Why Julia Gillard needs a mini-budget to clean up Swan’s mess: Kohler

Julia Gillard’s biggest and most immediate problem is her deputy, Wayne Swan, and specifically the budget he brought down six weeks ago.

That budget was a total stinker and as discussed here yesterday, its central element of a new tax on resources profits cost his boss his job. The man who delivered the budget and took responsibility for it, however, got a promotion. Ministerial responsibility at work.

Wayne Swan must bring down a mini budget that fixes his and Ken Henry’s catastrophic mess of May 11, so the RSPT can be removed as an election issue before the new Prime Minister asks “the Governor-General to call an election so the Australian people can exercise their birthright and choose their prime minister”, as she put it yesterday.

The best thing to do would be to put the new tax to one side and say the whole thing will be re-examined after the election. Julia Gillard will want to go earlier rather than later, and negotiating a new and acceptable RRT with the mining industry will take more than a few weeks.

But removing it would destroy the budget brought down six weeks ago. It would not affect the figures for the year that begins next week, since the new tax is due to start on July 1, 2012, but it would remove $12 billion in revenue from the four-year forward estimates period.

That revenue is balanced by five things: a proposed cut in the company tax rate, an instant asset write-off for small business, and 50% discount for tax on some bank deposits, contributions to a state infrastructure fund starting at $700 million in 2012-13 and bringing the budget into surplus in 2013-14 instead of 2015-16, as forecast last year.

The first four items add up a definite $5 billion across the forward estimates, and probably more since the infrastructure fund only included an amount for 2012-13, and a promise to increase this in subsequent years.

In any case, the former PM, Kevin Rudd, has been sprinkling infrastructure dust about in the past few weeks as he tried sell the RSPT to horrified WA and Queensland Premiers. A billion here and a billion there… I’ve lost count of the total, but we seem to be talking real money.

So at least half of the $12 billion in the forward estimates of Wayne Swan’s budget last month was committed to specific new expenditures and the other half was employed to announce a surplus two years earlier than expected.

Gillard and her new Deputy Prime Minister and Treasurer (you know, the one responsible for this stuff up) would have to cancel the company tax rate cut, the instant small business asset write-off, the discount for bank deposit interest and the infrastructure fund, and also announce that the budget will not be back in surplus in 2013-14 after all.

I was quite happy with the 2015-16 surplus. It was better than any other western country, and pretty good in the circumstances – pulling out of the worst global recession in 70 years and losing $15.3 billion in revenue because the CPRS was blocked in the Senate.

Who was clamouring for the surplus to come earlier then? Nobody. It was a political scheme designed to nobble Tony Abbott and Joe Hockey – a short-term political tactic with profound long-term economic effects.

But unfortunately the political reality is that we are now all locked into a budget surplus in 2013-14 – government and opposition alike.

Because of this, Tony Abbott and Joe Hockey announced $24.7 billion in savings last month to give themselves some room to move.

Julia Gillard and Wayne Swan must now do something similar – in other words, a mini budget is required to clean up her deputy’s mess before the new PM can announce an election.

This article first appeared on Business Spectator.