Manna or myopia? The 2006 Australian budget

And, if the inflation forecast is met, if unemployment does not worsen, if interest rates do not rise, if growth remains high and if the dollar rate is suitable, then such things may come to pass. It is on such things that the budget strategy hinges. It is here that the real gamble is made. What odds would you offer the treasurer? Has his budget increased the likelihood that inflation and interest rates will rise, say, or that the dollar will shift inappropriately? Will such changes see rising costs that swamp the budgeted individual and company income sweeteners?

His own comments point to clouds on the horizon. An evident desire to avoid Federal Government debt will see funding for public works and activities drawn from current revenues or private capital arrangements. Favoured projects will get a nod. Otherwise, things are unclear.

This matches a political predisposition for private provision of services - from roads through health and education to broader public services. Pay-as-you-go services will increase as pay-as-you-go taxes decrease. Diminution of public provision of services can be expected to continue.

So as parents switch schooling from under-funded government schools to private offerings, for example, are they and their children better off from this reallocation of monies? Are we as a society better off? Such questioning appears largely absent from both budget framing and commentary.

It is simple to generate a surplus if you overlook the quality of services and societal impacts associated with alternative provisions. That there are many good things in Australian public and private provision of services is not disputed. But where could and should things be better?

More telling from a macroeconomic view is an apparent assumption of uninterrupted, even stronger, growth. This may well be true over the next year but as we have been “growing in the longest continuous stretch our nation has ever experienced” things will not continue so rosily.

In many ways the treasurer has been lucky, as have we all. While his policies have contributed, the reality of his prudent management claims will be tested in the next downturn.

We remain vulnerable. With historically high levels of personal debt and limited reserves, many are heavily exposed. The high external deficit is expected to grow (from 6 to 6.25 per cent of GDP). How might such things play out? When questioned on the latter, the treasurer indicated that currency movements might solve the latter. No Australian actions appear needed. Rather than consider how we might actively trade our way out, an Australian dollar in the 40 cent range did not seem to faze him. From a government with such an avowed concern with sovereignty and proper economic management, this is surprising.

Treasury does note concerns in the budget papers about housing affordability. And, among other straws in the growing wind, ABC News reports the World Competitiveness Yearbook 2006 ranks Australia “57th as an international trader” out of 61 on the measure of most competitive economies.

Is our current prosperity of substance? Or is it an illusion, one that could shortly be shattered? Time will tell. In the meantime, the truly prudent will investigate the economic substance of individual and societal situations. “Manna from heaven” is no proper mindset for sustainable prosperity, or a secure nation.