Wednesday, May 14, 2008

Federal Budget 2008

I've been busy and found it difficult to assign time to assessing the budget. Clearly the Labor Party has inherited a fabulously prosperous economy - that the terms of trade is due to increase by so much over the next year is astounding and should dominate our impressions of where the Australian economy is going.

The bugdet response has been to award miserly tax cuts to lower income groups and to defer them for higher income groups and to run a massive budget surplus. Much of the surplus is to end up in investment funds to be spent on infrastructure, health and education.

This budget is therefore a beginning not an outcome. The main issues are how these funds will be allocated and how they will be spent when the economy is close to full employment. Project costs will be high so there is the prospect that returns on these investments will be under pressure. There is the possibility Labor will use them to pork-barrell in 2010 but they may surprise and spend the money wisely. It is a beginning.

Longer term these surpluses belong to the citizens of Australia not to the Labor Party. It is unsatisafactory for tax rates to be set so high that the government runs massive surpluses.

The funds can only be spent with a continued commitment to Labor market reform that prevents cost push inflation from emerging. The economy should be able to reduce unemployment still further and guarantee longer term better wages if the link between wages and prices can be broken.

I was less-than-impressed by the response of the Coalition to the budget. Malcolm Turnbull's responses on alcopops taxation added a bit of comic relief however. His claim was that the tax could not seriously target youth drinking because revenue to the government was forecast to increase with the tax! This is incorrect since the demand for alcopos clearly will slope downwards. The tax can still yield additional revenue if the price-elasticity of demand for alcopos is low enough. If the price elasticity is high then the tax will substantially reduce consumption but (contrary to the expectations of Treasury) yield less tax.

Update: John Quiggin makes a scathing attack on Brendon Nelson who has apparently followed Malcolm Turnull in criticising the alcopops tax. As I publicly supported the Government in increasing this tax two weeks ago I've got to agree with John that the criticism of the increased tax is foolish politics that suggests foolish policy sense. Taxes on alcohol in Australia are approximately volumetric which makes sense if you believe (as I do) that alcohol is a neurotoxin - they are not quite right however as the alcohol in beer is taxed less heavily than that in spirits. I favour a hefty tax on alcopos because these drinks are directed at youth and at ensuring an ongoing dependence on booze.


Spiros said...

"a massive budget surplus."

The surplus is not massive at all. It's only 1.5% of GDP.

"Longer term these surpluses belong to the citizens of Australia not to the Labor Party."

The Labor Party has not claimed ownership of the surplus. And the Commonwealth Government is not synonymous with the Australian Labor Party (not yet anyway). But I agree with you that there will be a lot of pressure to spend the money on uneconomic projects (not quite the same thing as pork barrelling).

"It is unsatisafactory for tax rates to be set so high that the government runs massive surpluses."

As I said, the surplus isn't all that big. And it is as big as it is because of the resources boom. Without China, and the same tax rates would deliver much lower revenues.

But if we're going to talk long term, then it is necessary for the government to save money now because in 20-30 years time, with an ageing population, there will be fewer taxpayers paying the pensions and medical costs of the nation's large number of geriatrics. Surpluses now are exactly what is required.

I see that the Coalition is threatening to block the alcopops tax in the Senate. They must be insane. I'm sure Kevin Rudd would like nothing more than a double dissolution trigger on this issue. On current polling, the Coalition would be wiped out for a generation.

conrad said...

The really stupid thing for the Liberal party to say is that they stole the policies off them -- what conclusion are we to draw from this? That they think the budget is a good one? or that it doesn't differentiate between parties and hence no longer relevant in determining who is good and who is bad?

hc said...

$20 billion is a huge surplus and yes it is due to the mining boom - certainly not the p[roductivity ogf government. It also suggests tax rates are much too high.

As far as I understand it the Labor Party is claiming to be the government of Australia.

Investments do not need to be funded out of current revenues and the fiscal needs of an aging population have little to do with providing infrastructure.

People can also save.

Spiros said...

"As far as I understand it the Labor Party is claiming to be the government of Australia."

Then your understanding is deficient. In the Westminster tradition, The Government is
separate from the party. Only ministers, who have been appointed and sworn in by the Governor General are in the Government. Labor party backbenchers are not formally part of the Government. The purpose of Question Time is for members of Parliament, from any party, to ask questions of ministers. All non-minister MPs, regardless of party, are treated equally (in theory) because all are equally not in the government. There used to be a tradition (sadly now in disuse) of backbenchers from the governing party asking awkward or even hostile questions of ministers, and these backbenchers quite explicitly positioning themselves as outside the government.

The Governor General (or through him Kevin Rudd) can appoint ministers who are not members of the Labor Party, or indeed (for a limited time) members of Parliament.

npov said...

"People can also save"

Sure, but the overwhelming evidence is that we don't unless forced to. For whatever reason, Australians seem to prefer to leave the responsibility of saving with the government.

That's why we have superannuation, and hoarding a surplus is surely just another way of ensuring Australia as a whole does save a certain percentage of its income.

I'd agree what is needed is tighter legal restrictions on how the government is permitted to spend those savings in the future. The primary reason I'm at all concerned about growth in government hoarding and spending is the likelihood of future populist governments spending money for largely vote-buying reasons, rather than for responsible economic ones.

I will ask though hc, if the government cut taxes substantially right now, then if in 5 years' time, when recession was looming, how would they be able to further cut taxes to stimulate growth, without going into deficit?

hc said...

npov, I think you have the argument inverted. Superannuation obviously reduces private incentives to save.

There is obviously a role for public savings and investment but also one for the private sector.

sexy said...