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Currying favour: the Budget

By Saul Eslake - posted Thursday, 12 May 2005


Indeed, the decision to lift the threshold at which the top tax rate of 47 per cent cuts in by 78 per cent (to $125,000) was probably intended, at least in part, to neutralise demands to cut the top rate itself, since only 3 per cent of taxpayers will now be paying that rate and nearly all of them live in safe Liberal electorates (or in Canberra) where their votes effectively don’t matter.

What Australia really needs is the same approach to reforming the income tax system that the Government took to its reform of the indirect tax system in 2000 - lowering rates by broadening the base. But there was no sign of any intention to move down that path in this Budget.

There were, to be sure, some other worthwhile tax reforms, including the removal of the 3 per cent tariff on imported business inputs and the superannuation surcharge, both of which were introduced by this Government in 1996. There are also some improvements in relation to the tax treatment of foreign-sourced income, non-resident investments in Australia, and foreign executives working temporarily in Australia.

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Elsewhere, the Government provides a mixture of “carrot” and “stick” to encourage greater labour force participation by those on single parent and disability benefits. Despite the tightened eligibility criteria and work tests for (future) disability and supporting parent beneficiaries, the package has an overall net cost of more than $3 billion over four years, so they can’t be simply dismissed as a savings measure.

The Government has also accepted that unfunded superannuation liabilities are no less a burden on future generations of taxpayers than conventional debt, and has established a “Future Fund” (with its investment earnings quarantined from the grasping paws of future politicians) from which those liabilities will be financed.

But the Budget passes up the opportunity to lay out a re-invigorated and comprehensive program of economic reform designed to take advantage of the Government’s enhanced political position after 1 July, when it obtains a majority in the Senate - despite there now being, as Treasury notes in Statement 4 (its annual “think piece”), “a unique opportunity to implement a cohesive policy agenda that will underpin strong economic growth now and over the decades to come”.

Treasury points out that “Australian workers produce only around 80-85 per cent as much per hour as their peers in the United States” and that “it is clear that a range of policy reforms could close this gap further”. Yet there is little by way of policy reforms in this Budget aimed at doing that. It notes that “a further set of initiatives could build on the many productivity and cost gains [in infrastructure] delivered in the past two decades”, and that “successful reforms [in this area] could boost national productivity significantly” - but there are none in this Budget.

Treasury rightly observes that “governments may add unnecessarily to complexity by over-regulation, by setting ineffective or inappropriate regulation or policies, or by too frequently changing them”. But there are no proposals to reduce the complexity of regulation, and only a few to reduce the complexity of taxation. And it points out that “the inefficient use of environmental resources can constrain economic productivity and prevent future generations from enjoying the same high levels of environmental benefits that Australians enjoy today”. But there is nothing in the budget, for example, to speed the introduction of rational pricing for scarce resources such as water, or to compensate those who might suffer capital losses in the process of moving to a sustainable water pricing regime.

Rather, it looks and feels like a pre-election budget, except that it has come after an election rather than before it (we had a pre-election budget last year). Which makes one rather fearful of what might be in store in the next two budgets, which really will be pre-election affairs.

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Maybe because economists don’t have to win popularity contests to keep our jobs, we find ourselves somewhat underwhelmed by what will probably be presented elsewhere as very much a “good news” budget. But there is a risk the “good news” may prove to be ephemeral, if it turns out that the Budget has provided too much of a good thing at the peak of the business cycle. Although the Reserve Bank (under Ian Macfarlane, in contrast to his predecessor) disavows the idea of any linkage between fiscal and monetary policy, the possibility of further increases in interest rates remains on the table in the wake of this Budget.

After all, this is the way that almost every business cycle in Australia’s history has ended. Australia has traditionally not managed prosperity well. Whenever we’ve been at this point in the business cycle before, the Arbitration Commission has handed out unsustainably large wage increases to all and sundry; the Reserve Bank has been denied permission to raise interest rates until rising inflation has convinced politicians of the unavoidable necessity of doing so; and governments haven’t been able to stop themselves from currying favour with voters by being seen to “spread the good fortune around”.

Fortunately, the Industrial Relations Commission is no longer able to inflict the damage which its predecessor used routinely to do. And the Reserve Bank no longer needs the blessing of the Treasurer to raise interest rates when it thinks it is necessary (which is just as well given the Treasurer’s, and other ministers’, seemingly relentless opposition to the rises which have occurred to date). But the scope to make the third traditional economic policy mistake remains wide open - as, inevitably in a democracy, it must - and only time will tell whether it has been made again in this cycle.

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About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

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