Wednesday, May 09, 2007

The budget

This budget is a political budget that delivers deserved rewards to many Australians and to the Government that helped provide the economic conditions creating its possibility. It is a budget that reflects the tremendous economic strength of the Australian economy - low inflation, dramatically low unemployment, dramatically high rates of private investment, fiscal surpluses and an expectation of continued strong economic growth at around 3.74%.

The $31 billion tax cuts target the low and middle income end of the income tax scale and are intended to both provide tax relief and address labour supply-side issues. The education moves – incentives for apprenticeships, vouchers for remedial education and bonuses for schools which improve literacy as well as a $5 billion fund for funding capital works (with a planned further $5 billion in the next budget) in universities – will also eventually contribute to the supply side. Boosting childcare payments will have the same positive supply-side effects. It is a sensible orientation for an economy operating at close to full employment. Costello claims that the combination of tax cuts and child care support should boost the labour supply by 45,000 while the 8,800 increase in the immigration intake will increase immigrants to 152,000.

I think overall it is an outstandingly good budget which will reduce the chance of a risky change in government later this year. The Coalition’s position will steadily improve in the polls as a consequence of it but the Coalition still has a long way to go. The budget steals the ground from Mr Rudd’s productivity-based education program and offers a more reliable, experienced management team.

The budget is good politics and good sense too.

I wondered how government critics might respond to the budget. The normal ‘wasted chance’, ‘not enough’ and perhaps even ‘finally’ verdicts were expected although I found mainly muted criticism. John Quiggin described the budget as ‘clever’, an interesting word with both positive and pejorative connotations. But he says the budget lacks ‘big ideas’ (the $5 billion education fund?). John thinks some of the remaining huge surplus will be spent as the election campaign progresses, which is obviously true. Larvatus Prodeo seems to want to find something critical to say but has problems collecting the intelligence. Polemica gives grudging approval to the budget because it makes things hard for Labor and Tim Dunlop follows suit.

On the detail I was pleased with the attempt to partially automate the submission of income tax returns for PAYE salary earners. It is a task I dread each year – Andrew Leigh has championed such reforms and comments on this here.


John Humphreys said...

Your LP link links to JQ.

And there is an obvious set of criticisms from free-market advocates that this is once again a tax'n'spend budget with pathetically small tax cuts and huge chunks of pork.

Uncle Milton said...

What John Humphreys says is objectively true, apart from the statement about pork. (The pork is very restrained, especially for an election year.)

Harry, your tribal pro-Howard instincts have overrun your free market principles. This budget could have delivered huge tax cuts, but didn't; it could have cut the top marginal tax rate, but didn't; it could have used the opportunity given by a (more or less) full employment economy to make serious cuts to welfare spending, but didn't.

It's a budget that could have been delivered by a Labor Treasurer. If it had been, I reckon you would have hated it.

Anonymous said...

What Uncle Milton said!

hc said...

John, Many of the spending decisions I think were good (defence, education, child care).

Uncle Milton, I am much more concerned with tax cuts at the low-middle end of the scale because of the supply effects.

I mean significant welfare cuts given the political position of the Coalition. Impossible! I am not choosing between the Liberals and the Libertarians but between the Liberals and the ALP.

Its clear who I want to win this contest and why. Get stuck into welfare next year if they pull off a re-election.