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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I’ve changed this a bit to be clearer on points that I hadn’t sorted out in the lockup. It was a long day

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I’m going to post a bunch of pieces I wrote for Crikey during my day at the Budget lockup. Here’s some pre-budget speculation. The reasoning still looks OK, but the government didn’t go for the rabbit from the hat I thought possible: a return to surplus in 2011-12.

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Because the government ignored most of the Henry Review, I put off reading it until I had a bit of free time. I expected to find myself in agreement with most of it, and in fact, I agreed with a lot. But I found one big problem, as I discuss below (previously posted at Crikey)

As Ross Gittins observed recently, the Henry Review will set the agenda for taxation reform for a long time to come and most of its recommendations will probably be implemented sooner or later. It’s important therefore, to give it some close and critical scrutiny now, before it acquires the status of holy writ.

There’s a lot of good sense in the Henry Review. In particular, its central recommendation, to get rid of the many inefficient taxes and imposts that have accumulated over the years, and replace them with broad, efficient taxes on four bases: personal income (comprehensively defined), business income, private consumption expenditure and economic rents from natural resources and land. On most points of detail, it’s sensible and well thought out, though there will no doubt be room for disagreement.

There is however, a fundamental flaw in the reasoning of the Review, which undermines its whole approach to the appropriate balance between the four tax bases defined above. That flaw is the assumption that the primary goal of economic policy should be to promote economic growth, as measured by GDP (along with other objectives such as equity and sustainability).
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… and brought forth a mouse

That’s my initial reaction to this ABC report of government’s response to the Henry Review of Taxation. All that effort, five months of waiting and we get a Resource Rent Tax and some tweaks to superannuation and company tax. Just about everything else has gone into the too hard basket.

An intriguing exception, it seems, is the proposal for congestion charges to replace existing road user charges, which has been neither accepted nor ruled out. Judging by the speed at which the Bligh government ran from the idea, I’d have thought this one would be very much too hard (if not as much so as the most sensible measure in the whole list, replacing existing burdens on homebuyers with a land tax paid by homeowners). I can’t see that happening, but I’m surprised to see it still a live option.

The Resource Rent Tax is a step forward, especially in the current environment where a booming minerals sector is placing all kinds of pressure on other sectors. And, I guess, it wouldn’t have been politically feasible a year ago, when the miners looked to be in trouble. So, I guess the delay hasn’t cost too much, and the Henry Review gives future governments an agenda that will last them a while.

When I get a bit more time, I’ll try and respond properly to the Review. Obviously, there’s no rush.

Stephen Long has a similar view

The Bligh government’s case for asset sales rests in part on a supposed fiscal emergency arising from the global financial crisis and in part from the general ideological claim that putting infrastructure assets into the hands of the private sector will promote economic efficiency. Both parts of the case have taken a knock in the last couple of days. A study by Access Economics confirms the findings of the union-commissioned study by Bob Walker and Betty Con Walker (derided by the government and state Treasury at the time) that the budget position is much stronger than has been admitted so far.

On the second point, Liberal Lord Mayor of Brisbane Campbell Newman has conceded that the days of private toll roads are probably over. As I’ve been saying for years (getting on for decades now) these projects always involve a social loss. In the 1990s, it was almost always the public that took the loss while private operators made out like bandits. In the easy money environment of the 2000s, private investors made silly investments, and often lost the lot. Now that everyone has wised up, there will be no more deals like this.

By far the best solution would be for the state government to buy back all the toll roads, and replace ad hoc tolls with a coherent system of congestion pricing. The Bligh government instead, plans to sell off its own toll roads. As for congestion pricing, Anna Bligh has made her view pretty clear “not while this government is in office”. In reply to which I can only quote Men in Black – “Your offer is acceptable”.

H/Ts Darren Godwell, Tom Miller, Nancy Wallace

When we were at the supermarket the other day, I noticed, and made use, of some helpful new information for buying toilet paper. Next to each of the various offerings was the price per sheet. Since the brand was the same, it was easy to identify and buy, the cheapest offering, rather than doing a complex estimation and calculation.

I vaguely assumed I was enjoying the benefits of the market for corporate control, as the supermarket, formerly a small Coles outlet had been taken over by Foodworks. But this article by Ross Gittins informs me that a requirement for unit pricing has been introduced by the Rudd government. Gittins is sceptical, saying:

It’s a nice idea – the kind that appeals to economists – but I doubt it will do much good. It assumes shoppers are a lot more diligent and coldly calculating – a lot more ”rational” – than most of us are.

Since I’m an economist, my delight in this innovation is consistent with the first part of Gittins’ claim, but as a shopper I disagree with the second part. The great thing with this is that I don’t have to be diligent or calculating – the calculation has been done for me. Certainly, I’m benefiting from this without even knowing there was a policy, whereas I never even looked at the unlamented Grocery Watch site.

Late last year I was among more than 20 economists who published a statement rejecting the case for privatisation put forward by the Queensland government in its ‘The Myths vs the Facts’ booklet. Among the claims to which we objected was one which read

MYTH: The five commercial businesses the Government plans to sell generate a lot of income for the State

FACT: The total return from all five businesses in 2008-09 was approximately $320 million. This is less than 0.9% of the Government’s income. For every $100 of Government income that’s less than 90 cents. When the sale process is completed, it is anticipated the Government will save $1.8 billion every year in interest payments.

The economists’ statement observed

This is an invalid, apples-and-oranges comparison. The $320 million figure consists solely of dividend payouts, excluding retained earnings, tax-equivalent payments[1] and the interest paid by the government business enterprises to service their debts.
The $1.8 billion represent the interests that would be saved, at a rate of about 6 per cent, if the state realised $15 billion from the asset sale and avoided $12 billion in new investment.  Most of this interest would be serviced out of the revenues of the GBEs, and can therefore not be compared with dividends derived from earnings after the payment of interest and tax.

The booklet is now on the web, and I’ve just noticed that the $1.8 billion claim has been dropped. If anyone would care to look through the archive, it would be interesting to see when this change was made.

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