By Ian Verrender Monday 18 August 2014

Photo: The sooner the Government accepts it has a dud budget, the quicker it can repair its standing within the electorate. (AAP: Paul Miller)

It is neither the Treasurer's sales proficiency that is lacking, nor his energy or application. He simply has a dud product that no one wants to buy, writes Ian Verrender.

If there was any truth to the old maxim that any publicity is good publicity, then Smokin' Joe should be a happy man right now.

Instead, our hapless Treasurer, a man seemingly full of good intent on his arrival to office, has suffered what the Bard would have described as "the slings and arrows of outrageous fortune".

Under attack from within his own ranks over his inability to "sell the budget", he's resorted to increasingly desperate arguments and even threats that have only served to undermine his position.

But therein lies the problem. It is neither the Treasurer's sales proficiency that is lacking, nor his energy or application. He simply has a dud product that no one wants to buy. And the sooner his colleagues wake up to that fact, the quicker they may be able to repair their standing within the electorate.

One thing the Treasurer has clearly and correctly articulated is that we face a long-term structural problem with our finances.

But there are two major flaws with the budget he handed down three months ago.

The first is that it is a bean-counter's, or even worse, a bookkeeper's quick fix response to a long-term dilemma.

And the second is that underlying the quick fix is an ideology that shifts the onus of budgetary repair from older, established and relatively wealthy Australians to younger, disenfranchised and those less well off.

Budgets are about balancing revenue and expenditure. Inevitably, that involves making unpopular decisions, for no one wants to pay more tax and yet everyone demands more than their fair share of the handouts.

The May budget was largely about expenditure. That's because the Treasurer and most of his colleagues convinced themselves whilst in opposition that government spending was out of control. It was a great line for an opposition wanting to portray an incumbent government as reckless and ill-disciplined.

As an election tactic, it worked a treat. Unfortunately, it simply wasn't true, at least not when it came to spending.

The real problem - and the one that's much more difficult to fix - was that revenue had fallen off a cliff while spending had remained relatively steady. In the final year of the Gillard government it stood at about 24.1 per cent of GDP.

In fact, that spending level was below that of the Howard Government from 2000 to 2004 and equal to the Howard-Costello levels from 2004 to 2006.

The rot set in with a series of personal income tax cuts, initially by Howard and then continued by Rudd that were more about buying votes than good economic management.

Hockey has been correct in his assertion that we face a structural budget problem that, if left unchecked, will saddle the country with debt well into the future. But he's looking at the wrong side of the ledger.

Those cuts created a structural budget problem because the assumption was that capital gains, rampant consumer spending and corporate taxes would forever pick up the slack. But the financial crisis put paid to that.

Capital gains taxes dried up, consumer spending dropped and corporate earnings slid, resulting in billions of dollars in revenue shortfalls. Revenue, which had never fallen below 25 per cent of GDP from 1999 until Rudd came to power, suddenly crashed to 21.5 per cent in 2010/11.

The Abbott Government's two key election policies to abolish the mining and carbon taxes then further eroded that revenue stream.

Hockey has been correct in his assertion that we face a structural budget problem that, if left unchecked, will saddle the country with debt well into the future. But he's looking at the wrong side of the ledger.

Our biggest challenge is how we cope with an ageing population. That means a blow-out in spending on health care and aged care. And it means that we need a smaller number of working age Australians to support a greater proportion of those out of the workforce than at any time in history.

Unfortunately, we have a superannuation system that is seriously flawed, that has been captured by an industry intent on enriching itself where overcharging is rife and where the annual fee grab is putting retirement savings at risk.

According to research by industry research group Rainmaker, about $21.6 billion in fees last year were raked out of the system.

Even in bad years, those fees flow out. That is because the industry rewards itself regardless of performance. It pays itself a percentage of funds under management and the funds continue to grow because every week 9 per cent of every Australian's salary is handed over to the industry.

The scandals now playing out at the Commonwealth Bank and Macquarie Bank are not atypical. They have been going on for years.

It was the financial crisis that exposed the rotten state of the industry and the ineptitude of the Australian Securities and Investments Corporation.

Australia's superannuation industry instead serves two main purposes. It provides an enormous source of profit for our major banks. And it is employed by the wealthiest citizens as a tax dodge.

If the Federal Government was serious about tackling our long-term economic challenges, it would immediately choke off the tax rort created by the Howard government in its dying days that entirely exempted all superannuation benefits paid to all Australian over 60.

As ever more Australians retire, the revenue stream dries up.

It was a decision economist Saul Eslake dubbed one of the worst tax decision of the past two decades, as even interest earned within funds is tax free.

A total remake of the superannuation system would be a major start to putting the economy on a sustainable long term budgetary footing by minimising taxpayer funded pension outlays in the future while lifting revenues.

But there is little hope of that, given the Abbot Government's recent rollback of consumer protection on financial advice, a policy enacted at the behest of the "wealth management" industry.

Unhappily for Hockey, he faces another gruelling week where once again he must "take arms against a sea of troubles".

Ian Verrender is the ABC's business editor. View his full profile here.

It's not you, Mr Hockey, it's the budget - The Drum (Australian Broadcasting Corporation)