BUDGET 2008

Australia's new centre-Left government has just brought down its first budget. Below are comments from a conservative and a left-leaning viewpoint. For a Leftist government to bring down a surplus budget (i.e. they plan to spend LESS than they raise in taxes) is rather remarkable but it is customary in Australia. The budget is quite mainstream with just a few Leftist flourishes




Budget 2008: mildly encouraging

Comment from a free-market economist below:

"The prices of food and oil are rocketing, so why are we complaining?” This is the question of the day, courtesy of pollster Gary Morgan. Morgan has a point. Australia’s principal exports include coal, natural gas and foods, not to mention iron ore and congealed electricity in the form of aluminium. Australia has the mother of all booms. Inflation is “only” 4 or 5 per cent, government coffers are overflowing with money and we can afford all sorts of experiments in helping battlers, building infrastructure, increasing spending on health and education. The clear risk is that the “mild tightening” that sums up this budget will not take enough pressure off the Reserve Bank and that interest rates will need to rise further yet.

Morgan, like Henry, is concerned that the resource boom with Australia’s current Industrial relations (IR) system is likely to encourage a surge of wage costs. The budget assumes slower growth of employment and increased workforce participation, hence greater unemployment. In “real” terms (i.e. if accurately measured) this problem will be far larger than officially estimated, especially if wage hikes increase. This will create a real problem for the Rudd government.

Like Henry, Morgan thinks governments are inefficient and government departments do not encourage productivity growth.

We’d both like to pay more tax (from higher incomes), but at a lower rate. As Art Laffer showed, that is what happens when tax rates are cut. There are mild cuts for all but those on the highest incomes - keeping the pre-election promise - and this will have mild encouraging effects on labour supply.

Last night’s budget was sold in advance as being “tough”. It is certainly tougher than the later Howard-Costello budgets, but not their first budget. Nor is it as tough as Keating’s Banana Republic budget. Henry applauds the means testing of certain benefits. Wayne Swan told Kerry O’Brien that a principal earner or family income of $150,000 was a “reasonable” cut off point for some benefits. Politically that may be the case, but one cannot reasonably say a family with such an income are battlers who deserve help from taxpayers.

Incidentally, real tax reform - which abolished lots of tax allowances - should exempt many more people than at present from lodging returns, saving transaction and compliance costs.

This budget is mildly encouraging. The risk is that the continued resource boom blows it out of the water, leaving the Reserve Bank to gather up the pieces.

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A surplus budget

Comment from a Left-leaning journalist with an interest in economics

THIS budget is meant to be read two ways, because it tries to have it both ways. It is a change-of-government budget in the most mundane sense of the term, because its main transaction for 2008-09 is $5.7 billion in new revenue measures and spending cuts to pay for $5.3 billion in election promises. No prizes for originality here, unless you count the absence of broken promises as something new.

What is different about this budget is the surplus. It won't go into Peter Costello's Future Fund because that fund is full. Instead, it will be divided three ways, between infrastructure, health and education investments. How and when the money will be spent will be up to the Government. This is a piggy bank like no other.

Wayne Swan has $40 billion set aside for these three policy areas. It is the sum of just two surpluses-2007-08 and 2008-09. There will be more top-ups before the next election. The Treasurer hasn't said yet what he will do with his initial war chest of $40 billion, but he has reserved the right to spend the capital as well as the fund earnings. This is where the real budget story lies, in Labor's flexibility to spend up on infrastructure for the next election and beyond.

Mr Swan is the first treasurer in history with no commonwealth debt to cover. There is no borrowing to pay off, or public service super liability to meet. Just a surplus that has to be returned to voters at some point. This is, indeed, a revolution. Labor has the luxury of thinking long-term because the budget it inherited from the Coalition allows it to.

The budget cuts are not as grand as they seem. The simplest way to unpack the numbers is to see where the budget would have been if Labor wanted to break every one of its election promises apart from the tax cuts. The figure is a surplus $19.7 billion for 2008-09, which, incidentally, is a surplus that would have met Kevin Rudd's January target of 1.5 per cent of gross domestic product.

But Labor implemented every promise because it could. The bill for staying sweet with voters was $5.3 billion in 2008-09. This was offset by $5.7 billion in new savings. A further $1.6 billion in savings had already been flagged at the last election, bringing the total cuts to $7.3 billion. Now subtract the savings of $7.3 billion from the promises of $5.3 billion and you have a $2 billion addition to the surplus, to $21.7 billion. If this looks like small beer, it is. The real budget headline was the $40 billion that Labor has set aside for itself.

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Posted by John Ray. For a daily critique of Leftist activities, see DISSECTING LEFTISM. For a daily survey of Australian politics, see AUSTRALIAN POLITICS Also, don't forget your roundup of Obama news and commentary at OBAMA WATCH