The Australian budget emerges from 'dog days'

Even in the time of controlled spending increases, there are still some areas which will receive significant increases. Fuel and Energy receives an increase of 8.7%. This is still a relatively small $601 million. Social Security on the other hand receives an increase of 7.3%. This is an awfully large $11.9 billion. Public Order and Safety receives an increase of 5.6% which amounts to a quote modest $282 million.

Figure 5: Estimates of Increases in Australian General Government Expenses by Function

SOURCES: Budget Paper No.1: Budget Strategy and Outlook 2017-18 & 2018-19 Statement 6, Expenses and Net Capital Investment; Morgans

What this Budget does

The centerpiece of this Budget is the provision of individual personal tax cuts. This is achieved through a seven year personal tax plan. This tax plan has three steps.

The first small step begins next year. Those earning up to $37,000 will have their tax reduced by up to $200. Those earning more than $37,000 will have their tax reduced by up to $530 per year. This is achieved by setting the threshold for the tax rate of 37 cents in the dollar at $90,000 on 1 July 2018.

The second step is that in 2022-2023 the lowest tax rate of 32.5% will be lifted to a threshold of $41,000. The tax rate of 37 cents in the dollar will come in at a higher level of $120,000.

The third step is in 2024-2025 when the 37% tax rate will be abolished. Australians earning more than $41,000 will only pay 32.5 cents in the dollar, all the way up to the top marginal tax rate which will be raised to $200,000.

The total cost of these tax cuts is shown as $13.4 billion. These tax cuts are possible because rising commodity prices have generated rising nominal GDP growth which is generated rising revenue.

Conclusion

The Australian economy has now emerged from its 'dog days'. During this period, falling commodity prices generated slow nominal GDP growth and slow government revenue growth. The only solution to this period was a tight control on spending.

A recovery in commodity prices and a rise in the terms of trade has now generated faster nominal GDP growth and faster government revenue growth. The government can now afford to return that faster government revenue growth to the voters in terms of prudent tax cuts.

Good luck is being accompanied by good management.