Budget facts

The full Commonwealth Budget Papers are at www.budget.gov.au.

The following is my summary of tonight' s Budget Brief.

In short there are significant tax cuts, improvements in benefits to retirees, significant inducements for firms to invest in new technology through enhanced superannuation benefits, furthering of the trend to tax family rather than individual incomes, a bit more on health research but not much more for education in general, big increased spending on defence, roads and mental health and a bit on the Murray Darling River System.

One issue is the implied effects of running an expansionary budget on interest rates. This effectively means that the RBA has been left with the exclusive job of maintaining internal balance and of preventing the economy from overheating. With high international capital mobility this is, anyway, the desired assignment of stabilisation duties in a small open economy like Australia. A future easing of commodity prices would then be met by a devaluation of the Australian dollar rather than through fiscal spending cuts.

1. Fiscal Outlook

1.1 Budget provides for cash surplus of $10.8b, the Government’s 9th surplus.
1.2 Net debt eliminated providing interest savings of $8b a year which can be invested in physical and intellectual infrastructure.

Comment: The notion that having low debt makes sense for a Government facing 'population aging' issues is sensible. But there is nothing intrinsically undesirable about spreading the cost of major capital works programs or of investing in science and education across generations by using debt. Debt phobic attitudes can be counterproductive.

2. Economic Outlook

2.1 Economic prospects good with growth forecast to be 3.25% in 2006-07.
2.2 Business investment to grow strongly over 2006-07 and export growth to pick up.

Comment: These forecasts assume that commodity prices remain strong in the immediate future and this is a reasonable assumption.

3. Personal tax cuts

3.1 Personal tax cuts worth $36.7b over 4 years from 1 July 2006.
3.2 The 30% threshold will rise to $25,001.
3.3 The 42% marginal tax cut to 40% and threshold rises to $75,001.
3.4 The 47% marginal tax cut to 45% and threshold rises to $150,001.
3.5 Low income tax offset increases to $600 per year and phase out from $25,000, up from $21,600.
3.6 Fringe benefits tax cut to 46.5%.

Comment: The tax cuts are significant given the considerable cuts in previous budgets and the prospect of further cuts in an election year budget next year. As one of the higher-income people who will get most benefits from these cuts my preference would have been to invest the money in education. I think the long-term economic benefits of investing in our universities would have offered greater social returns.

4. Plan to simplify and streamline superannuation

4.1 Tax free superannuation benefits for people aged 60 and over paid from a taxed fund.
4.2 Abolishing reasonable benefit limits (RBLs).
4.3 Streamlining the contribution and payment rules.
4.4 Reducing the pension assets test taper rate from $3.00 to $1.50 for every $1,000 of assets.

Comment: The most dramatic changes in the budget. According to the AFR (11/5/06, p. 7) a retirees with a lump sum of $200,000 will be $10,287 better off while one with a weekly benefit of $1,000 will be $170 better off. Huge changes. Good for me as I retire in the next 10 years and my super will be tax free. Note that this move reduces public savings because tax expenditures on superannuation will grow. Time to rethink retirement strategies - there are both income and price effects of this change - I get a better after-tax return but need to save less.

Note that Paul Keating in the Australian argues that under the old superannuation system one has incentives to take superannuation benefits as annuity income rather than a lump-sum. The reason was that RBLs - the maximum amount of retirement and termination of employment benefits that you can receive over your lifetime at concessional tax rates - was doubled if at least half the accumulation was taken in the form of an annuity. If you elected to take the accumulation as a lump sum you would enjoy the tax benefit on only half the RBL that an annuity would attract.

Now RBLs are abolished there is no incentive to take superannuation as a lump sum. Keating sees this as potentially disadvantageous since people aged close to 60 with perhaps 30 years of life ahead of them will now have incentives to spend up big, exhaust their savings and then go on an old age pension. It seems to me Keating’s argument is consistent with the philosophy that motivated forced savings via superannuation in the first place – that (i) with a publicly-funded pension scheme and (ii) because of agent myopia, people will under-save for their retirement. If this is true at pre-retirement ages it must be also be so when retirement approaches.

This will increase the burden that pensions impose as the population ages.

5. Enhancing incentives for business

5.1 $3.7b over 4 years to lift the diminishing value rate for depreciation from 150 to 200% for newly acquired eligible assets, supporting take-up of new technology.
5.2 Taxes on small business cut by $435m over 4 years
5.3 Reduce compliance costs for small business and increase access to small business tax relief arrangements and CGT concessions.

Comment: The major concession to business in the budget. Brings Australia into line with other OECD countries. On balance a pretty good idea. It should hasten the development of large priivate capital works programs - building ports and new mine processing units in the minerals sector.

6. Supporting families, older Australians and carers

6.1 Eligibility for the maximum rate of Family Tax Benefit Part A extended to families with an annual income of up to $40,000 (currently $33,361).
6.2 Large Family Supplement of $248 a year extended to eligible families with 3 children.
6.3 A one-off payment of $102.80 by 30 June 2006 to each household eligible for the Utilities Allowance and to each self-funded retiree eligible for the Seniors Concession Allowance.
6.4 Eligibility for the Utilities Allowance and the one-off payment extended to Mature Age Allowance, Partner Allowance and Widow Allowance recipients.
6.5 A $1,000 one-off payment to recipients of the Carer Payment and a $600 one-off payment to recipients of the Carer Allowance by 30 June 2006.

Comment: Increases the propensity to tax the family unit rather than individual incomes. The one-off payments and utility deductions don't make much economic sense - perhaps they are a response to what are assumed to be transitionally high petrol prices.

The main planned help for families lies in letting the market determine the supply of childcare places rather than restricting subidies to a predefined group. This might be slow to take effect if there are delays in training new childcare workers but seems a sensible move.

7. Furthering health and medical research effort

7.1 $735m in additional funding over 5 years for medical research.
7.2 $170m to establish a new health and medical research fellowship scheme.

Comment: Tinkering and confined to the medical research sector. Why this specific sector? Why not push hard to accelerate investment in human capital Australia-wide? There is a skills shortage that needs to be addressed via increased investment in training.

8. Strengthening defence

8.1 $10.7b between 2011-12 and 2015-16, providing a firm basis for continued long-term Australian Defence Force planning and enhanced capabilities.
8.2 $2.2b to acquire new C-17 aircraft to enhance significantly the Australian Defence Force’s airlift capability.
8.3 $1.5b to increase the Army’s size and enhance the Army’s operational readiness.
8.4 $1.5b to 2009-10 to strengthen intelligence services, airport and air transport security, and regional cooperation.

Comment: Significant and building on earlier budgets which also increased our defence capacity. Sensible given problems with terrorism.

9. Investing in road, rail and water infrastructure

9.1 $2.3b in road and rail infrastructure funding including to upgrade earlier key sections of the Hume ($800m), Bruce ($220m) and Pacific ($160m) highways.
9.2 $561m for upgrades to other major highways.
9.3 $308m for the Roads to Recovery programme.
9.4 $270m to improve rail track quality on the North-South rail corridor.
9.5 $500m for improved water management in the Murray-Darling Basin.

Comment: Regional handouts that should sure up support for the government. No spending on improving port facilities which are subject to bottlenecks. The MDB expenditure a good idea. Now a commitment to high-speed internet in regional areas to connect the country - cheaper than building roads!

10. Investing in health and improved service delivery

Funding boost to mental health system of $1.9b over 5 years, including $538m to improve access to GPs, psychiatrists and psychologists under Medicare.

Comment: Not a lot to say but I might need the help myself given the difficulties on maintaining a family and running a blogsite.

I’ll add views, links and commentary to this as I digest other views - without, in this case, necessarily indicating the changes.