The Guardian 21 May, 2008
Budget 2008-09:
Pandering to the big end of town
Anna Pha
"What we now propose is nothing less than this: The greatest modernisation of the architecture of the Australian economy ever contemplated in our peacetime history", Treasurer Wayne Swan told the National Press Club in Canberra on May 14. "The budget assumes the biggest transformation of the role and responsibilities of the federal government, in the pattern of our federation, for well over sixty years", Swan said. He may not be exaggerating; the Rudd government’s first budget could well be laying the foundations for the destruction of the so-called "welfare state" and a radical overhaul of the role of government.
On the surface the budget looks pretty ordinary. There are tax cuts, public service cuts, handouts to big business, a few environmental measures, assistance to various social groups, more money for the military, another budget surplus and the usual rhetoric about meeting the challenges of the 21st century and strengthening Australia’s economic foundations. The only difference is that what appears to be the usual rhetoric, is not.
Hidden behind all of the publicity about fighting inflation, delivering for working families under pressure, who gets what tax cuts, and the "winners and losers", Treasurer Swan is laying the basis for a long-term strategy. "I believe investment for the future is the most far reaching and significant element of this budget", he said.
"We have already developed substantial plans to modernise Australia. In last night’s budget we set aside the resources to implement those plans."
The pillars of this transformation are the development of special funds, a total revamp of the taxation and social welfare systems, measures to increase productivity and a new federalism. The resources being set aside come from whopping budget surpluses, forecast to be $16.8 billion for 2007-08 and $21.7 billion in 2008-09.
Future funds
The $60 billion Future Fund was set up by the Howard government to meet the Commonwealth’s unfunded superannuation liabilities by 2020. At present these superannuation payments are paid out of general revenue.
Around $40 billion is allocated for investment in three new "nation building" funds out of 2007-08 and 200-09 budget surpluses.
The Building Australia Fund kicks off with $20 billion over the next two years. It will be used for infrastructure in rail, roads, ports and broadband, working closely with the private sector.
The initial allocation to the Health and Hospitals Fund will be $10 billion for renewal and refurbishment of hospitals and the funding of major medical research facilities and projects.
The initial budget allocation for the Education Investment Fund will be $11 billion, $6 billion of it from incorporation of the Howard government’s Higher Education Endowment Fund. Its purpose at this stage is to fund capital expenditure in higher education institutions, but speculation is rife that it will later be extended to cover schools.
By the end of 2008-09 a total of around $100 billion will have been put into these funds. It is criminal that teachers and nurses are so underpaid, schools and hospitals so short staffed, that people die on waiting lists for diagnosis or treatment, that thousands are homeless and public housing is being wound back, yet there is $100 billion to spare. Carers, people with disabilities, pensioners, the unemployed and many other groups battling against the odds were offered peanuts, and remain in desperate conditions while the markets splash this public money around the globe.
These funds will operate independently of government and be managed by the Future Fund, whose board draws heavily on "experts" from the private, financial sector. They will be free to gamble on share markets, in all sorts of high-risk ventures, and could even be used to come to the rescue of reckless corporate misadventures.
PM Rudd reassures big business that these funds are there to assist them. "We won’t be overriding or substituting investment by private enterprise", Rudd told the Press Club. "And we won’t be overriding or substituting competitive processes or market disciplines. On the contrary, we will ensure that market mechanisms are robust and strong."
Inflation furphy
One of the reasons given for investing, rather than spending the $40 billion, is to fight inflation by reducing demand for goods and services in the economy.
It might do this, but it is not the prime purpose of these funds. Inflation or no inflation they would have been set up anyway. These future funds are a key component of the long-term strategy that Swan was referring to when he told the Press Club that the budget had "set aside the resources to implement those plans".
Statement 3 of the budget papers, raises the importance of looking beyond the forward estimates period (four years). "One indicator of the Government’s longer term financial position and ability to withstand adverse economic shocks is its available stock of financially liquid net assets."
Funds of this type, owned by government, are known as sovereign wealth funds. They have multiplied in recent decades, particularly in the Middle East and Asia. Some are built on budget surpluses, others on oil or other trade surpluses.
A number of these funds have used their liquidity, not to counter economic shocks on government budget sheets, but to rescue major western banks during the present global financial crisis. UBS, Morgan Stanley and Citigroup are amongst western banks that have turned to government-owned funds from the People’s Republic of China, Abu Dhabi, and Singapore when western investors were unwilling to put money into their plunging shares.
Amidst a credit squeeze and deepening global financial crisis and with the US sliding further into recession, the Australian government could well be looking at using its $100 billion or so in liquid funds to come to the aid of the crisis-ridden financial sector.
The Reserve Bank with its reserves plays a role with currencies and money supply, but it cannot make the high-risk investments on share, futures and other markets that these funds will be able to do. We have yet to see what — if any — transparency or accountability there will be over how the funds invest their monies. The use of these funds on capital projects will, however, go to parliament.
In the longer term, as these funds build up their role may be extended to provide recurrent funding for health, education and welfare and be used to provide a safety net for those who cannot provide for themselves.
The Rudd government is promoting the concept of "self-reliance".
New federalism
Through co-operation and other means the plan is for the states to work closely with the Commonwealth to develop a national approach on a wide range of regulations and laws. These include a national education curriculum, training accreditation, water management, health and safety standards and building codes.
The Loans Council, made up of federal and state government representatives, will be brought into the act to limit how much governments can spend. The question of eventually abolishing the states was raised at the 2020 Summit, and could well be on the agenda.
The new COAG Reform Fund will be used to funnel payments to the states.
There is a great deal of hype about productivity in the budget, with the focus on tackling the massive infrastructure shortages and decades of neglect. The government is still going to leave a great deal to the markets; its main role will be to provide capital assistance and negotiate priorities with the private sector.
The second arm of the productivity drive is the supply of skilled labour, preferably low paid. Section 457 visas will continue, thousands more skilled migrants will be brought into the country and many more workers and school leavers given training.
The third aspect is reducing labour costs by such means as holding down wages and other savings. This is talked about in terms of preventing "inflationary wage breakouts", spin doctor talk for increasing profits.
The Taxation Review will be looking at reducing the "tax burden" on the corporate sector, and this budget contains measures to do that for foreign investors.
Lowering corporate taxes
Compared with the Howard era, the tax cuts and the raising of the Low Income Tax Offset (a form of rebate) apply to people on lower and middle incomes, rather than being of most benefit to the rich.
Overall the trend is towards reducing income tax. The big changes will follow the Taxation Review which is due to issue a discussion document in July, and its final report by the end of 2009.
This review has a broad brief to consider state and federal taxes, the taxation of savings, assets and investments; the role and structure of company taxation; the welfare system; and the taxation of consumption. It must not raise the rate or broaden the base of the GST or touch the tax-free superannuation payments for those over 60 years of age. In addition there is the need for international tax competitiveness — a reference in particular to lowering corporate taxation.
Neo-liberal through and through
The main thrust of the budget pursues the same goals that the Coalition government, but in a much more cohesive and strategic manner. The changes are being largely driven by the demands and needs of transnational corporations and financial conglomerates and resulting economic and social consequences of their activities.
The underlying philosophy is neo-liberalism. The main differences between the Coalition and Rudd lie in the political and social approach. For example, there are differences on what extent, if any, the state should play in providing a residual role in providing a safety net for people who fall through the cracks under a system based on self-provision.
It is not surprising that while some tabloids such as the Adelaide Advertiser and Sydney Daily Telegraph give the impression it is a budget for the working class, the markets and big end of town are not complaining.
Next week The Guardian will examine the plans in store for the welfare system and some other aspects of the budget.