Tough budgets all around

There will be no death duties and the GST rate will not be increased, if the government can be believed, but beyond that, all bets are off.

That seems to be about the only things that can be said with certainty after Prime Minister Julia Gillard this week revealed a sharp deterioration in the federal government’s budget outlook.

Slower growth, low inflation and weak profits are set to wipe $12 billion off expected revenue this financial year, leaving the government with a large ‘black hole’.

Ms Gillard followed up with comments that were, in one sense, refreshingly honest, but also politically inept and a cause for uncertainty.

She said the government had “some serious decisions to make and announce in the coming two weeks” ahead of the May budget.

"Because we now are confronted with new facts and far more significant reductions in tax money than was expected – we are going through the process now of making decisions to spend less in some areas than we had hoped, to raise more in revenue in some areas than we had planned," she said.

Ms Gillard warned every “reasonable” option was on the table, “even options previously taken off the table”.

Ms Gillard said an increase in the GST rate was not being considered and Finance Minister Penny Wong said the reintroduction of death duties was not a “reasonable” option.

But it appears an increase in the Medicare levy is a reasonable option, with reports it will be lifted from 1.5 per cent to 2 per cent.

It seems the government’s political strategy is to link this increase with the introduction of its national disability insurance scheme, which has been widely praised.

The problem for Labor is that the extra revenue will fall a long way short of the estimated $14 billion cost of the NDIS.

Its wider problem is that it is committed toexpensive reforms like the NDIS and the Gonski schools education package, at the same time that tax revenue is slumping sharply.

The government has already upset many people by cutting university funding to help pay for the Gonski package and looks set to make even more enemies over the next two weeks.

The person who will be left to pick up the pieces after the September election will most likely be Liberal leader Tony Abbott and his treasurer, Joe Hockey.

They won’t simply inherit Labor’s budget problems.

They have their own ambitious policy commitments, including abolishing the carbon tax and the mining tax and introducing a paid parental leave scheme

Mr Abbott planned to fund the parental leave scheme with a 1.5 per cent levy on more than 3,000 big companies and had intended to introduce a matching corporate tax cut.

The Business Council of Australia said last week the plan “defies economic sense” and won't make companies better off – even if some can drop their in-house parental leave plans in favour of a government-managed scheme.

Mr Abbott appears to be waking up to the tough choices he faces, as he is now talking about a “modest” company tax cut and is hedging on the timing.

The tough times in Canberra will be matched around the states.

Queensland is talking about asset sales to help reduce its state debt and NSW has already gone down that path with the recent $5 billion sale of its major ports.

Premier Colin Barnett has publicly acknowledged that Western Australia also faces a tough budget outlook, although WA’s situation continues to be the envy of most other jurisdictions.

Treasury’s pre-election financial projections showed the state achieving an operating surplus in each of the next four years.

But more meaningful is the projected cash deficits, which take account of the government’s capital works program.

The net result will be an increase in state debt to $23.7 billion by June 2016.

The lesson for all governments is that they need to maintain fiscal discipline when times are good, because as sure as night follows day, the cycle will turn.

It’s times like now when we look back at measures like the baby bonus and the schoolkids bonus and ask what is prudent and affordable.