Economic policy

Why Budgets are boring

John Quiggin13 Comments

Budgets used to be big news once, both in the leadup and in the aftermath. Now, they’re front page news for a day, and even that’s not secure. If the Beaconsfield mine rescue had been a day later, I suspect at least some editors would have pushed the Budget to the inside pages. Why the decline in interest?

For a start, Budgets usually contained increases in excise taxes, so the tabloids could keep “Beer, Cigs, Up” stored away in 60 point type, to be run every year. The excises were indexed to inflation back in the 1970s, so now they go up automatically, with no need for an announcement. The Fraser government briefly went the whole hog and indexed the income tax scales, which killed off the good news of regular tax cuts as well, but that idea only lasted a couple of years. Still, people are pretty much used to tax cuts that return bracket creep and not much more.

Nest, the fact that people could make money by anticipating changes in taxes also produced a cult of secrecy, which generated high drama around Budget leaks. Now the government either preannounces or comprehensively leaks most of the Budget measures in advance. The trick in media management (fresh when Keating pulled it back in the 80s, but tired now) is to have a rabbit or two left to pull from the hat on Budget night.

Third, active fiscal policy is no longer used to manage the economy. This is now done by monetary policy, that is, by changing interest rates. All the attention that used to be paid to the economic analysis in the Budget is now focused on the Reserve Bank. The only real concern expressed about fiscal policy is whether an expansionary setting for fiscal policy will produce an offsetting increase in interest rates.

Finally, the big debate over the size of government has settled down into a stalemate. As a share of GDP, both tax revenue and public spending have been pretty much constant (in the high 30s) for the last twenty years. The numbers for the Commonwealth government taken separately are much the same, though they’re complicated by the debate about how to treat the GST. If you divide it up proportionally to the taxes it replaced, you get the answer that the tax take for the Commonwealth and the States is also virtually unchanging.

So, although there is a lot of readjustment, some of it necessary and some dictated by the political demands of the day, nothing much changes on the larger scale.

Will Budgets continue to be boring, or do interesting times lie ahead? I’ll try to post more on this.

13 thoughts on “Why Budgets are boring”

  1. Finally, the big debate over the size of government has settled down into a stalemate.

    Sad but true. With the handouts that the government is passing around these days they could nearly abolish income tax. The incentives (and productivity) would be a lot higher but even the Liberal party is now commited to socialism (the Nationals probably always were). We are not going to see the government sector rolled back to the size it was in the 1960s any time soon. Such a pity.

    The top tax rate could have been abolished entirely with next to no cost to the budget, but the political symbolism of doing that was obviously too much of a stretch. Lifting the thresholds will have to do for now.

    Whilst the the ALP commentators on budget night were obviously talking with the tone and spin that any opposition would, they did seem to recognise the real problem still embedded in the system. EMTRs (Effective Marginal Tax Rates) from the combination of tax brackets and welfare tappering have not received any serious attention. The flow on to lower productivity is a real waste. Of course given that the ALP introduced the means testing of welfare they kind of helped to invent the problem.

    At least Costello spoke of this budget as another “installment” in tax reform, implying that there will be more in the election budget. And of course the tax cuts that were delivered are a welcome incline in the right direction.

  2. Quick back of an envelope calculation suggest that families on average income still face an EMTR of 50%. For every dollar they earn they get to spend 50cents more. At the margin (where it counts) a huge trade wedge between households.

  3. Keeping interest rates low?…

    Ross Gittins in the SMH:
    The notion that we need a tax cut to compensate for the increase in interest rates is actually a strange one, akin to the idea that the solution to a hangover is to go back on the turps.
    In other words, it’s by spending our ta…

  5. “The debate about how to treat the GST” ? I thought the only person who is trying to keep that furphy alive is the Treasurer, and he’d lost the argument a while back.

  6. I was kind of hoping that Prof. Quiggin could make some insightful comments on the $500b. being made available to the Murray-Darling Commission, given his close links with the Commission.

  8. Hi Gordon. I mentioned this briefly in advance at the RSMG blog, and I plan to say more soon.

    BTW, while I talk with people from the MDBC from time to time, asking for data and so on, I wouldn’t describe myself as having close links with the Commission.

  10. Sorry Terje, too late at night to bother registering. Maybe tomorrow. I would have said that any tax cut is too small and would rather see all of the subsidies like private health rebate, child care rebates etc vanish completely and given back as a bigger tax cut.

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