Every time the budget comes out, we get little spreadsheets showing how much different kinds of households get in tax cuts. Something that struck me about last night’s budget was the fact that people on $30 000 got a smaller cut than people on $25 000. As far as I can see, no one has commented on this (feel free to point out exceptions) but on the face of it, there’s a puzzle here. As Costello said last night, if you cut the marginal rate on low incomes, (or raise the threshold), everybody gets the cut. So unless a rate is raised somewhere, people on higher incomes always get at least as big a cut as those on lower incomes.

The answer turns out to be something called the low income tax offset, which has been around for a while, as this factsheet from 2003 shows. As the name implies, low income earners* get an offset against their tax, but this is phased out as incomes rise from $20 000 a year to $30 000 (with this budget the phaseout starts at $25000 and runs to $40000).

Effectively, this is much the same as raising the threshold at which tax is paid (to around $9000, compared to the officially published $6000) and increasing the marginal rate on incomes between $25 000 and $40 000. I haven’t checked out how much, but I estimate it’s equivalent to around 2.5 percentage points, raising the effective marginal tax rate from 30 per cent to 32.5 per cent.

So, where the official tax scale suggest that low and middle income earners face the same threshold and lower marginal rates, the truth appears to be pretty much the opposite. It’s an open question as to which is better, but it would certainly be good for the tax scales to reflect reality instead of obscuring it.

*Another group of beneficiaries, far from low-income, are the children of those (probably including quite a few Cabinet ministers) who dodge tax through family trusts. The offset raises the threshold at which the income nominally assigned to them becomes taxable.

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?
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I got the conference volume from the Reserve Bank of Australia 2005 Conference quite a while ago, but I’ve only just read them. The main focus is on the decline in the volatility of the business cycle observed in the English-speaking countries since the mid-80s (or in Australia’s case since the end of the last recession).

There’s a lot of discussion of monetary policy, micro reform and so on, but no mention of what I would see as the single most important factor – the abandonment of the external balance objective. For most of the postwar period, economic policy makers juggled the desire to keep the domestic economy stable with the constraint imposed by the balance of payments. Not surprisingly, this was a difficult job and promising economic expansions were regularly choked off because of emerging current account deficits.

Now we have a deficit of 7 per cent of GDP (as do most other English-speaking countries) and no one worries. The assumption is that borrowers and lenders are consenting adults who can make their own decisions. Right or wrong, this assumption makes macroeconomic management an awful lot easier.

We may well be about to find out whether policymakers have been right to view trade deficits with benign neglect. The US dollar seems to be beginning its long-awaited depreciation against the euro and other trading partners (even against the $A) and long-term interest rates are rising. Some combination of the two should sooner or later bring the US back into trade balance. The question is whether this adjustment will be smooth or painful.