession.
Let’s not forget that Sweden’s starting point was a tax to GDP ratio of close to 50%; Australia’s, including all state taxes, is 30%. The federal tax to GDP ratio was 23%.
That aside, surpluses are definitely preferred to deficits and there is plenty of sound economic theory to the effect that tax cuts financed by reduced government spending are good for private sector activity, not bad. On the other hand, tax cuts financed by debt, as practiced by Ronald Reagan and George W Bush, are very bad indeed.
There won’t be tax cuts in this budget, I accept that, but please, please, Mr Swan, go easy on the tax increases. Don’t whack the miners again and leave super alone.
Far better to use smoke and mirrors and keep your head down until the galloping press pack returns to Craig Thomson or, better still, the Catholic Church.
*This article was first published at Business Spectator
But Allan, if they use smoke and mirror then the RBA won’t cut interest rate and it will lead to destruction to non-mining industries.
Speaking of middle class welfare, I hope one day they have the gut to reform negative gearing to improve the housing market for our younger generation. Study has found that we are getting to the stage where the under 35s are being locked out of the market, house price is about 9 times of income. We need to fix the structural inequity, we don’t want to continue on this trajectory and end up like other countries, China for example has house price 27 times of income.
They say negative gearing helps keeping rental price down but in reality it locks out first home buyers increasing more demand than supply on the rental demand/supply curve hence rental price increase.
The easiest way to deal with it is to introduce law to freeze negative gearing within six months. I would allow owners to have one home investment negative gearing against their income. If they decide to purchase more home investments after the law comes into affect and have more than one home investments, no negative gearing against personal income is allowed, the home investment portfolio should go under a business name, be opperated under a business structure. Those who already have multiple investment properties before the law comes into affect can continue to negative gear for another two years before they have to migrate their investment portfolio to a proper business and stop negative gearing.
Another alternative is to limit deductions for the cost of borrowing to acquire assets to taxable capital gains on those assets, rather than other income, and phase out the 50% general concession on taxation of capital gains. Transitional arrangements over two years sounds about right.
Interest rates are not high compared to historical levels, but they are high compared to our trading partners and that has an effect on the exchange rate. What effect will the budget, and in particular any surplus, have on the exchange rate ? Well I have read arguments that a surplus will make the $AUD a more attractive safe haven resulting in the exchange rate remaining high, and arguments that a surplus will lower the price of money, and hence the exchange rate, by reducing demand for debt.
Like which direction a frog will jump when shocked, it seems easier to rationalise after the fact than to predict.
The only way incompetent Swan will wind back the massive deficit, amid falling tax revenue, and the complete loss of business and consumer confidence is a massive tax rake, raid the future fund or cut more welfare.
He will hide behind Treasury Forecasts, forward projections, but will be found out later.
Perhaps the ploy is to create an artificial surplus, have an snap election in 2012 (cause they dismiss an MP etc), go into an election smiling, knowing his surplus was a con and they save as many seats as they can. Gillard has already setup a re-election swat team, its been reported today.
Would not put that beyond him
Astroturfer Susan Blake. Does it upset you when Swan uses Costello’s tactics. ie. raiding the future fund to obtain a “surplus”. Or is it ok for Costello to do it but not Swan.
//uatcdn.crikey.com.au/2007/03/22/broadband-brawl-exposes-costellos-50-billion-double-counting-fib/
Perhaps Costellos ploy was to “create an artificial surplus” as you say. OMG!!
Or maybe Swan could raise taxes to the level they were under Howard, you know, seeing as how the tax to GDP level is now lower under labor than it was during Howards time.
http://stephenkoukoulas.blogspot.com.au/2012/02/great-big-new-economic-and-market-quiz.html
Sweden has its own currency and thus does not face a debt burden in Euros or the diktats of the ECB. The UK, which also has its own currency, is in recession precisely because it is cutting spending.
There may be “plenty of sound economic theory” but there is a paucity of evidence that tax cuts are better than stimulus. I’m reminded of Jim Hacker’s definition of “sound” as “bent”.