The $6bn question totally evades the Gallery
Terry McCrann
28sep04
LABOR'S wage-setting plans pose a real and serious threat to interest rates - John Howard's $6 billion 'spending spree' does not.
The hyperventilating headlines on the $6 billion in yesterday's newspapers -- especially the 'quality' broadsheets -- were exceeded in their basic silliness only by the accompanying commentary.
The most 'outstanding' was the Financial Review's Laura Tingle, who claimed Howard had set a "new land spending record of about $200 million a minute."
Tingle was presumably asleep when Peter Costello delivered his Budget last May, unveiling tax cuts and new spending adding to $46 billion over the same four years.
As he took 30 minutes to read his speech, my calculator suggests
that worked out around $1500 million a minute. Some record, 'set' by Howard.
The $6 billion -- over four years -- is just not a big figure on its own. At an average $1.5 billion a year in a $200 billion-plus a year budget and an $800 billion a year economy.
On its own, its impact on the economy will add to four-fifths of five-eighths of very little. In more rigorous terms: diddly squat.
Amusingly, the number was put in immediate context by Telstra -- which is giving shareholders an extra, wait for it, $1.5 billion this year.
Yesterday it announced a $750 million share buyback and has already foreshadowed an extra $780 million dividend over and above what it normally pays.
Further, it intends to repeat this give-back in each of the next two years. And if it ends up doing it, as is likely, in the fourth year as well, it will have handed out, wait for it, $6 billion over four years.
Yes, Telstra is a big company. And yes, it does have its hands in most of our pockets. But it's still no federal government with its taxing power.
Ah, might come the response. While the $6 billion is not a particularly large number -- despite what we just claimed -- it comes on top of all the other spending by the Howard Government.
That's the $6 billion or so previously spent in the campaign, plus of course that $46 billion back in the Budget in May.
This brings us to the more general problem of the lazy and ill-informed commentary from the Canberra Press Gallery and its leading lights such as Tingle.
Every one of those dollars the government is spending has been 'funded'. And how has it been funded? By a commensurate, at least, increase in projected revenue over what was previously expected.
Now we will only of course discover whether the projected revenue -- through 2007-08 -- is real, as the future unfolds.
And if it doesn't, just maybe the extra spending will be desirable anyway, to help offset what would then have to be a serious downturn in the economy.
That aside, this is very different to the big spending in the mid-1980s and again in the mid-1990s, which was not funded. And so created big deficits.
This brings us to the even lazier aspect of so much of the Gallery 'analysis' -- lumping all 'spending' together.
In fact, of the measures unveiled since and including the Budget, a very significant part -- arguably the majority -- has been real or de facto tax cuts, not really new spending.
The measures up to and including the latest $6 billion add to roughly $62 billion over the four years to 2007-08.
It sounds like, and is, a big number. However $15 billion of it was tax cuts -- giving us back some of what should never had been taken in the first place but for bracket creep.
A further $17 billion was the family benefits measures. Yes, they are formally spending measures, but they can sensibly be considered as a form of tax cuts.
For most people, there's very little difference whether you give them a payment per child, or a tax rebate. It puts money into their hands, for them rather than government to spend.
So a little over half of the big number is not really 'spending' at all, but real or defacto tax cuts.
And the Howard 'spending spree' comes back to a more modest $30 billion or so over four years. A number big enough to impact on the economy -- but for the fact that it's balanced by a commensurate increase in revenue.
The government takes an extra dollar out of the economy and puts an extra dollar back in: broadly the overall impact is neutral. And certainly for interest rates.
Despite what a former member of the Reserve Bank board had to say on ABC radio yesterday.
If he had his time over, Professor Bob Gregory would 'rephrase' his comment that "interest rates are primarily determined overseas.
If so, how come our official rate never went down to the 1 per cent that prevailed in the US and Japan, or the 2 per cent of Europe?
Obviously he meant to say, determined "by the state of the world economy".
But even that is simply wrong. What happens here, including the influence from overseas, determines the interest rates.
And to cut to the chase, the one thing that could cause the Reserve Bank to aggressively push up rates -- as Gregory should know from his time on the board -- is any sign of a wages breakout.
That breakout can happen in one of two ways. Money wages going up, or labor productivity falling or just stalling.
And that's why Labor's plan to take us back to a wage-setting future somewhere around 1980 is a real threat to future interest rates.
Especially if it were to come to pass and hit business and consumer confidence.
While 'spending' that leaves the forecast surplus actually a little higher than previously anticipated is no threat.
Changing numbers
The silliness of getting all excited by that $6 billion figure can be further demonstrated by the way the budget numbers changed between May and the election update.
In May, the surplus was projected at $6.3 billion (on an accrual basis) over the four years. In the update that had jumped by $14.5 billion (of which the Government has spent less than $8 billion) to $20.8 billion.
Did it cut spending? -- no the exact opposite. Did it raise taxes? -- no, apart from bracket creep.
A thumping $19.6 billion increase in the projected surplus (more than the actual number, because of new extra spending) was due to "parameter variations".
Broadly that means, stronger economic forecasts projecting higher revenues; and changes in how much a new spending initiative will actually cost when you start to see what happens when it is implemented.
My point: the budget bottom line can change by $20 billion virtually overnight due to such "parameter variations".
So there's little point in hanging too much on a $6 billion program figure.
