The 2011-12 Budget: making insufficient room for the expected boom?

The 2011-12 Commonwealth Budget can be evaluated from at least three different perspectives.

Perspective #1:  ‘What’s in it for me?’

Most assessments are from this perspective and I won’t add to them.  Individuals, interest groups and the media have done this type of assessment to death already, and no doubt more are coming.

Perspective #2:  The Budget as a vehicle for longer-term structural reform

The second perspective asks whether the Budget has introduced reforms that improve productivity, labour force participation, and generally improve supply-side flexibility and capacity.  The more the Budget enhances sustainable supply-side capacity, the better off Australians can be over time.

From this perspective, there are a number of measures included in the 2011-12 Budget that are useful moves in the right direction, including:

1. The measures to increase (skilled) labour supply, including increased immigration, increased spending on training, increased incentives and penalties encouraging more people to move from welfare to work. These are all moves in the right direction.
2. Tighter targeting of government benefit payments to reduce ‘middle class welfare,’ is also sensible.
3. A (partial) move to reduce FBT concessions that at present encourage wasteful use of vehicles simply to meet driving distance thresholds, is good for the economy and for the environment.
4. Mental health initiatives are also potentially worthwhile attempts to deal with long-standing problems in this area.

Some might take comfort from the fact that these sorts of initiatives have been introduced while keeping the estimated increase in Budget spending to less than 1% in 2011-12 and across the next few years.

This looks good relative to an annual real spending growth limit of 2% per annum set by the Government as it responded to the global financial crisis with its ‘cash splash’ and other spending initiatives.  (Of course, part of this apparent discipline simply reflects cessation of ‘cash splash’ and similar initiatives that boosted spending in the previous years.)

But the official forecasts have the Australian economy booming next year and beyond.  Why should an annual spending cap of 2% real growth (i.e., more like 5-6% growth in current dollars) be appropriate with the economy stretched to the limit, and forecast to become even more stretched?  Surely there’s a need for the Budget to play a counter-cyclical role, ‘making room’ for a burgeoning private sector?

This brings me to the third perspective from which the 2011-12 Budget should be assessed.

Perspective #3:  The Budget as a shorter-term macroeconomic policy manager