The Budget - summed up

Wayne Swan has had to put together his first Budget in more challenging economic circumstances than those which confronted Peter Costello in framing his last four Budgets. Both the international and domestic economic outlooks are more uncertain - the former because of the global credit crunch and its impact on the outlook for economic growth in the United States (in particular), and the latter because of the unexpected acceleration in inflation and the significant tightening of domestic financial conditions over the past nine months.

In the face of those uncertainties, the 2008-09 Budget strikes a reasonably appropriate balance. It projects a Budget surplus of $21.7 billion or 1.8 per cent of GDP for 2008-09, 0.6 of a percentage point more than envisaged by the outgoing Coalition government just before last November’s elections, and does so through a combination of policy decisions producing net savings of $2 billion (about 0.2 per cent of GDP) and adding to the surplus, rather than spending or giving away (as was the previous government’s wont), and favourable “parameter variations totalling nearly $5.4 billion.

For the remainder of the forward estimates period, the Budget projects surpluses in the range of $19-20 billion or 1.3-1.5 per cent of GDP, marginally higher than those envisaged before the last election, though with policy decisions making a smaller contribution to the larger surpluses in the out-years than in 2008-09.

The Government’s ability to foreshadow larger surpluses has been enhanced by further upward revisions to revenue projections, although these were somewhat smaller over the past six months (about $25 billion in the four years to 2010-11) than over the corresponding periods of the last two Budget cycles, owing partly to lower revenues from capital gains and superannuation fund taxes than previously forecast (we wouldn’t be surprised, however, if the revenue projections in this Budget again turned out to err on the low side). And the erosion of fiscal discipline during the final years of the Coalition Government created plenty of opportunities for Finance Minister Lindsay Tanner to find ways of making savings.

In all, the Budget contains spending cuts and tax increases totalling about $35 billion in the five years to 2011-12, largely but not totally offset by new policy decisions totalling about $32 billion - although from 2009-10 onwards the impact of new policy outweighs the impact of the savings measures.

Note that these calculations don’t include the additional income tax cuts which come into effect from July 1, at a cost to revenue of nearly $47 billion over the four years to 2011-12. That’s because these tax cuts were initially decided upon by the outgoing Coalition Government just before the release of the Mid-Year Economic and Fiscal Outlook on the first day of the election campaign, and are thus included in the “baseline” from which the net effect of policy decisions by the Rudd Government is calculated; the Rudd Government’s decision to defer the tax cuts promised by the Coalition for taxpayers in the top tax bracket is credited as a policy decision in this Budget saving $5.3 billion over four years (and is the largest single saving decision in the Budget, although it has no impact on the projected outcome for 2008-09).

Although we are still inclined to believe that the tax cuts will provide a stimulus to domestic demand that isn’t necessary in an economy that is about to enter its 18th year of continuous growth, and in which “excess demand” is a significant contributor to inflationary pressures, we accept that the Government felt obliged to keep its election promises. And the Reserve Bank is likely to have (at least implicitly) factored their stimulatory impact into its monetary policy deliberations. So it would be wrong to argue that the tax cuts will put additional upward pressure on interest rates.

That being so, the 2008-09 Budget can be portrayed as embodying a moderate tightening of fiscal policy. And that’s a distinct change from the Budget’s of previous years, which we’ve consistently argued, have, through the net impact of the policy decisions contained within them, amounted to an ill-timed loosening of fiscal policy.

The specific savings decisions are a mixture of the bold and the unadventurous. The decisions to means-test the “baby bonus” and Family Tax Benefit Part B (for stay-at-home-spouses), effectively denying them to families with annual incomes in excess of $150,000, are especially praiseworthy as an attempt to improve the targeting of such measures. Indeed the pity is that there wasn’t a broader assault on so-called “middle-class welfare”.

On the other hand, we’re a bit sceptical of the one-off “efficiency dividend” which is projected to save more than $400 million a year from agency running costs and represents the largest single expenditure saving in the Budget. Previous experience with such measures suggests that they are actually a way of avoiding hard decisions about what programs should be cut, end up being pushed down to the lowest level of management possible, and more often than not result in reduced efficiency and standards of customer service.

Nonetheless, these and other savings have allowed the Government to fund other important priorities, including climate change, education, dental health, housing affordability and Indigenous disadvantage. There’s also a fillip to Australia’s funds management industry through reductions in the withholding tax rate on property income and capital gains (though not interest) paid to foreign investors.

One other notable aspect of the Budget is that it has created a more compelling vision of how it will deploy the enlarged surpluses which it is projecting over the next four years.