Thoughts on the budget

I’m on the opposite side of the world at the moment (Jerusalem — great city) and mostly out of touch with the political & economic debates of Australia. But the budget still gets me curious, so today I had a quick flick through the budget papers. A few things worth commenting on…

Big government? The Liberals are claiming that this is a big-government budget. The ALP are claiming that it’s better than what the Liberals did. Both are right. At first I thought this budget had actually cut tax & spending, albeit modestly. However, on closer inspection it seems that the ALP has actually increased tax and spending a bit.

Since the election, the effects of policy decisions increased revenue by $2.4 billion. Parameter variations increased revenue by an additional $6.4 billion. The policies in question included a tax increase on RTDs (“ready-to-drink” alcohol mixes), some fringe benefits & luxury cars… and removing a tax rebate on crude excise. This new money was used to increase the budget surplus and fund $1.3 billion worth of new spending. As these changes are all for the same year (2008/09) it is not appropriate to adjust for inflation or population growth. So once again we’ve had a “tax & spend budget”.

Having said all of that, the Liberals are in absolutely no position to throw stones. Howard increased commonwealth tax by more than anybody else except Whitlam, and the Liberals even opposed the plans of the ALP to cut spending further for pensioners. The Liberals seem to be playing a cynical game of calling for more spending, and then complaining that the ALP spends too much. They don’t seem to stand for anything.

LITO. The low-income tax offset has been increased again. The politicians and media report this as an increase in the tax-free threshold, and to some degree that is fair. But what they don’t do is factor in the consequent increase in the effective marginal tax rate as people lose the LITO. It is misleading to give some statistics adjusted for LITO and other statistics not adjusted for LITO.

If politicians and the media are going to report a tax-free threshold of $11k (or whatever) then they also need to report that the actual tax brackets are 3% higher for people between $30,000 and $50,000. Instead of having tax brackets of 15-30-40-45% we actually have brackets of 15-18-30-33-40-45%. That’s not a good thing. We should scrap LITO and increase the tax-free threshold properly.

Funds. Following the lead of the Liberals “future fund”, the ALP is now going to introduce three new funds totalling $41 billion extra. The idea has been debated a bit, but it doesn’t get me excited either way. On one side… the government isn’t generally the best at investing, so it would be better if the private sector kept the money and did their own investing. On the other side, if the government can fund their programs through a fund, then they don’t need as much tax.

But there is a problem with the new ALP funds. Unlike the “locked” future fund, the government plans on actually drawing down on the capital of the funds… not simply living off the interest. In other words, they are simply going to spend the money. Putting money in a fancy-named fund for a few days before spending money doesn’t taking away the fact that they are spending money.

Having the money in a fund seems entirely designed to hide future budget positions.Previously, if a government is spending all their revenue plus past surpluses we called that a “budget deficit”. With these new fandangled funds the government will still be able to report surpluses while drawing down on their funds. Not good.

Verdict. I give this budget a rating of “blah”. It made a few spending cuts, including the very appropriate means-testing of some welfare benefits, and it followed through on some election promises (including income tax cuts). But the ALP have missed the opportunity to significantly slash spending and I fear they will not get much braver in the future. Little tax increases aren’t nice, but they don’t concern me too much. The budget was fiscally responsible. But my overwhelming feeling is that nothing much has changed. Bit more tax. Bit more spending. Lots of nice words. The government wins again.

5 thoughts on “Thoughts on the budget

  1. Temujin

    Fair assessment. It’s a missed opportunity for the ALP to genuinely cut spending. When they say ‘cut’, they mean lower the growth in spending from 4.1% to 1%. The Liberals should frankly shut up – they have nothing of value to add.

    The ability to draw down capital from the Future Fund is a real negative, though. The rest is just garnish.

  2. The Liberals should frankly shut up – they have nothing of value to add.

    Worse than that, they are being positively idiotic. How can they claim to be good economic managers when all they want to do is increase taxes and spending. It’s bizarre.

  3. I haven’t being following the budget very closely due to an abnormally hectic schedule. So thanks for answering all my questions about the budget in a neat concise summary.

    Amen to replacing LITO. Like the medicare levy it serves no useful purpose beyond political presentation. In analytical terms it just muddies the waters. But heck we means test everything else so why not means test tax breaks. If we can have progressive tax, means tested benefits and means tested tax breaks all overlayed in a complex maze just so nobody has a clue where they stand then why the heck not? 😦

  4. I think you’re being unfair on the funds issue. The more funds the government sets up the more money flows to funds management and to fund managers. Don’t you care about my welfare?

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