Home > Economic policy, Oz Politics > Instant budget reaction

Instant budget reaction

May 13th, 2008

First up, I have to say that it was good to watch a budget without having to put up with Peter Costello. Unlike Howard, I never regarded Costello as having any real substance. Even after 11 years on the job, his mastery of his portfolio was a clever barrister’s mastery of his brief, not a serious understanding of economics. Despite his nervous start in the job, and a delivery of the Budget that wasn’t notable for rhetorical flair, Swan impresses me more as knowing what he is talking about. Turning again to the Opposition for contrast, I didn’t think much of Malcolm Turnbull’s response, claiming (on a basis he never made quite clear) that this was a “high-taxing, high-spending budget”, and edging perilously close to attacking the government for closing the alco-pops tax loophole his own side had created. Clearly the Liberals are still trying to work out what they stand for.

Coming to the main point, the government did a good job in keeping its promises, even if households on incomes over $150 000 may feel picked on. The means-testing of Family Payment B was announced before the election, and the threshold could scarcely have been higher than it was.

IIRC, the Howard tax cuts, largely copied by Labor were announced in nominal terms (without allowing for inflation). If so, the higher than expected inflation bequeathed to Swan is actually something of a gift, since it means that bracket creep will pay for (and justify) much of the promised cuts. Looking at the parameter revisions, most of which have been attributed to “the mining boom” it’s hard to believe that the $12 billion or so the government has gained from this source is all due to real increases in revenue, so I think bracket creep is playing a role here.

I was disappointed, if not very surprised, that the budget savings were made up almost entirely of odds and ends, with big targets like the dependent spouse rebate and the FBT exemption for cars left pretty much untouched (the rebate was subjected to the 150K means test). That said, there was enough fat left over from the previous government that it was possible to cut $7 billion or so without causing any obvious pain. It won’t be so easy next time, and I think it would have been better to take some pain this time around. Still with a surplus of 1.8 per cent of GDP, it’s unsurprising that they didn’t feel the need to cut further.

The one big new thing in the Budget (new in magnitude, but not in concept) was the announcement of $40 billion in infrastructure funds, building on the Future Fund and the Higher Education Endowment Fund. This seems promising, especially as the money seems likely to be invested in a mixture of equity and other assets, allowing the government to keep on issuing at least some debt.

Overall, this Budget is reasonable as regards its macroeconomic settings, cautious but reasonably sensible in fiscal terms, and likely to be politically successful (first budgets usually are). But it’s left some hard decisions to be taken later and, with a three-year term, there will only be one more chance before the next election year budget.

Categories: Economic policy, Oz Politics Tags:
  1. Spiros
    May 13th, 2008 at 21:56 | #1

    “it was possible to cut $5 billion or so without causing any obvious pain”

    What about the fishing hall of fame? If that’s not pain, what is?

  2. May 14th, 2008 at 00:15 | #2

    “alco-pops tax LOOPHOLE”.

    This was not a loophole. Alco-pops (as journalists seem to delight in calling what the rest of the nation terms a “pre-mix”) were taxed at the same rate as just about everything else alcoholic except wine, which is subject to a special high tax.

  3. Joel
    May 14th, 2008 at 00:47 | #3

    “This was not a loophole.”

    I’m sure I heard somewhere (little help?) that until now the “alco-pops” have been taxed at a lower per-volume of alcohol rate than any other spirits, a concession introduced as part of the GST package?

    This would be the loophole.

    Rudd’s “social engineering tax increase” is on more than closing this loophole, so all a little blunder about nothing surely.

  4. Ian Gould
    May 14th, 2008 at 00:55 | #4

    The luxury car tax was disappointing.

    It would have been far better to revise the whole basis of vehicle taxation – get rid of the distinction between “commercial vehicles” (which includes 4WDs) and “passenger vehicles”; and tax vehicles based on their fuel efficiency (with the most fuel-efficient vehicles getting a rebate and the least efficient attracting the highest rate of tax.

  5. paul walter
    May 14th, 2008 at 02:12 | #5

    I thought Quiggin’s assesment read a little like Davidson of the Age, who was sombre about the lack of comprehension of and thus desire to change, what some might call the immanent Australian socio-cultural paradigm, that is, “growth”/ “she’ll be right”/ worry about it tomorrow/ leave it to the never-never (burp!).
    That is, infrastructure spending/financing is still being directed toward white elephants popular with purveyors of privatisation, ppps and the like. Importation of debt remains high and much mitigates against a stable future based on the realities of ecology/economy, and the responses needed to have things like realistic housing at an available and affordable level which factors in acceptable public transport, water, power, etc.
    Eg, the Australian nation building project.
    Many feel the above IS answered in this budget, but I wonder if the realities of globalisation really don’t suggest the underlying issue of the looting of Australia; public debt/ private gain etc.
    For example, Davidson ends by expressing dismay at the deteriorating likelihood of a reversal of ideologically driven ( eg neolib ) education, as a means for enabling a better appreciation by future Australians, of the “real” realities of their world { still nothing as to stopping the decline in public broadcasting either? ).
    If even that redoubtable heroine of the { papier mache )left, the deputy PM, is unwilling to now challenge the same paradigms she challenged in opposition, what hope of an awakening?
    I know Davidson regards Labor governments as universally timid.
    After the depressing Iemma coup d’etat of last week against the rank and file and the deafening press, media and blog silence a part from misleading conflations of the rank and file with “teh unions” that accompanied it, I remain greatful for the few remaining honest informed commentators capable of accessing and informing an audience or readership.

  6. Tony G
    May 14th, 2008 at 03:27 | #6

    “I was disappointed”, but not “very surprised,”

    “it’s left some hard decisions to be taken later”
    ‘Whenever’ that is?



    “The big picture of this Budget is that the Rudd Government has announced $5.3 billion worth of new spending for 2008-09 leading up to it, and has now announced savings of $7.3 billion, increasing the surplus by $2 billion.

    In addition there are a total of $5.4 billion in unexpected increases in tax receipts and other windfalls since the pre-election fiscal outlook (PEFO) that was issued by Treasury during the election campaign last year.

    As a result the $14.3 billion surplus forecast in the PEFO has now turned into a $21.7 billion surplus ($14.3 billion plus $2 billion plus $5.4 billion)”.

    Swan should be commended for the $2billion in net savings, but in context it is very little.

    The Budget has delivered increased spending and higher taxes.

  7. jquiggin
    May 14th, 2008 at 06:26 | #7

    Tony G, after quoting Kohler at length your final sentence is the exact opposite of what he said, and, indeed, what you say yourself in the previous sentence (where you say the government made small reductions in spending, not increases).

    Did you mean to have something in between like “By contrast, Malcolm Turnbull claimed that …”?

  8. Mathew
    May 14th, 2008 at 07:04 | #8

    Looking at this years budget papers, in fact the governement appears to be spending 12.5 Billion dollars MORE than last year, so I don’t understand where these “savings” are hiding.

    And what about the environment? Kevin was all about that and climate change pre election, but with a ton of money sloshing around he can’t find any worthwhile policies in this area to spend it on?

    Every reader of this blog should be writing letters demanding action on this point! I know I am.

  9. pat
    May 14th, 2008 at 07:53 | #9

    “The one big new thing in the Budget (new in magnitude, but not in concept) was the announcement of $40 billion in infrastructure funds, building on the Future Fund and the Higher Education Endowment Fund. This seems promising, especially as the money seems likely to be invested in a mixture of equity and other assets, allowing the government to keep on issuing at least some debt.”

    I think that’s the future, eventually their will be no work, therefore no income tax, consumption taxes will have to be supplemented by returns from govvie owned investment funds, everyone will be on the dole or on dividends, and by the time no one can tell the difference between them, the difference between tax and dividends will also be erased.

    Weird world coming, commodities r us, you are nothign if not yourself.

  10. Jill Rush
    May 14th, 2008 at 08:12 | #10

    It was surprising that there were no big environmental announcements in the budget as one of the big issues of the election.

    The cynic in me thinks that this is because it allows for announcements to be made later in the year when there is a need to boost credentials.

    However it is not a budget to cause too much angst which is probably the intention.

  11. May 14th, 2008 at 09:02 | #11

    It would have been far better to revise the whole basis of vehicle taxation – get rid of the distinction between “commercial vehiclesâ€? (which includes 4WDs) and “passenger vehiclesâ€?; and tax vehicles based on their fuel efficiency (with the most fuel-efficient vehicles getting a rebate and the least efficient attracting the highest rate of tax.

    Hear hear! Feebates for all vehicles and household appliances should have been introduced years ago.

    Do we still have the tax break for imported 4WDs, and the FBT incentive to drive more, and the fuel excise capped at 38c/L? Yep, thought so.

    P.S. Man I love that preview button. Thanks ProfQ!

  12. Tony G
    May 14th, 2008 at 09:56 | #12

    You caught me out, I did steel this quote from Turnbull;

    “The Budget has delivered increased spending and higher taxes”

    …But I think it is quite factual, it happens every budget.


    This budget;

    Revenues up $17 Billion.

    Spending Up $12 Billion.

    “where you say the government made small reductions in spending, not increases).”

    So in context spending is now only $12 billion instead of $14 Billion more than last year.

    If that way of spinning it makes sense?

  13. May 14th, 2008 at 10:28 | #13

    “Unlike Howard, I never regarded Costello as having any real substance”.

    Does that mean that you never regarded Costello as having any real substance, unlike Howard’s view of him, or that it was unlike your view of Howard himself?

  14. Lord Sir Alexander “Dolly” Downer
    May 14th, 2008 at 10:55 | #14

    Like PM Lawrence, I regard pedants as silly.

  15. O6
    May 14th, 2008 at 11:21 | #15

    No. 9, there was a big ‘environmental’ re-announcement: $500M for ‘clean coal’, the same amount as for all renewables put together. This at a time when coal profits have never been higher. Why not a $/tonne export tax on coal to fund this work.
    In passing, CSIRO will cut staff by 85-100 in 2008-9 as a result of cuts in this budget and the general ‘efficiency dividend’. Good idea?

  16. Ian Gould
    May 14th, 2008 at 13:01 | #16

    On the car tax issue, it’s worth noting that the Israeli government’s agreement to cut taxes on electric vehicles is apparently a major factor in Nissan/Renault’s plans to roll-out electric vehicles globally by 2010.


    “Early this year, Nissan and its French alliance partner, Renault, signed a deal with the California-based Project Better Place to produce electric cars for sale in Israel and Denmark.

    Renault will provide the cars and Nissan will supply lithium-ion battery packs. Mr. Ghosn, who also serves as chief executive of Renault, said the Israeli government would encourage sales of electric cars by sharply cutting taxes to levels below those on gasoline-powered vehicles.

    “We would never have done this if the Israeli government was not encouraging it,â€? he said. “Whoever puts the most incentive on the table is going to get the technology first.â€? “

  17. May 14th, 2008 at 13:12 | #17

    500M for ‘clean coal’, the same amount as for all renewables put together. This at a time when coal profits have never been higher. Why not a $/tonne export tax on coal to fund this work.


    Howard may have had the ‘Greenhouse Mafia’ running climate change policy, but Rudd has something equally as bad — The CFMEU and The Minister for Paying Lip Service to Climate Change.

    At a time when Australia is reaping the rewards from exporting the enemy of the human race its shameful that we are doing so little on climate change.

    Are we behaving any better than the Taliban with a bumper crop of poppies?

  18. May 14th, 2008 at 13:19 | #18

    “a clever barrister’s mastery of his brief, not a serious understanding of economics”

    What a thing to say about Mr Turnbull!

    And Spiros, with you on the FHoF buddy…

  19. Father Mercy
    May 14th, 2008 at 15:18 | #19

    I’m surprised that foreign aid will be lifted. On the one hand we slap any Australian who is successful and acquires wealth. We tax him or his company and distribute that money amongst the less well off. On the other hand when we find out that one of Sohartoe’s wealthy kids is a regular at Burswood Casino; or the buyers of that famous piggery are wealthy Indonesian; or that at horse racing carnival time the owners of some decent horses happen to be wealthy Indonesians we don’t ask the Indonesian government to start soaking their own rich. Why don’t we ask the Indonesians to mulct their own wealthy residents before we are expected to buy the Indonesian government new patrol boats and other toys?

  20. Doug
    May 14th, 2008 at 15:27 | #20

    The increase in foreign aid is the first step in meeting an election promise to move overseas aid to 0.5% of GDP.

    Priority on spendiing under this budget is directed at the Millenium Development Goals.

  21. tomd
    May 14th, 2008 at 15:29 | #21

    …tax vehicles based on their fuel efficiency…

    Isn’t that called fuel excise? 🙂 It’s doing a decent job of encouraging people to buy smaller cars. Pity we don’t have a viable small car industry – and large fleet purchases are all that’s keeping our large car industry going.

  22. Lord Sir Alexander “Dolly” Downer
    May 14th, 2008 at 17:01 | #22

    I’ve deleted this comment, as a personal attack on another commenter, based on speculation

  23. Smiley
    May 14th, 2008 at 17:06 | #23

    With the prediction by a major petroleum company that petrol will be $3.30 at the bowser within the decade I have a feeling that inflation will be with use for some time. Only a fundamental change in the way our economy is run will have a dramatic effect. Dr Nelson did say something on ABC Radio on Tuesday morning which suggested that he understood the causes of inflation in our economy. However, he didn’t offer any solutions as far as I can recall.

    I guess when it really starts hurting, people will have to change their ways.

  24. Lord Sir Alexander “Dolly” Downer
    May 14th, 2008 at 18:41 | #24

    Oh, alright John. (re 20.) Sorry.

  25. May 14th, 2008 at 20:18 | #25

    A few commentators have mentioned the “higher spending, higher taxing” nature of the budget. If such a criticism is coming from a Liberal supporter then it is highly cynical.

    Yes, nominal revenue/spending increased. But to get a proper measure of the growth of government you need to account for (1) inflation; and (2) population growth. Accounting for those two factors, we can see that the previous Liberal government increased the size of government significantly. And yet, at every budget they tried to hide this fact by using misleading statistics… and then claim to be a friend of classical liberals.

    This is a good budget, without being great. It would have been nice to see them cut more radically, as first budgets are generally the best chance to make the tough decisions.

  26. Tony G
    May 14th, 2008 at 20:24 | #26

    Ziggy puts it eloquently.

    Comment 1 of 12 from here;


    “We are now seeing the start of Whitlam-2 under Krudd and his gang, with rising interest rates, increasing unemployment and a budget that will make the entrepreneurs, those who create jobs and wealth, head for greener pastures and take their money and expertise with them. More companies such as Beechwood Homes will collapse, throwing workers out of their jobs, where instead of contributing to the nation’s coffers, they will be drawing the dole. The budget was a pile of touchy-feely left-wing ideological spin that might have appeased union thugs and socialists, but in the long term, such tax and spend policies will bring the nation to its knees again. Just wait and see what happens when interest rates rise again. Many Labor voters facing mortgage foreclosures will rue the day they voted for the Krudd government and threw out the best economic managers this nation has ever experienced.”

    Posted by: Ziggy of Sydney 7:24am today

  27. Ian Gould
    May 14th, 2008 at 20:43 | #27

    “…a budget that will make the entrepreneurs, those who create jobs and wealth, head for greener pastures and take their money and expertise with them.?

    Yeah, confronted with the twin horrors of tax cuts and massive public infrastructure investment the entrepeneyrs will be fleeing in terror before Bloody Kevin’s plans to re-enact the Ukrainian Famine reach fruition.

  28. Domino
    May 14th, 2008 at 22:08 | #28


    I’m a little confused about the surplus figure. Does the money for the various “funds” come from this figure, or are they in addition to the surplus? And I’m lead to believe that there are various bits of spending, including transfers to the states, which are currently off-budget, but which may be included by the end of this year.

    Any insights?

  29. Pedro S
    May 14th, 2008 at 22:18 | #29

    Swan did not know what the NAIRU was when asked. He doesn’t even have a clever barrister’s grasp of economics. Everyone else thinks that Swan’s job is on the line. Labor has quite a few strong folk on the front bench. Swan’s days may well be numbered. If things turn South due to global economic conditions and Rudd has to sacrifice someone, who better than a mediocre treasurer?

  30. El Mono
    May 15th, 2008 at 01:49 | #30

    Did Whitlam produce surpluses?

  31. Ian Gould
    May 15th, 2008 at 04:03 | #31

    El Mono, actually I think he did.

    But if so they were bad Commie surpluses.

    Much like the wicked socialistic tariff cuts he introduced.

  32. Tony G
    May 15th, 2008 at 06:42 | #32

    In the 1975/76 tax year the deficit was about $1.5 billion or 1.8% of GDP.

    I cant find further back than that.


    Whitlam lost his job on the 11th of November 1975.

    If we can blame Howard for the current inflation we can blame whitlam for that deficit.

    “Whitlam’s approach to economic management was to allocate the surplus of wealth or abundance.”


  33. May 15th, 2008 at 08:59 | #33

    Did anyone notice the Solar PV Rebate is to be means tested ?

    Good one Swannie, you just killed the Australian PV industry.

    Oh well, just one more step along the road from “clever country” to “coal country”.

  34. wizofaus
    May 15th, 2008 at 09:37 | #34

    Was there much (any?) of an increase in funding for R&D for alternative energy sources?
    If anything’s going to solve climate change, it’s some major technological breakthroughs at the R&D level.

  35. Ian Gould
    May 15th, 2008 at 09:52 | #35

    “Good one Swannie, you just killed the Australian PV industry.”

    In 6, 12 or 18 months if the Australian PV industry (by which I assume you mean the installation industry because that’s damn near all we have)is still around, will you admit your error?

  36. May 15th, 2008 at 10:22 | #36

    Yes I mean the installation industry, and yes I’m sure there will still be some installers struggling along in 18 months time.

    The PV rebate was never the smartest policy in the world, but in the absence of any sensible policy (emissions trading, carbon taxes etc) it gave the local PV industry a big kick along and put it in a position to take advantage of (hopefully) better policy in the future.

    Realistically rebate or not, very few people earning less than $100K are going to be forking out thousands for a residental PV system. The rebate was almost certainly going mainly to well-off greenie do-gooders who just needed a little extra incentive to front up with the cash. Now that incentive is gone, and the PV installation industry will be badly hurt.

    The time to do away with these kind of rebates and subsidies would have been when emissions trading came in, but no, Swannie’s killed it to save a few bucks because of his obession with inflation.

  37. Socrates
    May 15th, 2008 at 10:24 | #37

    I won’t comment on the macroeconomic picture beyond saying that it seemed headed in the right direction, but I too was dissappointed on no change to rebates for company cars etc and tax reductions for 4WDs. I can see no economic or environmental case to subsidise vehicles that are imported, more costly to run and less safe. On the plus side, hopefully the as yet undefined new infrastructure fund will be used for rail and busways and not just more urban freeways.

  38. Socrates
    May 15th, 2008 at 11:24 | #38

    “tax vehicles based on their fuel efficiency…
    Isn’t that called fuel excise?”

    No it isn’t. Lots of distortions in ownership structures (eg company owned cars) and the ways car running costs are paid (eg people with work supplied fuel accounts) mean that these two effects can and do operate quite separately. We badly need to eliminate those anomalies and link vehicle taxes and charges to their cost and impacts, not arbitrary measures like number of cylinders. There are many good economic, environmental and engineering reasons why we should link taxes on cars to their weight and fuel consumption, with lighter, safer and more economical vehiles rewarded, and vice versa. At presente we still have large, heavy and worse impacting 4WDs actually paying less tax than smaller, safer sedans. That subsidy should have been stopped and penalties for worse impacting vehicles imposed.

  39. May 15th, 2008 at 13:44 | #39

    Christine Milne in today’s Crikey says:

    A second clanger is gaining momentum: the ludicrous decision to means test the rooftop solar panel rebate. While means testing is generally policy that we Greens support and advocate, applying it to a policy geared at bringing down the price of what is currently the Rolls Royce of renewables is either an utter failure to think or a deliberate move to undermine the industry. What family on less than $100,000 will spend $20,000 on solar panels? The move has already sent shockwaves across the country, with speculation that the installation and manufacturing industries could collapse, along with the Solar Cities program and other so-called government priorities.

    In other words: Good one Swannie, you just killed the Australian PV industry.

  40. Ian Gould
    May 15th, 2008 at 14:48 | #40

    “What family on less than $100,000 will spend $20,000 on solar panels?”

    Except that you can buy a solar system for substantially less than that – especially after the various rebates.




  41. May 15th, 2008 at 15:08 | #41

    Lord Sir Alexander “Dolly” Downer, sometimes a narrow difference makes a lot of difference. That has nothing to do with pedantry. Asking about this difference would (if he had answered it) have revealed whether JQ had a good opinion of Howard’s competence.

  42. jquiggin
    May 15th, 2008 at 16:34 | #42

    I (and obviously Lord Sir A) thought it was obvious that I was referring to my own view that Howard had substance, rather than (absurdly) imputing to Howard the view that Costello had substance. But if you really need it spelt out, PML, consider it spelt.

  43. Tim M
    May 15th, 2008 at 18:55 | #43

    Ian Gould, Christine Milne’s comment could have been better phrased “what family on less than $100,000 will spend $6,000 on solar panels?” and it would be equally valid.

    Ironically, both my boss and I (I suppose you could call us both ‘well off greenie do-gooders’) were actively planning in the last week or so to get panels under the rebate. The budget killed that stone dead.

    Oh well, maybe when the emissions trading scheme kicks in the utilities will introduce their own rebates.

  44. Ian Gould
    May 15th, 2008 at 20:51 | #44

    “Ian Gould, Christine Milne’s comment could have been better phrased “what family on less than $100,000 will spend $6,000 on solar panels?â€? and it would be equally valid.”

    Any family that can get a home equity loan on the house they’re about to put the solar panels on for a start.

  45. May 16th, 2008 at 00:39 | #45

    JQ, I might have read it that way, if not for the fact that I have so often seen you belittle Howard in a variety of respects.

  46. Tim M
    May 16th, 2008 at 16:39 | #46

    Sorry Ian, the facts seem to be bearing out Carbonsink’s and my interpretation of events, rather than yours. Solar installation companies are already reporting large-scale cancellations of orders:


  47. Tim M
    May 16th, 2008 at 16:46 | #47


    Events seem to be bearing out Carbonsink’s and my own fears. PV companies are reporting large scale order cancellations:


  48. Ian Gould
    May 16th, 2008 at 18:54 | #48

    It appears that I may have been incorrect regarding the impact of the means test for solar panels.

    The industry is certainly talking up the impact – but I’m somewhat skeptical of this sort of immediate reaction.


  49. tomd
    May 17th, 2008 at 02:52 | #49

    Socrates: well, I was slightly tongue in cheek, but thanks for pointing out the cases where chooser-of-car and fuel-bill-payer are different. What’s the point in taxing by weight, though? Isn’t that fuel efficiency by another name?

  50. El Mono
    May 17th, 2008 at 12:31 | #50

    Slightly off topic but while people are discussing cars and carbon emissions. Is the only factor for a cars carbon emissions how much fuel it uses, or can two cars use the same amount of fuel but emit different amounts of carbon.

  51. Morgan Gibson
    May 18th, 2008 at 01:57 | #51

    The budget was a piece of inoffensive, centrist garbage intended to gain massive support from the majority of the electorate. Australia is spiralling further into mere populism with two catch-all parties representing nothing but the voters they can convince to vote for them and pretending to endorse any policy that is most likely to achieve this.

    The destitute and down-trodden, those who Labor are meant to stand for, were largely ignored (carers, pensioners and those earning under the annual average), especially in the long-term. This was no Robin Hood budget and let’s not try and pretend otherwise.

    There was also no significant movement on climate change. This is one promise Rudd certainly failed to keep! There are so many possible options to start dealing with oil dependency and climate change, but no movement is made towards them. Indeed, there is a specific, elite movement of institutionalised interests acting to prevent these ideas and products receiving public attention.

    Furthermore, why can so much be spent on soccer, but be taken on union. Even more so, how can we be spending about what we spend on soccer on aboriginal community development? It is pathetic and needs more attention.

  52. Alison Alloway
    May 18th, 2008 at 21:03 | #52

    I was shocked and disappointed that pensioners were given a bum steer in the budget. One of the key findings of the Joint Senate Inquiry into pensions, entitled “A Decent Quality of Life” tabled earlier this year, was the urgent need to raise the single rate of pension. I hope pensioner groups exert some pressure on the Government to address this issue.

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