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Budget 2010

May 11, 2010

Finally, the night we’ve all been waiting for. Forget Christmas or New Years… it is Budget night that all red-blooded Australians look forward to every year, sitting down with family and friends with a bottle of single-malt and a bag of popcorn and eagerly anticipating the annual throwing of the pork.

But this year was a non-event. Even economists got bored. One eager politics-watcher walked out on our live-blogging last night to go and get KFC.

The short version

* Budget deficit for 2010/11 is $40.8 billion (2.9% of GDP) — which is about $2000 for every man, woman and child. The budget is projected to return to surplus in 2012/13. This has been achieved by an increase in revenue (including the $9 billion/year mining tax), not by a reduction in spending.

The good news

I’m with the Liberals, and the government is Labor, so I’m supposed to say that they’re all wrong. But they weren’t. There were some policy adjustments that were small steps in the right direction:

* 50% tax discount on savings (worth $0.5 billion/year). This brings the tax treatment of regular savings in line with the tax treatment of capital gains, and it’s always good to see tax cuts. Unfortunately, this only applies for the first $1000, which means that large investments will still be distorted in favour of capital gains.

* Introducing a “standard deduction” for work expenses for people’s income tax returns. Anything to simplify tax returns is a good thing. The fact that most people use an accountant to manage their tax affairs shows that our tax system is too complex. We need much more fundamental reform, but a small step in the right direction is better than nothing.

* Delivering on Howard’s tax cuts. During the 2007 election, Rudd copied the Liberal Party’s tax policies, which included a series of small tax cuts in the future years. The government has met this promise, increasing the effective tax-free threshold to $16,000. Unfortunately, this was done by increasing the “low-income tax offset” (LITO) which also means that the marginal tax rate was increased from 30% to 34% for people earning between $63,750 and $67,500.

* Cutting company tax rates down to 28%. The full implementation of this has been pushed out until 2013/14 and we should of course be hoping for the rate to go lower… but it is good to see the company tax rate at least moving in the right direction. This is worth $2 billion per year.

The bad news

But it’s not all roses & sunshine. While the government has announced a return to surplus in 2012/13, they have only been able to achieve this on the back of significant tax increases.

* The government insists that they have “offset” their new spending with new “savings” measures. But in reality, their “savings” are just a massive increase in tax revenue. I find these sort of language games frustrating, and even more so because the media often reports it with a straight face.

* Another “tax & spend” budget. Revenue (mostly tax) for 2010/11 will be $27 billion higher than expected a year ago (due mostly to higher than expected economic growth). However, the budget deficit is only $16 billion lower than previously expected, because the rest was used up in higher spending.

* The biggest change to the budget position is the $9 billion/year new tax on mining, starting in 2012/13. In contrast, the cut in company tax is worth $2 billion/year. There have been various complaints made about the mining tax — including the absurd calculation of “super profit”, the potential impact on the mining industry (both current & future), and the sovereign risk issue. Strangely, the government has actually assumed that this new tax will increase economic growth.

* The other major tax grab was the increase in cigarette excise (raising an extra $1.4 billion/year). This is a classic example of the tyranny of the majority. Views were split along smoking lines, with most smokers opposing the tax hike and most non-smokers supporting it. But there are more non-smokers, and so they have been successful at increasing the tax on the minority. The government knows this won’t do much to change usage rates, but it will raise money. The sad sting in the tail is that the cigarette excise (like most “sin taxes”) will hurt poor people particularly hard.

* The future surpluses only exist because of new taxes. Without the mining tax and the higher cigarette taxes, the budget would have had a deficit in 2012/13 (-$3.2 billion) and also in 2013/14 (-$6 billion). The government got into deficit by spending too much, and they’re trying to get out of deficit by taxing too much.

* Compulsory super has been increased from 9% to 12%. This could have been a good reform if it was linked to matching income tax cuts so that it wouldn’t change business costs or take-home pay. But as it stands, most businesses will adjust to this by simply cutting wages by the same 3%. Where that isn’t possible, it will drive up labour costs and lead to lower employment.

Other news

* The government has changed they way they report their historical statistics, which has magically shrunk the size of government by about 1%.

* Some of the reporting is a bit strange. For revenue, the government reports nominal growth per year… but for spending they report real (ie inflation adjusted) growth per year.

* The government projects a return to surplus in 2012/13, but the big question is whether the government is actually able to hold on to such a small projected surplus ($1 billion). It’s easy to promise you’ll do good in the future; it’s harder to actually do it properly.

* Major costs include health ($57 billion), aged pension ($44 billion), education ($33 billion), family benefits ($30 billion), defence ($21 billion) and the disability pension ($20 billion).

* Delaying the ETS helped make the budget look a bit better. If they had included the ETS, then the government would have broken their promise to keep tax below 2007/08 levels (as a % of GDP), and broken their promise to keep spending down to 2% real growth per year.

A final thought…

Over the past two years (covering the slowdown period) the 2010/11 budget forecast has changed from a $20 billion surplus to a $40 billion deficit. Of this $60 billion turnaround, about half was due to a weaker economy and half due to policy. If the government had not thrown that money away in panic, we could have instead cut tax by $30 billion per year. This is enough to cut the company tax rate down to about 10% — leading to more investment, more jobs, higher wages, cheaper prices and stronger economic growth.

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  1. TerjeP (say Taya)
    May 11, 2010 at 11:03 pm

    I presume in your last sentence you mean “now” rather than “not”.

    You need more readers. Until you achieve celebrity status please cross post at ALS or Menzies house. You write well and you’re very well informed but you are not getting enough exposure here.

    And whilst we are talking company tax how about cutting it to zero and taxing dividends as regular income without all the franking complexity. Estonian style. 😉

  2. Julian
    May 13, 2010 at 11:56 am

    Hi John,

    I noticed that you had left the LDP in favour of the LNP? Was this because your views have evolved? As a believer in smaller government as well a social libertarian, I have found few in the membership of the NSW Liberal Party to hold similar views. Instead it seems to be dominated mainly by either careerists or social conservatives?

    So I was interested in your experiences of how you have been received in the LNP and how I can find others with similar views to my own?

  3. TerjeP (say Taya)
    May 14, 2010 at 3:53 am

    He is on a secret mission to recover the libertarian Holy Grail. He just lost his footing along the way and ended up in a snake pit. But don’t worry he’ll figure it all out before the closing credits. Perhaps.

  4. David Paxton
    May 19, 2010 at 10:32 am

    OT

    http://blogs.telegraph.co.uk/news/danielhannan/100040195/av-is-the-worst-voting-system-of-all/

    I seek the benefit of your experience. Have you an opinion on the options before Blighty?

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