The Money Men by Chris Bowen (i wanna iguana read aloud .TXT) 📗

a $3.4 billion surplus, which represented 0.6 per cent of GDP. A slowing economy meant that this became completely unachievable, but the Keating government did not provide a budget update outlining the deterioration in the books. Accordingly, Evans told Howard and Costello that the budget deficit was now $4.9 billion. Costello preferred to use the underlying measure, which made the deficit much bigger: $9.5 billion.

The situation was redolent of 1983, when treasurer Keating inherited a much bigger deficit than treasurer Howard had predicted. The 1996 deterioration was less in relative terms than the 1983 blowout, but Howard and Costello did not let this hold them back. Costello held a press conference outlining the extent of the budget deterioration. Kelly captures the political dynamics: ‘Like Howard, Costello knew the deficit was a catastrophe for the Labor Party. His script was written and Labor was doomed. On 12 March, the day after the swearing in, Costello conducted the ritual slaughter.’8 Kelly goes on to say:

The political delegitimisation of Labor was stark. Keating, in fact, had bequeathed no fiscal crisis to Howard. Australia’s public debt was, by OECD standards, neither exceptional nor critical. [Ted] Evans said that among significant OECD nations only Japan had a lower net debt than Australia’s at 20% of GDP.9

Costello set a two-year program for a return to surplus that required substantial savings. The 1996 Budget included $500 million in cuts to childcare funding and $11 million in cuts to the ABC (with another $55 million to be cut over the next two years), and it reduced the 150 per cent research and development concession to 125 per cent (funding for the Commonwealth Scientific and Industrial Research Organisation, or CSIRO, was increased). A high-income superannuation surcharge of 15 per cent was also introduced. Howard claims this last measure was his own idea, one that was needed to show equity, with high-income earners paying their fair share. It was unpopular and administratively complex. Costello would later say his biggest regret as treasurer was this surcharge, which he removed towards the end of his term.

The 1996 Budget did not consist entirely of spending cuts. A 30 per cent rebate for private health insurance was introduced and became the fastest-growing area of the federal Budget. It would later be means-tested by the Rudd–Gillard government. Also introduced was the Family Tax Benefit, to provide tax relief for families. Howard had championed preferential tax treatment for families throughout his career by promoting income splitting—allowing a husband and wife to average their income for tax purposes. This proved difficult to administer and expensive, so the Family Tax Benefit was adopted as a means of achieving the same end.

The government also attempted to claw considerable funding away from the states, cutting the exemption relating to sales tax. Costello had wanted a straight cut to the states’ funding, but Howard, guided by advice from his department, thought the sales tax route was preferable. Making the best of his defeat on this issue, Costello attempted to sell the change as a micro-economic reform. This was disingenuous: while it was a minor reform, it was a major saving of $1.2 billion. Costello announced the decision as a fait accompli two days before the new government’s first Premiers’ Conference. This did not go down well. One of Costello’s biographers, Tracey Aubin, says of the episode that the new government was ‘as arrogant as it was inexperienced’.10 Costello’s old nemesis, Victorian premier Jeff Kennett, also went on the attack. The Liberal premier of Tasmania, Tony Rundle, referred obliquely to one of Kennett’s old insults about Costello (‘He’s got the attributes of a dog, except loyalty’) when he said, ‘Peter Costello’s only been there a dog watch but in that short time he has made Willis and Dawkins look good.’11 Costello then went through the humiliation, not unknown to other treasurers, of receiving less than full support from his prime minister. Howard sidelined Costello and reverted to a scheme much closer to that which Costello had originally proposed: a direct cut, which meant that the Commonwealth received almost as much. It was an early sign of discord between them.

Surplus was attained in the 1997 Budget through the comparatively easy move of abolishing the Keating government’s L-A-W tax cuts. Keating had converted the tax cuts to payments into the superannuation accounts of employees. Costello replaced them with a savings tax rebate that cost the Budget $1 billion less than the cancelled cuts.

From 1997/98 to 2006/07, Costello delivered nine surplus budgets—2000/01 was the exception, as compensation payments as part of the GST package preceded revenue. The commitment to surpluses, however, did not involve a devotion to spending cuts or to avoiding tax cuts. The 1996 Budget involved a serious contraction in spending as a percentage of the economy, and the 1997 Budget involved one big-ticket item (the cancellation of the L-A-W tax cuts). But as then Treasury secretary Ken Henry notes of the Costello era, ‘Spending constraint stopped after the first budget.’12 Or as the Treasury officially put it, in less-prosaic terms:

There has been a reduction in the number and proportion of savings measures included in the budget reports since the 1997/8 budget. In the 1997/8 budget, close to a third of all measures had a savings component, where as more recently savings measures have averaged around 1.5% of total measures.13

Although the mining construction boom began about halfway through the Howard–Costello term, the improvement in Australia’s terms of trade began to have a very positive impact on budget revenues. It made the task of budgeting for surpluses while delivering substantial personal income tax cuts much easier. Often, this windfall would only be confirmed late in the budget process, meaning that Costello and Howard would settle the size and scope of their proposed tax cuts in the days leading up to the Budget’s delivery. Indeed, revenue usually exceeded expectations. The Treasury, which would cop severe criticism for underestimating the size and speed of the reduction in the terms of trade during Wayne Swan’s term as