Nelson Promises Tax Relief On Party Drinks And Luxury Cars

The federal opposition leader Dr. Brendan Nelson has used the opportunity of his budget right-of-reply speech to practice a bit of good old populism. After being led to expect a harsh budget with deep expenditure cuts, Dr. Nelson was left with not much to criticize when the budget turned out to be much softer than many people expected. As a result the opposition leader has now promised to block the increased excise on pre-mixed alcoholic drinks, and possibly the increase in luxury car tax as well.

To add his own flavour to the recipe, Brendan Nelson additionally proposed a 5 cents a litre reduction in the excise on petrol, which would save the average motorist around $2.50 a week. Big deal. Any such one-off reduction would disappear in the next round of price rises and leave families no better off. That’s the opposition’s big idea.

Beyond that, the coalition also proposes to block the planned lifting of the threshold for the medicare levy surcharge, claiming that the expected exodus from private health insurance will not only drive up premiums, but increase the pressure on public hospitals. The fact is that while people might choose to drop their private cover, nobody is forcing them to. Everybody is free to choose private health cover. The threshold for the surcharge has never been changed since it was introduced as a measure aimed at the affluent. Since then the average income has passed the $50 000 mark, and the surcharge has been hitting battlers. It had to be changed.

Dr. Nelson also took special care to mention aged pensioners and carers. Unfortunately special mention is about all they get with no actual concrete plans to increase their payments or to make their bonus payments a permanent feature. And, to the disappointment of many he said nothing about the disabled.

The reply speech by Brendan Nelson had no big ideas, no bold visions. Although plenty of words were spoken, not much was said. That’s why the headlines could find nothing more to write about than the alcopops tax and the petrol excise, both of which are populist statements on issues that are well removed from the main game of economic management.

Funds For The Future… Or Future Election Promises?

The establishment of the three new special funds for infrastructure, education and health is essentially a good idea. One of the greatest failures of the past generation or so has been the failure to adequately invest in those three crucial areas of our economy. National infrastructure has been either neglected or left to private enterprise. Universities have suffered a crippling erosion of capital investment, and as for hospitals, all you have to do is pick up any newspaper and read the headlines. This new initiative holds the promise of placing future infrastructure investment on a sustainable basis.

While they will be run by the trustees of the Future Fund, these new funds will not be set up in the same way. Where the Future Fund has its capital locked away, the new infrastructure funds will have their capital available for drawdown and expenditure. What’s more, the funds can be expended at any time and for any purpose approved by Cabinet. This is a significant difference from the Future Fund, which can only be used for the purpose for which it was intended.

The opposition has seized upon this reality and promptly accused the government of setting up a slush fund which can be used at election time for good old fashioned pork-barreling. And it’s true. There is nothing to prevent that other than the government’s good intentions, and what the prime minister promises to be layers of accountability and public scrutiny, which have yet to be set up, or even defined. Each fund will have its own independent board to make recommendations for the use of the funds, but the decisions will be taken by Cabinet.

In effect, the government is asking us to trust them on this. Of course, the opposition might also want to remember that as long as the funds remain unlocked, it means that the Coalition can also do its own pork-barreling when it comes to making election promises.

No Surprises Here

After all the dire warnings of painful expenditure cuts, the federal budget seems rather tame now that it has arrived. Wayne Swan promised there would be no rabbits pulled from the hat and he has been true to his word. About the biggest surprise on budget night was the snappy blue and white striped tie worn by the treasurer. Very conservative and very reassuring, much as the budget itself was intended to be.

The opposition has been claiming that the budget is high taxing and high spending, but in terms of it’s proportion of the overall economy that’s just not true. It seems that there really isn’t much for the opposition to criticize, so it has been reduced to those jingoistic claims and bleating about the plan to means test the baby bonus.

Meanwhile, in the rest of the community, the most serious critique has come from those who worry that the fiscal discipline imposed to contain inflation may not have gone far enough. The much publicized pain has turned out to be quite minimal, while lower to middle income earners will have their tax cuts delivered as promised. The risk remains that inflation won’t be brought down by this budget, and if that’s the case those tax cuts will dissipate in the face of rising interest rates.

Elsewhere, some wish lists remain unfulfilled, such as comprehensive dental care, a better deal for aged and disability pensioners, and targeted programs for rural and indigenous health.

On balance, this is a remarkably conservative budget, and if anything that is the only surprise. Some might have expected the cuts to run a little deeper, the initiatives to be a little bolder, and the decisions to be a little braver. Only time will tell if the right balance has been struck.

Apparently Kevin Rudd was serious when he claimed to be an economic conservative.

Don’t Bank On Better Customer Service

The proposed merger between Westpac and St. George Bank is a bold plan which, if successful, would undoubtedly deliver benefits to the shareholders. But would it be in the best interests of customers? That will be the question which treasurer Wayne Swan must consider. The plan comes on the eve of Wayne Swan’s first budget, and obviously presents him with a new and unexpected challenge at a time when his plate is already rather full. It will be a test of the direction this new government intends to take.

The so called “four pillars” policy makes it impossible for any of the “big four” banks to merge with or acquire each other, for reasons of preserving competition in the market place. This proposal is of a similar magnitude because St George has grown to be a significant player with substantial market share. If it goes ahead, the combined entity will be the biggest financial institution in the nation by far. It will hold 25% of the home mortgage market alone.

It’s no surprise that the Finance Sector Union is concerned that jobs will be lost. What is more interesting is that business groups such as the New South Wales Business Chamber are also concerned about the proposal. The Chamber has questioned the impact on competition in the banking sector if one player achieves so great a slice of market share.

Aside from the concerns of the unions and business leaders, the question remains about customer service. Westpac itself is spruiking the potential boost to customer service with talk of seven day a week banking. And to be fair, Gail Kelly has an excellent record of improving customer service. However past experience shows that when big banks swallow up smaller boutique style banks, the culture of those customer friendly operations is quickly dissipated. Remember the Colonial Bank? It was renowned for personal service before it was swallowed up by the Commonwealth Bank.

If St George goes the same way the shareholders might be richer, but the community will be the poorer.

So How Bad Is It…Really?

On the one hand, there are screaming headlines about the housing affordability crisis telling us that house prices are so high that some people might never own a home. There is a shortage of supply, and rents keep going up. On the other hand, there are more screaming headlines about property prices plunging, and repossessions rising, leaving people selling for less than they bought. Some houses have crashed to half their previous value. So what’s really going on?

While the crunch has been precipitated by the United States sub-prime credit collapse along with rising inflation pushing up interest rates, the bottom line is quite simply that short supply has pushed prices beyond the point of sustainability. Where once an average house would cost about three times average wages, it now costs around eight times average wages. At that level it becomes impossible for ordinary families to provide shelter for themselves, and sooner or later something has to give.

The balance can be restored by prices either falling, or by incomes rising, or a combination of both. Ironically, inflation can actually ease that process by pushing up wages, while cushioning the numerical fall in house prices. Even better it erodes the value of the debt home owners have incurred in pursuit of their dream. However, if the flames of inflation rage out of control it becomes an eternal game of catch-up where nobody wins.

The sub-prime crisis was created by the pursuit of endless growth in speculative gains, accelerated by leverage. In the end it will be resolved by a period of negative growth… also known as a recession. Already the Prime Minister has warned of the prospect of “the mother of all economic hangovers”. He’s not just whistling in the wind; it really could get that bad, and it is the most significant challenge now confronting this government.