Next Tuesday night is budget night, a night when election hype meets political reality. Kevin Rudd used the phrase "This reckless spending has got to stop" to win the 2007 election. He promised the same tax cuts with lower government spending than the Coalition.
The government face difficult choices. They have promised to increase the budget surplus, maintain the tax take as a percentage of GDP and have various expensive spending promises relating to education, health and infrastructure. They have also promised not to cut taxes beyond those cuts promised at the election.
Treasurer Wayne Swan made his life harder when he decided to tar the previous government's economic legacy. This was unnecessary and could make his first budget unnecessarily complex.
Mr Swan had been telling everyone that the inflation genie was out of the bottle. He said the way to contain inflation would be to have a tough budget and to cut spending.
After all, the Rudd government was elected with a promise to cut spending. Unfortunately for Mr Swan the Reserve Bank governor contradicted him on the inflation front when he was specifically asked if the genie was out of the bottle. Mr Glenn Stevens told the Standing Committee on Economics, "There is a problem, but I do not think it is out of control."
With his inflation narrative cut off at the knees, Mr Swan faces the question of how to justify spending cuts. It is difficult to point to a broad and vague election promise while imposing budgetary pain on voters.
It is here that the old chestnut of middle-class welfare enters the debate. Of course, middle class can be very broadly defined -- the "rich" apparently are recipients of welfare too.
An article in The Age by Michelle Grattan sets out the basic argument. The top three percent of taxpayers have seen their average tax rate fall by 6.2 percentage points since 1996. "In kind" transfers to the top 20 percent of income earners has increased by 33 percent, compared to 27 percent for all households. The analysis, apparently undertaken by Treasury, is not in the public domain.
It is surprising they look only at the top three percent of income earners. Why choose that number? Using ATO data for the top five percent, I arrive at a very different conclusion. In the 1996-97 financial year the average tax rate for the top five percent of income earners was 33.11 percent.
By 2005-06 (the latest data available), the figure had increased to 38.17 percent. Similarly the proportion of net tax paid had increased from 24.5 percent to 32.3 percent. The "rich" in other words are paying more than their fair share of tax.
A lot of middle class welfare consists of universal entitlements. But I have yet to see any proposal for public schooling or Medicare or even university fees to be means tested.
The Rudd government want to abolish university fees for Australian students; they would rather a student be on middle class welfare than pay their own way through university. Unemployment benefits could be paid out as a HECS-style loan. There are many, many avenues for reform in this area. Remarkably none of these reforms are under consideration probably because some of them would be in the too hard basket.
The only concrete proposal is to means test the baby bonus. The bonus is a very expensive mechanism to promote greater fertility and, as economists Joshua Gans and Andrew Leigh have shown, it can lead to perverse behaviour in the timing of births.
Most economists believe the baby bonus should be scrapped -- means testing it is a step in the right direction. There is, however, another perspective.
Australian women do not have access to a uniform paid maternity leave system. The loss of income associated with child birth, subsequent recovery and maternity leave for working mothers can be very high. This week the Productivity Commission began hearing submissions into paid maternity leave.
The opportunity cost of foregone income for working mothers increases as her income increases. If the baby bonus is understood as a flat rate government financed maternity leave payment then means testing is exactly the wrong policy. Women with low incomes should not get a higher maternity leave payment than women with high incomes.
My argument will strike many as being counter-intuitive -- low-income women need the money more than high-income women. That may be the case, but if our argument is about maternity leave, then the payment should reflect the opportunity cost.
Alternatively, people could argue that high-income women are likely to have a high-income partner who could provide support during the maternity leave period. Even if this were true, it is not clear that we should discriminate on the basis of partner income when considering the opportunity cost.
Paid maternity leave is an argument about women and their opportunity costs of having a baby. To be clear, I am not advocating Australia introduce a government financed maternity leave payment, but to the extent that the baby bonus operates as such a payment, means testing it is exactly the wrong policy.
The Rudd government's economic narrative is all about form over substance. Mr Swan has to somehow justify spending cuts in the budget. His first argument about inflation being out of control has failed. His second argument about "the rich" benefitting more than the rest of the community over the Howard era is dubious; the tax burden on the top five percent of taxpayers actually increased since 1996.
The "attack" on middle-class welfare boils down to means testing the baby bonus. Apart from being the politics of envy, it is inconsistent with arguments for paid maternity leave. This begs the question as to whether Mr Swan has a coherent narrative for economic management.
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