It all sounds highly contradictory because it is.
THEY'RE wary of green shoots in Canberra. It could be a weather thing: the bush capital's dry expanse of suburb and scrub lends itself to a certain botanical vigilance.
But from the Government's perspective, it's also about managing expectations. When you are about to deliver a whopping budget deficit, and are sharpening the knife on a range of payments and programs, it pays not to dwell too long on good news.
It is going to be a tough budget next month. We know this because Wayne Swan keeps telling us so. On Thursday, following the release of China's official growth figures, the Treasurer gave his starkest warning yet about what was to come. The budget's revenue and growth numbers would be "substantially worse" than those cooked up just a couple of months ago. And they were pretty grim.
But at the same time, as John Garnaut reported in BusinessDay, economists looking at the Chinese figures reckoned they did not look so bad. In fact, the surge in Chinese domestic investment looked pretty good. People were talking about a "V-shaped" recovery in China.
So who is right — the Government or the economists? Both, hopefully. There might be hints of hope bobbing up in the world economic numbers, but they're surely not going to help the Government's budget position in the next month.
The only way that preparing this year's budget will be easier than last year — when the early subprime detonations were rattling in the US but coal and iron ore prices were driving the Government's tax receipts another leg higher — is that this time all the revisions will be in one direction: down.
One particularly delicate task the Government faces will be how it sets up future budgets. It has already promised to reduce real growth in government spending to 2 per cent a year, once the economy starts to stabilise. All very good and sensible, but this will be a really, really tough ask.
It will be made tougher if the Government cannot start making savings as soon as possible. As the early Howard years showed, the easiest time for an administration to swing the axe to outlays is during its maiden term. In the latter years of the Howard government, spending growth jumped to about 4 per cent a year. It was bubble-economics 101.
So if Swan, Finance Minister Lindsay Tanner and company are serious about grappling with the growth in government spending, they need to begin next month.
But they also need to keep pumping money into the economy to help offset the recession — if they cut hard this year, they'll only risk making the situation worse.
But they also need to lay the ground for future thrift and to stimulate the economy. If it all sounds very contradictory, that's because it is.
And while they're grappling with this, they would also do well to remind voters why they elected a Labor government in the first place. To do this, they need to make the direction of their budget spending redistributive, as opposed to indiscriminate. It is common sense, not class warfare, which makes people squirm at a $200,000 grant to an elite private school delivered as part of the latest stimulus package.
One thing the Government should do is make significant changes to the superannuation system. Tax concessions on superannuation are extremely costly, and skewed to the advantage of the well-off. The skew is pretty easily understood. You get taxed little for the money you contribute to super. And the higher your income — and therefore the higher your marginal tax rate — the bigger the benefit from the 15 per cent tax rate on super.
So, a worker earning less than $35,000 a year does not get any benefit from the tax concession on super, because their top marginal tax rate is already 15¢ in the dollar. A worker on about $50,000 a year gets a tax break of around $700 based on the difference between their 30 per cent marginal tax rate and the 15 per cent tax on super. And if you earn over $180,000, you get an average of $11,300 in tax benefits from super, according to figures from Ben Spies-Butcher and Adam Stebbing from the Centre for Policy Development.
In essence, the more you earn the more you benefit. And tax breaks on super concessions cost the budget about $6 billion a year, although that figure is inflated by the one-off changes introduced by former treasurer Peter Costello that prompted a flood of money into superannuation accounts.
If the Government wanted to save money, therefore, it could tax superannuation contributions at a higher rate for higher-income earners. Or, put another way, it could offer a greater tax concession to lower-income earners as opposed to higher-income earners.
Either outcome would be easy to justify on equity or fairness grounds. And they would help with the arduous task of limiting real growth in spending.
