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Manna or myopia? The 2006 Australian budget

By Mark McGovern - posted Monday, 15 May 2006


The headline writers greet this year’s budget with acclaim and enthusiasm as will, it is supposed, we all given generous tax cuts. “Manna from heaven” proclaims The Australian on the morning after. “Spend, Spend, Spend” shouts the Sydney Morning Herald.

Leaving aside the more interesting issues of when heaven was moved to Canberra (and who is now playing God), we come to some more mundane economic issues.

The Federal Treasurer was certainly upbeat. As reported on the 7.30 Report website:

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Australia has weathered some economic storms over the decade, storms every bit as deadly as the cyclones that lash the north of our continent in the early part of this year. We have weathered the Asian financial crisis, the global downturn, a one in 100-year drought … SARS … terrorist attacks …

Strong government has seen us through.

But with disciplined and prudent management, our economic has come through these storms intact. In fact, growing. In fact, growing in the longest continuous stretch our nation has ever experienced.

But we have prevailed.

There were moments where we were vulnerable. But through these storms we never lost sight of our goals to get Australians jobs, to keep inflation low, to keep interest rates affordable, to balance our Budget and to repay Labor's debt.

The worst, it seems is behind us. Now we can spend our surplus, or at least some of it over this year and the next few. The Federal Government debt repayment appears one of the government’s proudest achievements. It has been a key mission goal.

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But how has the goal been achieved? In part, by selling assets and under funding key societal activities. Other goals have similarly been achieved through under funding or under investing, as is particularly evident in education and health. Education ($16.6 billion) does not get a mention in the broadcast budget speech, though childcare and training do. Health ($39.8 billion) gets a little more mention with some research funding and mental health services noticeably up. Social security ($91.8 billion) receives only a single mention. Little comment and few initiatives are offered where $148 billion or 64 per cent of the budget is spent.

Instead the emphasis is on how little government will take. Tax will not be as high as it might have been, on income and superannuation. “You will have more to take home” is the central message. You may now even be able to stay in your home on retirement if it is a suitable rural property.

Treasury and its treasurer are relying on a money illusion it seems. People receiving more cash in their pocket will feel good. Outgoings on things like fuel, food, housing and personal services will need to be more than compensated for.

And, if the inflation forecast is met, if unemployment does not worsen, if interest rates do not rise, if growth remains high and if the dollar rate is suitable, then such things may come to pass. It is on such things that the budget strategy hinges. It is here that the real gamble is made. What odds would you offer the treasurer? Has his budget increased the likelihood that inflation and interest rates will rise, say, or that the dollar will shift inappropriately? Will such changes see rising costs that swamp the budgeted individual and company income sweeteners?

His own comments point to clouds on the horizon. An evident desire to avoid Federal Government debt will see funding for public works and activities drawn from current revenues or private capital arrangements. Favoured projects will get a nod. Otherwise, things are unclear.

This matches a political predisposition for private provision of services - from roads through health and education to broader public services. Pay-as-you-go services will increase as pay-as-you-go taxes decrease. Diminution of public provision of services can be expected to continue.

So as parents switch schooling from under-funded government schools to private offerings, for example, are they and their children better off from this reallocation of monies? Are we as a society better off? Such questioning appears largely absent from both budget framing and commentary.

It is simple to generate a surplus if you overlook the quality of services and societal impacts associated with alternative provisions. That there are many good things in Australian public and private provision of services is not disputed. But where could and should things be better?

More telling from a macroeconomic view is an apparent assumption of uninterrupted, even stronger, growth. This may well be true over the next year but as we have been “growing in the longest continuous stretch our nation has ever experienced” things will not continue so rosily.

In many ways the treasurer has been lucky, as have we all. While his policies have contributed, the reality of his prudent management claims will be tested in the next downturn.

We remain vulnerable. With historically high levels of personal debt and limited reserves, many are heavily exposed. The high external deficit is expected to grow (from 6 to 6.25 per cent of GDP). How might such things play out? When questioned on the latter, the treasurer indicated that currency movements might solve the latter. No Australian actions appear needed. Rather than consider how we might actively trade our way out, an Australian dollar in the 40 cent range did not seem to faze him. From a government with such an avowed concern with sovereignty and proper economic management, this is surprising.

Treasury does note concerns in the budget papers about housing affordability. And, among other straws in the growing wind, ABC News reports the World Competitiveness Yearbook 2006 ranks Australia “57th as an international trader” out of 61 on the measure of most competitive economies.

Is our current prosperity of substance? Or is it an illusion, one that could shortly be shattered? Time will tell. In the meantime, the truly prudent will investigate the economic substance of individual and societal situations. “Manna from heaven” is no proper mindset for sustainable prosperity, or a secure nation.

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About the Author

Dr Mark McGovern is a Senior Lecturer at the School of Economics and Finance, Queensland University of Technology.

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