Federal Budget 2014: Brain audit needed for budgeteers

Peter Switzer is one of Australia's leading business and financial commentators and founder of the Switzer Super Report, a newsletter and website for self-managed super funds.

 

 

If it wasn’t so important to investment, consumer spending, confidence and even the Aussie dollar, you could dismiss this pre-Budget brawling just like a bash-up in Bondi by ageing corporate heavyweights.

No, this is not just a battle between the Abbott Government trying to get bad news out of the way in its first year versus a Labor Opposition that would love to use the Tony Abbott trick of chanting “broken promises” to make this Coalition in Canberra team a one-hit wonder.

This is about fixing a deficit and debt problem that could come back to bite us if another GFC came our way. And with the world economy awash with cheap money, the next day of reckoning could be a doozy!

Beware a GFC Mark II

Though I do think this is some years off, we can’t afford to procrastinate on our repair bill or else, as Michael Knox of brokerage Morgans argues, “the debt ratings agencies could take away our AAA-credit rating and that would push up interest rates here”.

Spotlight on spending

Park that potential punishment for Budget-repair tardiness and focus on the Commission of Audit released last week. This was treated as if it was the Budget itself, but in truth was a business view on government spending and what reductions could be made to get the most bang for the buck spent.

Take your pick, Joe!

It really is like a smorgasbord of spending cut options for Treasurer Joe Hockey to serve up to his Prime Minister and Cabinet, and many of these will feature in some form in the Budget next Tuesday and undoubtedly in ensuing Budgets over the next few years.

That said, many of these recommendations will be banished to the dustbin of good but unsellable ideas, while others will be incorporated into some overdue reality-based reforms.

The key proposals

Here are the big ideas in a nutshell, with my brief comments:

• Pension age to go to 70 by 2053 – that seems to be a perfect punishment for Gen Y!

• The preservation age where you can get your super tax free goes from 60 to 65, which makes sense as we are living longer.

• A family home worth $750,000 or more should be in the asset test – crazy and the home value is too low if you are mean and stupid enough to accept this vote-killing idea!

• Five per cent of public servants chopped – that’s not as vicious as I was expecting.

• Paid parental leave capped at $28,500 for six months – that’s more realistic.

• $15 co-payment for GP pop-ins – which is on the high side but I think we have a very cheap medical system that needs to be protected from abuse by users.

• Private health insurance becomes virtually compulsory for the wealthy, which makes sense.

• States to be even more responsible for education.

• The National Disability Insurance Scheme to be grown more slowly – seems economically sensible as the whole show seems to be based on trial and error.

• Higher uni fees – they’re high enough.

• Sell a lot of assets such as Australia Post, National Broadband Network, etc., which I have no problem with.

• Family Tax Benefit B to be abolished and Benefit A will have tighter conditions – these are less affordable these days given where the nation’s debt could head.

Reality bites

And it is the concerns over where our debt is heading that will be the criteria used to judge the appropriateness of next week’s Budget measures. If you are an alarmist on the debt matter then all decisions will be seen as appropriate to right the wrongs forced onto us by Labor’s mistakes.

The d-word dilemma

The PM is worrying many Aussies by saying the debt is heading to more than $600 billion but that is in many years and would only happen if Treasurer Joe Hockey and others ahead of him did nothing to turn annual budget deficits into surpluses.

Related: Why the deficit levy makes sense

Cautious optimism

Right now our net public debt is only 10% of GDP where the Yanks are at 90%, so we shouldn’t be panicking, but we do have a lot of promised spending in the pipeline – some from Labor and some from a promising PM-to-be called Tony Abbott – and so some offsetting spending cuts and tax hikes might be needed to create a plan that tells our foreign lenders and debt-rating agencies that we are heading in the right direction.

One extreme to the other

To prove this point, I recently showed in my Yahoo column that the ABC used its fact-checker service to verify two important claims from the Treasurer.

This was the first: “Of the 17 top surveyed IMF countries, Labor left us with the fastest growth in spending of anyone in the world.” The second was: “And they left us with the third highest growth in debt of anyone in the top 17 (IMF countries).”

Setting the record straight

Joe did point out that we could face $123 billion worth of deficits and $667 billion of debt without a serious Budget effort, but he did not say our actual debt as a percentage of GDP is now one of the lowest in the world.

On the debt issue, HSBC’s chief economist locally, Paul Bloxham, dismisses the AAA-rating threat and says the net public debt is small at around 10% of GDP, and he suspects the Budget won’t be as hard as the media has been predicting.

Rates to rise?

He agrees with me that the recovery does not need a Government making it any harder than it has to be with crazy ideas such as debt levies, but the downside is that he expects the RBA to raise interest rates later this year.

Stand by for my post-Budget call, which will have, among other things, my view on interest rates.

So, if Treasurer Joe Hockey plays bad cop with a mean Budget toting a debt levy, then Glenn Stevens will have to play good cop. I hope I can trust him!

Related: RBA's next move hard to predict

American hustle

One final positive Michael Knox talks about is the expected strong recovery of the US, which he says is actually an economy two times the size of China. So a slightly slowing China will be more than made up by a faster growing, and much bigger, US.

Do the right thing!

I’d prefer a softer Joe this year combined with a rampaging US economy that would mean in 2015 our economy could take some tough love, Abbott-style! Unfortunately, the playbook of politics says you are a hard bastard in year one and you go soft in the second and third years.

I hate that dumb playbook! If the Government goes too hard next week I will call for a brain audit.

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au