After the Budget

* Budget lockup low point: Only instant coffee, had to get my caffeine hit from Diet Coke. High point: Asked for autograph by Treasury officials. Also, a fun dinner with Robert Gottliebsen, Alan Kohler, Natasha Stott-Despoja, the Crikey crew and others. Not quite as lively as some accounts suggested, but a good time was had by all.
* One thing I missed: Got through some of the confusion on the aid budget but wasn’t able to work out if the money for Copenhagen commitments was additional new money (as promised) or old money taken from elsewhere in the aid budget. Unsurprisingly, it was old money
* A bigger thing I missed: What Possum’s Pollytics correctly calls the most important chart in the budget, a graph showing a regression of the size of economic stimulus against economic growth relative to IMF forecasts. The relationship is highly significant, and the coefficient is approximately 1. That is, each dollar of stimulus resulted in (roughly) a dollar of extra output. No doubt this will be subject to reanalysis, but it’s a striking result.

* Tony Abbott’s reply: predictably weak. Freezing public service recruitment is silly symbolism, not a serious way of cutting spending.

What I wrote in the lockup: Budget summary

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.
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Some thoughts on Resource Rent Tax (updated)

I’m going to be in the Budget lockup tomorrow, so I probably won’t be posting much after this. So, rather than polish it up, I’m going to bang out some thoughts on the Resource Rent Tax proposal, the main element of the Henry Review adopted by the government. The shorter version: the Tax is a good idea, and the criticisms we have seen are what you would expect from rent-seekers seeking to protect their rents.

The central arguments in favor of the RRT proposal are intertwined, and I’ll try to put them together in coherent way

* The basic efficiency argument: Since mineral deposits yield super-normal profits to those who have the right to exploit them, a tax on those profits will not lead to less investment – the profit will still be enough to induce investment

* The economic equity argument. Compared to almost any other tax we could impose, the burden of the RRT falls least on low-income Australians and most on high-income investors, many of whom are foreigners

* The legal equity argument. In Australia, mineral resources are, and always have been, owned by the state, representing all Australians, and not by individuals. So we should seek to maximize the return on our own assets.

* The political economy argument. Ever since I can remember, and probably before that, mining companies have been threatening to pack their bags and go overseas. They’ve made these threats when they were upset about tax policy, about environmental restrictions, about Aboriginal land rights, about union wage demands and work practices and when they were in a bad mood for no particular reason. But, even though lots of Australian industries have disappeared, or contracted drastically for a range of reasons, the miners are still here. The reason is obvious. They can leave, but they can’t take the minerals with them. It’s precisely this immobility that underlies the case for RRT
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