Bill Shorten should probably zip it about next year’s budget deficit.

Next May, Tony Abbott and Joe Hockey are going to feel very uncomfortable indeed. They’ll be bringing down a Budget that is completely the opposite of what they hoped for.

The 2014-15 Budget was full of spending cut plans and forecasts of rising tax revenues. The spending cuts are mainly in shreds on the floor of the Senate, and the rising tax revenue projections got vapourised by weak growth and falling iron ore prices. The few measures they did pass, like a temporary tax hike on high income earners, aren’t likely to be enough.

The Abbbott/Hockey game plan was to get their horror budget out of the way early. But the ghost train didn’t stop at the station, and it looks like they’re stuck on the ride as it enters the tunnel once again.

The Budget, when it comes out, is going to include some large negative numbers. They were expecting deficits of $30 billion this year and $17 billion next year.


But revenue fell hard in the most recent quarter as growth fell to 0.3 per cent.

Budget update

I expect the government will be forced to admit the deficit this year is very much like the last Labor year (around $50 billion), and that the 2015-16 one will be at least twice the size they expected.

What’s worse for them is this – the more they try to correct this scenario, the worse their reputations become.

I wouldn’t want to face the dilemma Hockey faces – try to put the budget on track and cement once and for all the impression of having a heart of stone, or try to salvage a bit of popularity while letting the nation’s finances spiral away. Perhaps he will happily give up his job to Mr Turnbull.

So, from a fiscal perspective, Opposition leader Bill Shorten has been given a free kick in the goal square. This is political gold!

But should he go hard on this topic? Should he try to drive a fiscal stake through this government’s heart?

I see three reasons he should not.

1. Don’t perpetuate Deficit-phobia.

The fear of deficits is extremely corrosive to our national debate. Governments are absolutely petrified of borrowing, for fear of being accused of running a deficit.

Interest rate the government faces on a 10-year loan. Source: Bloomberg
Interest rate the government faces on a 10-year loan. Source: Bloomberg

The cost of borrowing, right now, is exceedingly low, and the benefits of borrowing could be very high. Almost everyone thinks Australia could use a big whack of infrastructure to set it up for the next century. Obsessing about spending only what you earn is for people who can’t get credit, or for people whose expenses are smooth and predictable. A mid-size first world nation can get credit cheaply, and might want to occasionally build a huge project. In those cases a deficit should be celebrated.

If Shorten accusing Abbott of incompetence because of the existence of a deficit, then he further limits the policy options of all governments of all stripes.

2. Focus on something important.

Budget day I argued in April that Labor should have made equality a big budget figure. You could hoard all the relevant data on equality until Budget day, brief the right people that an important measure was coming out that day, and then boom, get some cut through on a topic that wasn’t so meaningless.

If Mr Shorten goes after Mr Abbott on the defict, he adds his imprimatur to the idea that managing a deficit is the most important job a government can have. Assuredly, it’s part of the government’s role. But to place it at the centre of responsibilities is to show a distinct lack of imagination. Find something important and make Budget day about that instead.

3. Tying your own noose.

If Mr Shorten wins government in late 2016 and the deficit is all he’s talked about for the preceding three years, he’ll be forced to fix it, fast. That could prove uncomfortable for him.

Mr Shorten’s approach will depend to some extent on what Mr Hockey has planned. We will know a but more about that once the mid-year economic update (MYEFO) comes out.

It was exactly 51 weeks ago that I wrote about the first MYEFO that Mr Hockey brought down, which was clearly setting the stage for big cuts. I wrote this

“What is the last “cut” that is heralded as a major political reform? Howard strangled the dole payment down below some estimates of the poverty line, but that’s oddly omitted in his hagiography. Even right-wing economist Judith Sloan has argued the dole should now be raised.

When we list the economic reforms that have made Australia great we include microeconomic reform, floating the dollar, an inflation-targeting central bank and the GST.  Not cuts.

If the Abbott government’s first term economic reforms can mainly be labelled “cuts”, what will be its legacy?”

It will be very interesting to see what themes we can read into this year’s MYEFO (perhaps coming out next week, and required by law before the end of January).

Paid Parental Leave – worth cutting eligibility to $100,000?

Tony Abbott’s paid parental leave policy is one of the most expensive pieces of social policy Australia has been offered recently. It is a $5.5 billion scheme funded by a 1.5 per cent levy on big business. It proposes full replacement salary to new mothers, for six months, up to a maximum of $150,000.

But nobody thinks the PPL scheme is well-designed or good value for money.

The jaw-dropping part of the scheme is the $150,000 salary cap, which works out at a maximum rate of pay of $600 per weekday. That’s wildly expensive childcare – even in Sweden, people taking parental leave get only €105/day.

If this policy had been proposed by the Motoring Enthusiasts, the Greens, or the Palmer United Party, everybody from Janet Albrechtsen to Ross Gittins would be arguing they had no concept of how the economy works and were demonstrably unfit to govern. Arguably, Albrechtsen, Gittins et al would be right.

But would cutting the generosity of the scheme deliver a big saving? The Coalition thinks not. This quote is from an article by Phil Coorey, of the Australian Financial Review.

“The difference between a $100,000 and $150,000 salary cap is not seen as a major impediment to reaching a deal because about 90 per cent of women of child-bearing age earn under $100,000.

The Coalition has been looking at ways to make its policy more affordable and dropping the salary cap to $100,000 was not deemed worth it in terms of savings.”

The truth is that while plenty of Australians make over $100,000 – over 837,000 people, statistics say – only 18 per cent of them are women.  And of course, earning power tends to increase with age.

Screen Shot 2014-01-29 at 10.53.24 am
Number of women earning over $104,000, sorted by age and state. (Incidentally, in WA and QLD, women aged 15-24 are more likely to make the big bucks than those over 65. One guess why.)

Women’s earning peak happens after their fertility peak. Earnings peak around age 40, while the most common age to give birth is 32.

Screen Shot 2014-01-29 at 10.11.29 am

That means only 5,400 women earning over $104,000 would be eligible for the payment each year, according to my calculations. [Don’t thank me for making the data category end at $104,000, thank the ABS.]

Births, categorised by state of residence and age of mothers
Births, categorised by state of residence and age of mothers

[This link will take you to a big google drive spreadsheet where you can check my calculations and see some interesting graphs.]

The Greens are proposing a similar policy to the Coalition, but with a $100,000 eligibility cut off.

So what would be the saving of cutting eligibility to $100,000?

Assume the average claimed salary is $130,000. The net cost of 6 months extra pay is $15,000. 5,400 births @ $15,000 =

Just $81.2 million, or 1.48 per cent of the total cost of the $5.5 billion scheme. (Likely a conservative estimate, given some assumptions I had to make.)

That’s a rounding error in the Australian Government’s social policy budget. Do we just blink and move on?

I say no. The Commission of Audit is currently moving through the Government’s books, trying to find savings everywhere. They are likely to have a very fine-tooth comb. An $80 million saving is one they would pocket with delight. The government also has a social welfare review running, looking at Newstart and the Disability Support Pension.

Politically, $80 million seems like a small price to pay to garner headlines and combat a “women problem.” But from a policy perspective it makes sense to cut the rate. If you frame the question as “how can the Australian people best spend a spare $80 million,” the answer is never “funnel it via the government to the very rich.” 

Realistically, Paid Parental Leave is unlikely to be introduced in the same format it was sold to the Australian people.

If I was advising the government, I’d say: pledge to introduce it slowly. Start off paying up to a salary cap of $60,000 and say you intend to ramp it up by 10 per cent a year.

Then wait.  Something will come up for which there is great public support. It might be rebuilding after a flood. It might be sending troops off to the South Pacific to help restore stability somewhere. It might be a surge of support for pre-K education. Then you can raid the PPL cookie jar to fund that.