RUDD DELIVERS FOR WORKING FAMILIES

UNCLAS SECTION 01 OF 02 CANBERRA 000490

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV SENV AS
SUBJECT: RUDD DELIVERS FOR WORKING FAMILIES



1. (SBU) SUMMARY: The Rudd Government's first budget has
slowed the growth of government spending and hit "the rich"
to combat inflation, while delivering its election promises
and looking after Rudd's "working families." There is means
testing of family benefits, tax cuts, spending on the ALP's
health, environment and education initiatives, less favorable
treatment of the private health insurance industry, and
investment of the surplus in infrastructure to boost
productivity. As part of the budget, the Government has
packaged some of its measures as a "Working Families Support
Package." The Australian Labor Party (ALP),as it promised,
has delivered a budget surplus "at least" 1.5% of GDP - the
surplus is 1.8% or A$21.7 billion. The Government says it is
a "tough but fair" budget which reigns in irresponsible
government spending and will help secure Australia's
long-term economic future. The Budget has bolstered Rudd's
claims that he is an "economic conservative." The budget has
forecast declining inflation but slower economic growth and a
rise in unemployment from the current very low levels. END
SUMMARY

"WE ARE DOING WHAT WE SAID WE WOULD DO"


2. (U) At 19:30 on May 13, Treasurer Wayne Swan delivered his
2008-09 budget address to the House of Representatives. He
said it was a budget that combated inflation - at its highest
level in 16 years - while looking after "working families"
and honoring the ALP's election commitments. Australia faces
the countervailing forces of a slowing world economy and
inflationary pressure domestically due in part to booming
terms of trade which is predicted to increase by 20% over the
next year. The budget's centerpiece is a "Working Families
Support Package" which delivers the tax cuts the ALP promised
during the campaign, and invests in education, affordable
housing, child care and support for carers. The budget
surplus satisfies the GOA's earlier promise of being "at
least" 1.5% GDP - it is 1.8% or A$21.7 billion. Most of this
and next year's surpluses will be invested into three new
"nation building funds": education, health, and productivity
boosting infrastructure. For the next year the budget
forecasts inflation to fall from 4 to 3.25 percent economic
growth to slow from 3.5 to 2.75 percent, and unemployment to
rise from 4.2 to 4.75 percent. New spending is entirely
offset by spending cuts. Growth in spending is 1.1 percent -
its lowest level in nine years. Under Howard and Treasurer
Peter Costello, budget growth averaged 4 percent over the
previous four years. As promised, the GOA has not increased
taxation as a share of GDP - it has actually declined from
24.7 to 23.8 percent, and individual taxes will be cut by
A$47 billion over the next four years, mostly according to
Swan to benefit lower-income families. Swan also announced a
comprehensive review of the Australian tax system, which he
pledged to conclude by the end of 2009.

SWAN PLAYS ROBIN HOOD; WHACKS PRIVATE HEALTH FUNDS


3. (U) A family tax benefit for a stay at home parent whose
partner works and the Baby Bonus paid to new mothers will be
means tested - households which earn over A$150,000 will no
longer be eligible for these payments. The luxury car tax on
cars costing more than A$57,000 will be increased, the fringe
benefits tax regime will be tightened and the tax exemption
for crude oil condensate will be scrapped. An Education Tax
Qfor crude oil condensate will be scrapped. An Education Tax
Refund will be funded by redirecting tax cuts proposed (by
Howard) for those earning more than $180,000 per year. The
threshold for the Medicare Levy Surcharge will be raised
meaning that significantly more "working families" will not
be penalized through the tax system for not signing up to
private health insurance.

CLIMATE AND ENERGY TINKERING


4. (SBU) The budget provides A$686 million between 2008-2012
for programs to address climate change, with A$133 million to
be spent in 2008. The the effort to reduce Australia's
emissions includes the establishment of an emissions trading
system (A$9.3 million in 2008),establishment of an A$500
million clean coal fund, putting A$227 million into
alternative energy, and an out-year A$100 million Green Car
fund. Greenpeace and other groups, including the Green
Party, harped on the budget for emphasizing clean coal over
other renewable technologies, but there is going to be
significant government support for a range of technologies,
including advanced solar and geothermal. The Australian
Geothermal Energy Association (AGEA) was surprised and
angered, however, to note that the A$50 million Geothermal
Drilling Program does not come into being until 2009; one
industry contact told embassy that was the last item cut from

CANBERRA 00000490 002 OF 002


the budget. AGEA has claimed this will slow down new
exploratory projects being planned by at least a year. On
water, Climate Change Minister Penny Wong's previously
released A$12.9 billion plan to protect existing water
resources, expand water conservation, and develop new water
sources was fully funded.


5. (U) Energy giant Woodside Petroleum is one of the budget's
biggest losers, with the west coast oil company expected to
lose the largest share of a previous A$2.5 billion tax break
for producing condensate in the Northwest Shelf and onshore
areas. Condensates will now be charged the same excise rate
as other oil production.

NOT A LEFT-WING BUDGET


6. (SBU) COMMENT: As Swan said on May 14 in remarks at a
National Press Club luncheon, this budget reflects a "modest
tightening" of fiscal policy for Australia; it is not an
inflationary budget, but the onus for watching inflation
remains squarely with the Reserve Bank of Australia. Some
economists expressed disappointment that there weren't
greater cuts, but most agreed the uncertainty in the global
economy (in particular in the US) and the credit crunch
reduced the need for deeper cuts. Swan also stressed that
contrary to former Treasurer Peter Costello's assertion that
Swan was the luckiest incoming treasurer ever, the Howard
Government left the ALP with a poor economic situation, with
inflationary pressures building in the last 18 months of
their time in office.


7. (SBU) With this budget, the Rudd Government has delivered
for "working families" and generally satisfied economists,
particularly those critical of the growth of "middle class"
welfare under the Howard government. By producing the
biggest budget surplus (as a proportion of GDP) in almost a
decade and reigning in spending, Rudd and Swan have lived up
to their claims of being "economic conservatives." Some
economists doubt the budget will put downward pressure on
inflation. Indeed, Swan hasn't cut spending as savagely as
the Howard government did in its first budget. On the other
hand, inflation and economic growth is forecast to slow and
unemployment is forecast to rise, so deeper cuts may have
increased the risk of a hard economic landing.


8. (SBU) More important than the surplus, tax cuts, or
spending cuts is the change in direction in this budget from
the Howard/Costello ones of recent years. In establishing
the three funds for infrastructure, education, and health,
Swan was clear that spending decisions would remain with the
GOA, but the commitment not to make expenditures under them
for the next year should help reduce demand in the short
term. It also helps bank the windfalls from the resource
boom for future needs, instead of giving handouts to the
wealthy as the ALP (and many others) charge was the practice
under Howard/Costello. Notwithstanding some "Robin Hood"
headlines, it is not a left-wing budget - it does not seek to
radically redistribute income or impose burdens on business;
means testing social benefits is not soaking the rich.
Rather, it reflects Rudd's cautious, pragmatic approach to
economic management.

STETTENBAUER