Wednesday, May 12, 2010

We are the envy of the world

GOOD resolutions make for boring budgets. The big story in this budget is not what it does, but what it doesn't. It doesn't have tax cuts. It doesn't have much new spending. It doesn't even have much in spending cuts.

In Treasurer Wayne Swan's words, the budget "produces an economic and fiscal position the envy of the developed world".

This budget doesn't give and it doesn't take. More than any other budget I've seen, it leaves things as they are. And that's the reason it is able to forecast a return to surplus by 2012-13, three years earlier than previously forecast.

Leaving things as they are delivers two benefits to the bottom line. First, it means stimulus spending programs are allowed to run out without being replaced. That's the main reason Canberra's spending as a share of GDP is forecast to shrink from 26.2 per cent of GDP now to 23.8 per cent in 2012-13.

Second, leaving things alone means there are no tax cuts and so bracket creep brings home the bacon. Taxes will rise from 20.2 per cent of GDP to 22.5 per cent in the same three years, primarily because incomes will rise but income tax thresholds will not. Without any formal tax increase, Australians will pay a higher share of their income in tax.

Income tax on individuals, now at a 40-year low as a share of GDP, is forecast to climb from $120 billion this financial year to $174 billion in four years a rise of 45 per cent. Part of that is because we are forecast to have almost a million more jobs by then. But the main reason is that our wages are forecast to rise roughly 4 per cent a year, and with no tax cuts apart from the long-scheduled nip and tuck from July 1, that means with each year a higher share of our income is in our highest tax bracket.

Unfair? No, I think that's very fair. It's in our interests to get the budget back in the black as soon as is feasible, and anyone who says we can do it just by cutting spending should spell out where he (it's usually guys sounding off this way) would cut another $36 billion a year from spending. I'll bet it's not from spending on him or the interest groups he represents.

In fact, with GDP itself forecast to grow reasonably fast 28 per cent in those four years, or 14 per cent excluding inflation that would still leave the taxman taking just 10.5 per cent of GDP off us in personal income tax in 2013-14. That's well below the 25-year average of 12 per cent of GDP from 1980 to 2005.

The return to growth would see company profits soar, so tax on them would rise 47 per cent in four years. And the proposed resources tax on the miners would add its bit, though mostly after we are already back in surplus.

The bottom line in all this is the Rudd government's political calculation that it is more vulnerable to attack for spending too much than too little, so it has made restoring the surplus its first priority. Everything else can wait.

There is no money in the forward estimates any more for an emissions trading scheme not even in 2013. It is now government policy in principle only, with no commitment to putting it into practice.

There are a few fiddles here. To make the coming year's budget deficit look smaller, Team Rudd has pulled $1.5 billion of grants for roads and local government into the dying weeks of 2009-10, exaggerating the improvement in next year's budget balance.

It has ripped more than $1 billion out of the forward estimates for foreign aid. While it is still committed to lifting Australia's development programs to 0.5 per cent of our national income by 2015-16, more than two-thirds of the work has been left for the last four years. One may well ask whether that is another Labor promise halfway to being abandoned.

The biggest budget saving, apart from abandoning emissions trading, is $1.9 billion saved by slashing payments under the Pharmaceutical Benefits Scheme to manufacturers.

The Government has also cut $840 million from its future superannuation co-contributions for lower-income earners. Does it see the scheme now as a bit of rort for the families of the well-off?

But that's all the bad news for ordinary folk. What about the good news?

Well, that's the problem. There's really not much positive news to take out of this budget, apart from the fact that, in an election year, it is a very restrained document that sets Australia up to be back in the black by 2012-13. That is its real achievement.

The budget completes the government's response to the Henry review by introducing a 50 per cent discount on up to $1000 of interest income from bank savings, and by allowing ordinary taxpayers to opt for a standard $1000 tax deduction for work-related expenses without having to fill out all the details.

Given that the average work-related expenses are about $2000 per taxpayer claiming them, that offers a good deal for people who make small claims, while leaving those with bigger expenses to keep filling out the forms.

The savings tax break is a good first step towards Ken Henry's goal of levelling the playing field for taxation of savings, but it is just the first step. A discount rate of 50 per cent, applied to investment income and losses alike, would go a long way to improve the taxation system.

By halving the tax break for negative gearing, it would also greatly improve the Australian housing market, incentives for productive investment, and the prospect of younger and less wealthy Australians being able to own their own home.

In ruling out reform, Labor has failed hundreds of thousands of people who voted for it.

The best thing about this budget is its restraint.

By refraining from tax cuts or new spending, Labor has allowed fiscal policy to play its part in getting policy settings back to normal. That will relieve the pressure on interest rates, and maybe our overexcited Reserve Bank now will also settle for a bit of welcome restraint.