CANBERRA OBSERVED: News Weekly
Rudd Government faces horror budget
, March 21, 2009
Global industrial production could plummet a further 15 per cent this year, according to the World Bank.The economic situation is deteriorating so rapidly that the Rudd Government's razor-gang is now working overtime just to find sufficient money in the federal budget to pay for a promised increase in pensions.
Having made such a loud noise about an overhaul of the pension system over so many months, it is politically untenable now for the Government to back down.
A wall of condemnation fell on Liberal frontbencher Tony Abbott when he recently questioned whether a mooted $35 a week pension rise was affordable.
"Obviously many pensioners are doing it tough, but a $35 a week increase is an enormous hit on the revenue," Mr Abbott told the press.
"I think something like this would need to be considered very carefully and very cautiously, I really do."New circumstances
Yet Mr Abbott was merely stating the obvious - circumstances have changed, and now may not be the time to institute a permanent rise to the pension just when Australia's terms of trade are deteriorating sharply.
It is just over 100 years since another Labor Prime Minister, Andrew Fisher, along with King O'Malley, introduced the Invalid and Old Age Pension Act into the Commonwealth Parliament.
This world-beating measure gave around 34,000 pensioners 10 shillings a week - the equivalent of 12 per cent of male average weekly earnings.
Aborigines were not fully entitled to the old age pension until 1966, and for many decades people of dubious character were often refused.
It was a privilege rather than a right.
Another Labor Government, led by Gough Whitlam, committed Labor in 1974 to raising the pension rate to 25 per cent of average weekly earnings, leading to a substantial but costly rise in pensions.
Later, the Hawke Government set in stone the current benchmark of 25 per cent or more of Male Total Average Weekly Earnings (MTAWE).
The Howard Government went one step further, enshrining this benchmark in law.
Finally, the Rudd Government appointed Dr Jeff Harmer, secretary of Jenny Macklin's Department of Families, Housing, Community Services and Indigenous Affairs, to conduct a review into the pension system in May last year.
Reforming the system is extremely complicated because the old age pension intersects with the tax system and a range of payments and allowances.
Pensioners are rightly aggrieved that they largely missed out on the boom, and the Howard Government's move to grant one-off payments created a lack of certainty and an expectation at the same time.
But, given the rapidly shrinking company tax base and the impending rapidly shrinking income tax base, Mr Abbott's fears are coming home.
If the government decides to extend an old age pension increase to include carers, disability and other welfare recipients, the cost will rapidly escalate beyond $6 billion a year.
Finding an extra $6 billion in this year's budget will be a tough task indeed.
Kevin Rudd's inner sanctum consists of Treasurer Wayne Swan, Finance Minister Lindsay Tanner and Deputy PM Julia Gillard, and the picture they are getting from the Departments of Treasury and Finance looks uglier with each passing week.
The Expenditure Review Committee also has input from Families Minister Jenny Macklin, Assistant Treasurer Chris Bowen, and, interestingly, an old hand in the form of Trade Minister, Simon Crean.
Under them programs are being cut and pressure is being applied to departmental heads to find hollow logs and superfluous programs.
But merely axing an agency here and trimming funding there will not produce $6 billion.
It is possible that the Government will have to hack into so-called middle-class welfare to fund a pension rise or possibly raise taxes on high-income earners.
No matter which way it goes, there will be a good deal of squealing. But the Government is eventually going to have to make some even tougher calls.Shrinking economies
The World Bank has become the first major international governing body to warn that the global economy is shrinking.
According to the bank, global industrial production could plummet 15 per cent lower this year, and the worst affected region will be right on our doorstep.
It also warns that up to 130 countries will not be able to raise sufficient finance to meet their budgets or current account deficits because of the credit squeeze.
No one would want to deny pensioners - the most vulnerable in the community - some extra assistance at this time.
However, embarking on decadal structural uplift in the pension rate at this time is a very brave decision.