A budget to build beyond the boom

The 2006-07 Budget to be handed down by Federal Treasurer Peter Costello on May 9 should build for greater dynamism in the domestic economy. It should look beyond the current bout of good fortune due to the minerals boom and work on areas where the economy is showing signs of weakness.

In particular the budget should:

• create incentives for greater workforce participation, saving and investment by restructuring the personal income tax scale - particularly for people earning less than $30,000;
• announce a phase-down of the tax on superannuation contributions;
• herald a new focus on training and education - both for prospective employees and, critically, for existing workers;
• begin the development of a new, closely co-ordinated and cross jurisdictional approach to building business capabilities;
• improve Australia’s approach to commercial innovation;
• undertake a major stimulation to investment by announcing a program to lower the company tax rate; and
• start dismantling the barriers to successful investment abroad from an Australian base.

Details about these policies can be found in Ai Group’s Pre Budget Submission of last November and in our recently released report Manufacturing Futures: Achieving Global Fitness. Both are available on Ai Group’s website.

These policy measures were developed to address the cracks that are appearing in Australia’s productivity performance; to encourage businesses as they look to invest in better processes and new products; as they engage more in international activities; as they look to create smarter enterprises; and to help build a more skilful workforce.

Of course this ambitious program cannot be swallowed all at once. There is, nevertheless, plenty of room for real headway in a number of initiatives and starts can be made across all these policy fronts. More to the point these changes are required as foundation stones of a more successful economy and a more prosperous society. They are needed to help prepare the economy for the inevitable rebalancing that will be called for when the good fortune of high prices for minerals begins to fade.

The budget context

The starting point for the 2006-07 Budget is likely to be a strong surplus of well over $10 billion and perhaps as high as $15 billion. This is due overwhelmingly to higher-than-expected income tax collections.

While the government clearly has enough of taxpayers’ cash in its own hands to introduce policies that can make a real difference, it also faces a few constraining forces.

There is the need to avoid excess budgetary stimulation. This is always the case but all the more so at a time when the Reserve Bank is looking nervously at inflationary pressures and tossing up whether to nudge interest rates a bit higher.

The government will also be very mindful of giving too much back to taxpayers when a fair slice of the strength of its budgetary position comes from what is most sensibly seen as a temporary income boost associated with the strength of non-rural commodity prices.

Finally, the next election is still well over a year away and the government will be tempted to keep a solid share of goodies in hand for dishing out a bit closer to the election.

These factors do provide reason to moderate expectations somewhat but certainly do not provide reason for the government to do nothing other than squirrel away a bit of extra provision for public servant superannuation via its Future Fund.