Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

The Budget - summed up

By Saul Eslake - posted Thursday, 15 May 2008


Wayne Swan has had to put together his first Budget in more challenging economic circumstances than those which confronted Peter Costello in framing his last four Budgets. Both the international and domestic economic outlooks are more uncertain - the former because of the global credit crunch and its impact on the outlook for economic growth in the United States (in particular), and the latter because of the unexpected acceleration in inflation and the significant tightening of domestic financial conditions over the past nine months.

In the face of those uncertainties, the 2008-09 Budget strikes a reasonably appropriate balance. It projects a Budget surplus of $21.7 billion or 1.8 per cent of GDP for 2008-09, 0.6 of a percentage point more than envisaged by the outgoing Coalition government just before last November’s elections, and does so through a combination of policy decisions producing net savings of $2 billion (about 0.2 per cent of GDP) and adding to the surplus, rather than spending or giving away (as was the previous government’s wont), and favourable “parameter variations totalling nearly $5.4 billion.

For the remainder of the forward estimates period, the Budget projects surpluses in the range of $19-20 billion or 1.3-1.5 per cent of GDP, marginally higher than those envisaged before the last election, though with policy decisions making a smaller contribution to the larger surpluses in the out-years than in 2008-09.

Advertisement

The Government’s ability to foreshadow larger surpluses has been enhanced by further upward revisions to revenue projections, although these were somewhat smaller over the past six months (about $25 billion in the four years to 2010-11) than over the corresponding periods of the last two Budget cycles, owing partly to lower revenues from capital gains and superannuation fund taxes than previously forecast (we wouldn’t be surprised, however, if the revenue projections in this Budget again turned out to err on the low side). And the erosion of fiscal discipline during the final years of the Coalition Government created plenty of opportunities for Finance Minister Lindsay Tanner to find ways of making savings.

In all, the Budget contains spending cuts and tax increases totalling about $35 billion in the five years to 2011-12, largely but not totally offset by new policy decisions totalling about $32 billion - although from 2009-10 onwards the impact of new policy outweighs the impact of the savings measures.

Note that these calculations don’t include the additional income tax cuts which come into effect from July 1, at a cost to revenue of nearly $47 billion over the four years to 2011-12. That’s because these tax cuts were initially decided upon by the outgoing Coalition Government just before the release of the Mid-Year Economic and Fiscal Outlook on the first day of the election campaign, and are thus included in the “baseline” from which the net effect of policy decisions by the Rudd Government is calculated; the Rudd Government’s decision to defer the tax cuts promised by the Coalition for taxpayers in the top tax bracket is credited as a policy decision in this Budget saving $5.3 billion over four years (and is the largest single saving decision in the Budget, although it has no impact on the projected outcome for 2008-09).

Although we are still inclined to believe that the tax cuts will provide a stimulus to domestic demand that isn’t necessary in an economy that is about to enter its 18th year of continuous growth, and in which “excess demand” is a significant contributor to inflationary pressures, we accept that the Government felt obliged to keep its election promises. And the Reserve Bank is likely to have (at least implicitly) factored their stimulatory impact into its monetary policy deliberations. So it would be wrong to argue that the tax cuts will put additional upward pressure on interest rates.

That being so, the 2008-09 Budget can be portrayed as embodying a moderate tightening of fiscal policy. And that’s a distinct change from the Budget’s of previous years, which we’ve consistently argued, have, through the net impact of the policy decisions contained within them, amounted to an ill-timed loosening of fiscal policy.

The specific savings decisions are a mixture of the bold and the unadventurous. The decisions to means-test the “baby bonus” and Family Tax Benefit Part B (for stay-at-home-spouses), effectively denying them to families with annual incomes in excess of $150,000, are especially praiseworthy as an attempt to improve the targeting of such measures. Indeed the pity is that there wasn’t a broader assault on so-called “middle-class welfare”.

Advertisement

On the other hand, we’re a bit sceptical of the one-off “efficiency dividend” which is projected to save more than $400 million a year from agency running costs and represents the largest single expenditure saving in the Budget. Previous experience with such measures suggests that they are actually a way of avoiding hard decisions about what programs should be cut, end up being pushed down to the lowest level of management possible, and more often than not result in reduced efficiency and standards of customer service.

Nonetheless, these and other savings have allowed the Government to fund other important priorities, including climate change, education, dental health, housing affordability and Indigenous disadvantage. There’s also a fillip to Australia’s funds management industry through reductions in the withholding tax rate on property income and capital gains (though not interest) paid to foreign investors.

One other notable aspect of the Budget is that it has created a more compelling vision of how it will deploy the enlarged surpluses which it is projecting over the next four years.

One of the reasons why the previous government felt obliged to “hand over” the revenue windfalls generated by the commodities boom in the form of tax cuts and increased spending may have been because, once they had “paid off” the Commonwealth’s net debt, they couldn’t think of any alternative use for those surpluses than defraying the hitherto unfunded liability for retiring public servants’ pensions.

Although that was an appropriate thing to do, it was unlikely ever to win widespread public support for the notion of paying more in tax was spent on public services. In its final six months in office, the Coalition Government did finally start to designate part of its surplus for longer-term expenditure priorities in higher education and medical technology.

This Budget takes that approach a quantum leap further, by allocating $20 billion to a new “Building Australia Fund” to finance longer-term spending on infrastructure, $10 billion into a “Health and Hospitals Fund” and $5 billion into a new “Education Investment Fund” (to which the $6 billion previously allocated by the Coalition Government to its Higher Education Endowment Fund will be added). These are exactly the sort of purposes for which government should be (and should have been) seeking to “save” some of the windfall revenues associated with the current commodity boom.

Finally, this Budget includes some noteworthy initiatives to improve the transparency of financial reporting. At long last, the GST has been recognised as a Commonwealth tax, consistent with the advice of the Auditor-General and the Statistics Bureau. The sometimes confusing presentation of the Budget using three different sets of accounting frameworks has been simplified. And there is a more helpful discussion of the sensitivity of the Budget aggregates to alternative economic scenarios, including a fall in the terms of trade.

In sum, this is an appropriate Budget for challenging economic circumstances. It doesn’t add to upward pressure on inflation and interest rates, as recent Budgets have done; nor does it take undue risks with a more uncertain outlook for economic growth than at any time in the past five years. It acknowledges that bringing inflation down will entail some sacrifices (including a rise in the unemployment rate), but attempts to spread those sacrifices more fairly than would have been the case if the task of slowing domestic demand had been left to monetary policy alone (as it has been up until now).

Having brought down an “appropriate” Budget for current circumstances, and having kept faith with the voters who installed it at the last election, it is very much to be hoped that the Rudd Government will be willing to spend political capital more adventurously in the two Budgets before the next election.

  1. Pages:
  2. 1
  3. 2
  4. All


Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

13 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

Other articles by this Author

All articles by Saul Eslake

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Saul Eslake
Article Tools
Comment 13 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy