Home > Economic policy > What I wrote in the lockup: Budget summary

What I wrote in the lockup: Budget summary

May 12th, 2010

Last year’s Commonwealth Budget represented a huge, and, for the most part, successful economic gamble. The gamble last year was that a big budget deficit would yield an economic stimulus sufficient to outweigh the associated increase in public debate and provide a basis for sustainable economic growth in the future.

As the Treasurer’s speech points out, the Australian economy has recovered strongly at a time when the US and European economies are only marginally stronger than at the depths of the recession. Public debt is now projected to peak at 6 per cent of GDP, compared to a developed world average of more than 80 per cent. The government’s claims as strong economic managers have a fair bit of credibility.

This year’s Budget is a political gamble; that the government can win re-election based on that credibility, without offering any significant electoral sweeteners. The government doubled down on this gamble with the series of backflips and repudiated promises in the leadup to the Budget, motivated largely by the desire to achieve an early return to surplus. The political price for these backflips, most notably the indefinite deferral of the CPRS, has been steep, and it’s far from obvious that the Budget will provide any offsetting bounce.

The government’s rhetoric also precludes anything extravagant in the way of election promises. Given that the projected surplus is only $1 billion, there room to move. Anything new has to be fully offset, or else justified by a further upward revision in estimates of the net position.

There are a few options remaining. The Henry Review provides a wide range of policy options in addition to the handful of measures adopted in the budget (in addition to the Resource Rent Tax, the budget implemented Henry’s recommendation for concessional treatment of interest income). Some of Henry’s measures would increase revenue and provide funding for new initiatives.

Equally, the Budget presents the Opposition with some nasty political problems as the election approaches. Tony Abbott has dissipated any credibility he might have had with a series of policy thought bubbles. The most notable was the announcement of a generous parental leave scheme, to be financed by a levy on big business, in direct contradiction of his rhetoric about Great Big New Taxes. So far, the political cost has been modest. But he cannot afford any holes in the accounting for his election platform.

Abbott now has to decide whether to match the government’s pledge of a return to surplus by 2012-13. Like the government, the opposition has no room to move, in net terms, if this target is to be met. But the position worse than that for the coalition. The government’s projection includes the revenue from a range of measures the opposition has pledged to reject, including the means test on the private health insurance rebate, the tobacco tax and the resource rent tax. In the absence of a backdown on these measures, the opposition has to find big expenditure cuts just to break even.

The result is not one to inspire enthusiasm. But we ought to be grateful that we are facing these problems, and not those of the US, UK and eurozone.

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  1. BilB
    May 12th, 2010 at 21:02 | #1

    Were you one of those economists who flicked through page after page to discover that the CPRS was shoved into “other” at the back?

  2. May 12th, 2010 at 23:41 | #2

    The opposition is all over the place, and they don’t have much time left to convince Australians they can do any better than Labor. That and their lack of anyone credible in parliament means that Labor will probably squeak back in. Hopefully Labor will have learnt a few lessons and won’t make such silly mistakes as they did in this first term. The loss of a few seats would help get them focused – maybe.

    I was going to say that at least Labor is honest, unlike Howard. But that’s not true any more, with their saying the resources super tax is like the oil tax (it’s not) and that it will pay for superannuation increases (it won’t – it’s employers who’ll wear that cost), and that the resources belong to ‘all Australians’ – they don’t; and that they care about the climate – yet they only put in a measly amount in the budget towards weaning us off coal.

    I understand untruths are often excused as acceptable political spin or simplifying the issues – but senior politicians keep treating us as if we are infants who could not hope to understand the ‘complexities’ – leaving aside the fact that many of us have worked at senior levels in government. And of those who haven’t – they understand complexities well enough.

  3. Ikonoclast
    May 13th, 2010 at 11:14 | #3

    We have Hobson’s choice. Rudd’s govt has few good ideas and thus is almost useless. Abbott and company would be worse than useless.

    The stimulus was needed but was very poorly applied (insulation and school buildings fiasco). The CPRS was always a bad idea as it depended on the rest of the world and an experimental market in a negative externality; the latter being economically wrong in principle and practice. We should unilaterally implement a carbon tax, remove fossil fuel subsidies and promote renewables.

    BTW, the resources do belong to all Australians. Companies are granted a lease and a right to extract according to laws by the govt. Ultimate ownership resides in the Commonwealth and its people.

  4. Fred Argy
    May 13th, 2010 at 16:41 | #4

    John, if one believes Tanner, Abbott’s promises so far would cost 15.7b changing the predicted 2012-3 $1b surplus into a 4.4b deficit and the following year’s $5.4b surplus into a $450 million deficit.

  5. Popgomouse
    May 13th, 2010 at 17:27 | #5

    Sou :
    But that’s not true any more, with their saying the resources super tax is like the oil tax (it’s not) and that it will pay for superannuation increases (it won’t – it’s employers who’ll wear that cost), and that the resources belong to ‘all Australians’ – they don’t; and that they care about the climate – yet they only put in a measly amount in the budget towards weaning us off coal.

    I believe in a round-about way, the super tax on resources and the cut in company tax may be seen as a reallocation of the resource boom profit. At least, I think that is what the Henry Tax review has in mind. So, the employers are super co-contribution increase, but they are compensated with the company tax cut.

  6. May 13th, 2010 at 19:20 | #6

    When I said that resources don’t belong to all Australians, what I meant was the resources belong to the States – not the Federal Government. That’s why the Fed Govt has to get the money via a tax – otherwise it could charge a rent or royalty like the States already do. (WA resources belong to West Australians etc).

    The company tax cut won’t necessarily cover the cost of the superannuation increase. The company tax is a 2% cut in tax on company profits. For many companies, the 3% increase in payroll will cost more than they get back from reduced taxes.

    It’s a reallocation of resources from the private sector to the public sector, but we don’t know yet how the bulk of it will be spent by the public sector; nor how much it will be.

  7. Louis Hissink
    May 13th, 2010 at 21:57 | #7

    “Last year’s Commonwealth Budget represented a huge, and, for the most part, successful economic gamble. The gamble last year was that a big budget deficit would yield an economic stimulus sufficient to outweigh the associated increase in public debate and provide a basis for sustainable economic growth in the future.”

    This has to be one of the best non-sequiturs ever published on the internet – How the heck a government stimulus could fiscally affect (which is its purpose) public debate, rather than public economic activity, has to be delusional.

    While you are trying to understand that John, BHP-Billiton shares have a 3% yield, and Rio Tinto 0.9% yield on share price. So how from decreasing those yields by a Resource Rent tax will cause an improvement in mining company investment is an interesting proposition.

    Such views are expected among the economic illiterati, of whom you seem to be a paragon.

  8. Donald Oats
    May 13th, 2010 at 23:10 | #8

    Abbott has one idea and one idea only: block every bill that is to do with specific election promises. That’s it. The budget reply by Abbott merely confirmed that central strategy, if it can be called that. To claim that he is taking the government to task or holding them to account is baloney, but that is the Liberallati refrain. As far as I can see, they are shaping up to block supply again, having knifed their previous two leaders for being too liberal – quite ironic, that.

    Quite frankly, the Labor government is not showing any signs of an adroit defence against the Liberal campaign of negativity. I hope that they get around to appointing some superior strategists for this election, otherwise it is going to be a damn boring contest.

    PS: The Dow dropped nearly a thousand points in a couple of minutes (itchy trigger finger), and a day or two later recovered by 400 points or so, because of European Union GFC-related concerns – Greece mainly. Australia’s resource rent tax had nothing to do with that, or with Spain taking austerity measures in the wake of Greece’s troubles. Currency plays in which attempts to crush a weak currency are made also have nothing to do with Australia’s taxation reform – which will no doubt be blocked by the Liberal opposition anyway. While Australia has a lot of mineral and organic wealth locked up in the land, there are plenty of other areas around the world that can be exploited by Rio, BHP, and the like. Australia is just one piddling little country with weak tax regimes when it comes to natural non-renewable resources.

  9. Stephen L
    May 14th, 2010 at 00:12 | #9

    John I think you mean “debt” not “debate”. Still, you seem to have confused Louis Hissink. Not hard, but amusing nevertheless.

  10. Freelander
    May 14th, 2010 at 01:35 | #10

    @Louis Hissink

    Obviously, the level of debt, that is the deficit has increased public debate, even if that debate has been led by the ignorant or untruthful. Abbott and his climate change denying clowns have been rabbiting on about little else.

    Now they have something new to rabbit on about. The resource super profits tax. Little do they care the incredible disservice they are doing to Australia. They are perfectly happy to sell Australia down the river for a few pieces of gold and a chance at re-election. I suppose they have little else because if they were honest, who would elect them?

  11. krusty
    May 14th, 2010 at 07:55 | #11

    Louis Hissink! Just. Rocks !

  12. Freelander
    May 14th, 2010 at 09:10 | #12

    Don’t abuse him. He can help being unsteady on his feet. Not ’till he lays off the meths at least.

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