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Cutting Aid: Why, At What Cost and For What Gain?

The Gillard Government has today confirmed their intention to shift hundreds of millions of dollars from the overseas aid budget to the immigration budget. A total of $375 million in foreign aid will now be redirected to paying for onshore processing of asylum seeker applications. Not surprisingly there has been a significant amount of anger directed at the government from overseas aid providers in the charity sector.

The refocused budget allocations will help pay for the living costs of asylum seekers, 400 of whom have been released into the community, while their refugee claims are being processed.

The move comes weeks after the end of the parliamentary year. The contentious decision has arrived at a time when the government’s budget surplus is looking an even more impossible and unbelievable prospect than when Treasurer Wayne Swan announced that there would be four successive budget surpluses during his May fiscal statement.

Governments have a habit of making bad decisions, ones that will cause a political storm, when they think few are watching. And few likely are paying as much attention to the political debate, not just because of the toxic year in politics, but because we are coming ever closer to Christmas and there is always much less attention at this time of year.

And this latest decision about the aid budget comes after an announcement by the ALP Government that, in search of the elusive surplus, they would delay increasing the aid budget to 0.5% of gross national income by a year.

With the Australian Government moving to temporarily decrease our contribution to foreign aid, the question must be asked: What will be gained by our decision in terms of our domestic political environment?

The answer is, absolutely nothing. The chances of our budget returning to surplus are non-existent unless much more dramatic cuts are made. Returning the budget to surplus is not even seen, according to some polls, as a political necessity to help curb the poll woes facing the Labor Government.

If the Labor Party is so desperate to return to surplus, perhaps they could have considered cutting unnecessary subsidies and government programs which offer assistance to people and businesses that do not require government help.

What makes this decision harder to contemplate, even more baffling, is, as Shadow Minister for Foreign Affairs Julie Bishop has pointed out, that it comes just two months after Australia won a seat on the UN Security Council. And what did we do to help our chances of winning a temporary spot on the Security Council? Why, we played around with our aid budget, offering significant financial incentives to developing nations.

But far more important than the terrible look this has in terms of our recently won UN campaign, is the human cost of such a short-sighted decision, from a government desperate to at least appear as if they have a shred of credibility when it comes to balancing the federal budget.

Of course foreign aid can always be better targeted and is most efficiently allocated when it is focused completely on our sphere of influence.

But development aid should never be cut . This is especially the case when such funds will not be replaced by payments from other nations, when our ultimate aim is to increase foreign aid and especially not when the domestic political situation is part of the equation and will not be changed by such a decision.

This is exactly what has occurred and in the shadow of Christmas.

Not So Taxing Times

The Minerals Resource Rent Tax has commenced and it’s causing problems for the Gillard Government, including in particular, the Treasurer. What most people would not have expected is the way in which it is causing trouble for Wayne Swan. Instead of having to defend a huge tax grab, the Treasurer today was forced to respond to reports in newspaper The Australian that the MRRT failed to raise any revenue in it’s first quarter of operation. This is a circumstance few would have seen coming, though tumbling commodity prices should have provided somewhat of a warning to the pundits.

You see, the Minerals Resource Rent Tax, the renegotiated version of Kevin Rudd’s Resource Super Profits Tax was designed in an interesting way. Even though the name was changed, the new iteration was still a tax on profits. Therefore, when profits were high, the tax would be paid and when they were low, it would not.

Budget papers, released earlier this week in the Mid-Year Economic and Fiscal Outlook showed that the government believed the tax would still raise $2 billion this financial year.

A failure to clearly sell the way the tax works is the main reason that the response today was as it was. Too little time was spent saying that the tax would not raise revenue in bad times, but would in good times.

It is also a failure of design. If the ALP wanted to be sure of revenue then pegging the new tax to profits as they did was not the way to achieve a certain stream of revenue, especially one so easily impacted by poor commodity prices. To make matters worse, the new mining tax is not to prop up revenues with proceeds put away for future benefits. No, the tax revenue raised was to pay for promises made by Labor.

Clearly the turn of events this week, including the broader revenue shortfalls announced as part of MYEFO, make the prospects of returning to surplus extremely unlikely. Commodity prices for one would have to not just get back to where they were, but likely higher to make up for the time when the price was below expectations. Those prices could yet stay low for some time.

But the tough week, more accurately the tough day today did not end there for Mr Swan.

Speaking to reporters in Brisbane today, Treasurer Wayne Swan twice made a mistake when saying how much revenue the Minerals Resource Rent Tax would provide to the budget bottom line. Twice the Treasurer said that the tax would make $9 billion this financial year.

Actually, the resource rent tax is set to make $9 billion, not over the first year, but over the forward estimates, the next four financial years. It was a case of third time lucky for Mr Swan.

Ordinarily a simple gaffe like that does not mean much. It happens to politicians from time to time. However,for a Treasurer battling for a surplus and not having the numbers add up, it adds to a perception of confusion and uncertainty on the part of Wayne Swan and the Gillard Government.

The Opposition of course were crowing, enjoying a day where again, the Treasurer has been squirming over economic issues. But the celebration should also have been a tad on the difficult side for them too. The tax raised no revenue, so it was not doing the damage to the economy and businesses that the Coalition had warned about.

Federal Labor are seeing any remaining hope they had of returning the budget to surplus, which was delusional in the first place, evaporating before their very eyes.

But it is not the surplus the ALP should be most worried about the most. It is a worry, but the least of them. What they should be worried about the most is how much they might have to borrow to pay for the spending promises associated with this new tax of theirs.

The Stupid, the Strange and the Sensible in Search of a Surplus

The Gillard Government’s Mid-Year Economic and Fiscal Outlook, or MYEFO for the acronym loving political wonks, is now out. The record continues to struggle, a fact not lost on many, even the most casual of observers. After some time discussing personalities, yesterday the discourse turned to discussing economics and the economy, a welcome shift. Wayne Swan’s budget hopes were always, at the very least optimistic and at the most fanciful when he brought down in May what he believed was the first of four budget surpluses.

Revenue and tax receipts have continued to decimate the federal budget in the wake of the Global Financial Crisis and as a result of the continuing shocks in Europe and the US in particular.

The May budget revealed a small budget surplus of $1.5 billion and that has already, in four months fallen by the wayside with the prediction of the final budget surplus downgraded to just $1.1 billion in the MYEFO update from Monday. Falling commodity prices and ongoing poor tax receipts were the chief factors blamed for the below expectation forecast.

Tax revenue over the forward estimates also points to an ongoing challenge for the budget, with expectations for the current financial year $4 billion down and over that entire period, down $22 billion.

Of course new spending will also be a major problem for the budget bottom-line and that still, despite improving poll numbers, seems like it will become the Coalition’s problem from 2013. But of course that will be tempered by widespread cuts in a variety of areas. This appears likely to include some areas of spending with bipartisan support, with rhetoric from the Opposition around the NDIS particularly troubling.

As there always is with budget cuts and payment increases, there has been much debate over the past 24 hours about the main measures employed by Treasurer Wayne Swan in an attempt to complete his budget mission. Overall, MYEFO revealed $16 billion in spending cuts and extra charges.

The main features of so-called ‘mini-budget’ were limits to the private health insurance rebate, increased visa application fees, changes to the baby bonus, a delay in funding for trades training centres and changes to how businesses pay tax.

In terms of political stupidity, cutting the Baby Bonus for a second and subsequent children wins the prize. The changes simply will not be widely liked and will quite easily be fed into the ongoing cost of living debate.

However, it is an entirely sensible decision economically to change the size of the payment made to families choosing to have more than one child. This payment is merely meant to assist with the initial costs of raising children and in no way makes a dent, nor should it, in the long-term costs of raising a child.

The government’s decision to dramatically increase the price of visa application fees, including the Working Holiday Visa, is one of the most ridiculous decisions taken in the Mid-Year Economic and Fiscal Outlook. Tourism is a very important part of our economy and has been hit by natural disasters in the north and more broadly by the GFC and continuing trouble in Europe and the US. Add the high dollar to the equation and the Gillard Government looks quite stupid in choosing to increase prices in this area.

Another odd decision for the Gillard Government to make is to delay funding for trades training centres. Delaying funding for their baby, replacing John Howard’s iteration, will look stupid to and hurt some of their constituency, at least in the short-term. The Labor Party making these cuts to their own program also effectively blunt their own attacks on the Liberal Party over cutting funding to this program.

The ALP has also, unsurprisingly, decided to give big business a bit of a whack, though this time, it’s not just the big miners, but businesses earning over a billion dollars in general. Changes to how companies pay tax, from quarterly to monthly installments will raise $8.3 billion dollars in revenue for the government. The overall effect on individual businesses is as yet unclear but the extra impost and timing of it will certainly have some effects.

Increases to the private health insurance rebate will now be limited to inflation. It is possible that some of those on low incomes who might choose to enter the private health insurance market at the lower end could be discouraged, though the punitive measures already in place will probably cut the chances of that down.

We have a bit of a mixed bag from a government in an almost vain search for a surplus. There have been some stupid decisions and there are some sensible ones in MYEFO. The sensible ones though, especially in the case of the baby bonus payment, will quite likely be seen by many as the exact opposite, dumb ones by the broader public. The unpredictability of some of the measures is also met with the predictability of others.

The only question left is will this budget update hold up to scrutiny? There will be attacks on and questioning of it and the Labor Government from various quarters. The political pain that will seemingly be felt still seems unlikely to be quelled by a surplus.

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