Pandering to the big end of town
“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.
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.”
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”.
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.
“From welfare state to asset state”: Rolling back the government’s role
Pensioners took to the streets in Melbourne recently to protest against a budget which gave them a one-off handout of peanuts and no real increase in their below-subsistence fortnightly pension. They were not the only group to have their hopes and expectations dashed — carers, people with disabilities, the homeless, and a range of other groups were just as disappointed and angry.
It is not as if there is not enough money to spare a few million or even a few billion dollars to ease the suffering and hardships that these groups endure. After all, the government managed to find $41 billion to put in three new funds for education, health and infrastructure.
If fears that a few extra dollars in the pockets of the most disadvantaged in the community would fuel inflation were genuine, then there are many other areas where spending could have been cut without hurting people. For starters, military spending is set to increase by at least three percent per annum to fund criminal wars in Afghanistan and Iraq, and Australia’s role as the US’s deputy sheriff in the region.
The new funds and changes to welfare and other social expenditure are laying the foundations for radical changes in the future to both the role of government and funding of social and other public services. When Treasurer Wayne Swan said 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”, he was deadly serious. In the 2008-09 budget, he said, “We set aside the resources to implement those plans.”
The nature of this transformation will become much clearer following the Taxation Review which was announced with the budget. This has a very broad brief to look far beyond taxation into areas such as spending on social services, including the funding of education and health.
The extensive welfare systems that were built up following the Great Depression and Second World War in Australia and other industrialised nations have come under considerable attack and erosion in recent decades. The economic conservatives (previously known as economic rationalists or neo-liberals) have waged a persistent ideological campaign to undermine the philosophical underpinning of universal coverage and the funding of social security through a centralised, progressive taxation system. The role of the state is being rolled back and replaced by the private sector and “self-provision”.
There are a number of important trends that began several decades ago with the shift by successive governments from Keynesian economics to economic rationalism. The following are some of these trends with a few examples from the budget:
- Transfer of government funding from public to private sector — 25 years ago federal government funding to state schools was larger than to private (independent-church) schools. This has been gradually reversed — the 2008-09 budget allocates twice as many dollars to the private system which has only one third of the student population!
- Government “incentives” to use private services — deliberate, chronic under-funding of public hospitals has driven many people into private health coverage through fear of spending years in severe pain or even dying on a waiting list for public hospital treatment.
- User pays instead of “free”, government funded services — the introduction of university and TAFE fees and gradual lifting of restrictions on fees charged.
- From not-for-profit to for-profit services — this shift is most apparent in childcare and health, but also is emerging in education with private universities and private training colleges.
- Greater reliance on dog-eat-dog market forces — this is through such means as privatisation and deregulation.
- From universal access to access based on ability to pay. The prospect of a huge debt and lack of income is preventing many prospective students from further studies.
- Use of loans — HECS-HELP loans for university students instead of free places funded through taxation by government.
- Sharper targeting of government assistance through means testing — the baby bonus will be added to the list of means tested entitlements.
- Opting out of tax payments for specific services and funding your own expenses instead of using a public service — exemption from Medicare tax surcharge of one percent if private health insurance has been taken out (the threshold at which the surcharge kicks in has been raised in the 2008-09 budget).
Tax rebates replace the use of direct government subsidies. Childcare subsidies were once paid directly to childcare centres and parents paid the gap to the centre. Now parents pay the full fees upfront and then claim a means-tested rebate of up to 50 per cent through the taxation system. The new refund on (non-tuition fees) education expenses of 50 percent (with a cap) is based on this approach. Parents pay for text books, uniforms, etc and then claim a tax rebate.
One of the aims of this new approach to the provision of welfare — self-provision — is to wind back the age pension and have government completely withdraw from any direct role.
Underlying all of these trends is a shift in responsibility for the well being of society from the state to individual self-reliance and privatisation and a tightening of who can receive services or benefits from the state. In particular, health, education and other public services are being commodified, commercialised and privatised.
Personal future funds
Using unsubstantiated claims that “we can no longer afford the welfare state”, the economic conservatives promote “self-reliance” and “self-provision”. They point to an ageing population to try to justify cuts and funding shortfalls in health, pensions, aged care, etc. They argue that the state should butt out and leave it to the private sector.
This approach has been imposed on workers in the area of retirement income. The 1970s’ policy of phasing in universal aged pension coverage for retirees over a certain age and a centrally funded age pension through the taxation system has been replaced by compulsory superannuation and stringent means and assets testing.
Superannuation is based on special savings accounts or investments which become accessible on retirement. Income on these investments carries a concessional taxation rate of 15 percent and is tax-free when paid as superannuation to the retiree.
The previous government’s incentives for workers to pour more money into superannuation are largely maintained. The government is set to spend more on tax incentives (tax exemptions, tax deductions, concessional tax rates, etc) for superannuation than it will spend on the age pension! This legacy from the Howard-Costello era is set to continue. The estimated amount involved for 2008-09 is $27.466 billion on superannuation as against $26.668 billion on the age pension.
One of the aims of this new approach to the provision of welfare — self-provision — is to wind back the age pension and have government completely withdraw from any direct role. It is a cruel twist that sees billions of dollars of pension money being drawn into the very scheme that is designed to replace the age pension — private, individual, superannuation coverage.
The use of specific purpose personal savings accounts along similar lines to superannuation funds is intended to provide the basis for people to opt out of the “welfare state” and fund their own education, health, sickness and unemployment. This approach has been trialled in the US and Britain.
Such accounts would carry tax concessions and possibly top-up payments from government such as are now available to low income earners who make personal contributions to their superannuation funds. The new first home savings accounts are run along similar lines.
With the use of personal savings accounts the centralised funding of social services from government revenue could be rolled back and a residual safety net and other assistance provided from the future funds. The long-term aim is to substantially reduce or even eliminate income tax and rely solely on indirect taxes such as the GST. This would give Australia the “international competitiveness” that foreign and local business organisations are demanding.
These sorts of questions are being debated in economic circles, including amongst Labor Party figures and no doubt the Taxation Review will go some way in working out the next steps.
The privatisation of social services offers big business and financial institutions new opportunities for investment and profit-generation. Special use personal future funds also provide the banks and insurance companies with new sources of long-term capital for investment, in much the same way as superannuation funds have. In theory the future funds would provide even the poor with the means to purchase private services, or so their proponents claim.
For the people, the destruction of the “welfare state”, the winding back of the income tax system and gambling of their future security on shares, futures, currency and other markets in the casino economy presents a bleak future. What we don’t know yet is how far down this track PM Kevin Rudd and Swan plan to take us and the extent of any safety-net.