• John Quiggin

14 May 2008JOHN QUIGGIN’s thumbnail assessment of Wayne Swan’s first budget

UNLIKE previous incoming governments, the Rudd government largely kept its promises, even if households on incomes over $150,000 may feel unhappy. The means-testing of Family Payment B was announced before the election, and the threshold could scarcely have been higher than it was.

The Howard tax cuts, largely copied by Labor, appear to have been announced in nominal terms (without allowing for inflation). If so, the higher than expected inflation bequeathed to Swan is actually something of a gift, since it means that bracket creep will pay for (and justify) much of the promised cuts. Looking at the parameter revisions, most of which have been attributed to “the mining boom,” it’s hard to believe that the $12 billion or so the government has gained from this source is all due to real increases in revenue, so bracket creep appears to be playing a role here.

It is disappointing, if not very surprising, that the budget savings were made up almost entirely of odds and ends, with big targets like the dependent spouse rebate and the fringe benefits tax exemption for cars left pretty much untouched (the rebate was subjected to the $150,000 means test). That said, there was enough fat left over from the previous government that it was possible to cut $7 billion or so without causing any obvious pain. It won’t be so easy next time, and I think it would have been better to take some pain this time around. Still with a surplus of 1.8 per cent of GDP, it’s unsurprising that they didn’t feel the need to cut further.

The one big new thing in the budget (new in magnitude, but not in concept) was the announcement of $40 billion in infrastructure funds, building on the Future Fund and the Higher Education Endowment Fund. This seems promising, especially as the money seems likely to be invested in a mixture of equity and other assets, allowing the government to keep on issuing at least some debt.

Overall, this budget is reasonable as regards its macroeconomic settings, cautious but reasonably sensible in fiscal terms, and likely to be politically successful (first budgets usually are). But it’s left some hard decisions to be taken later and, with a three-year term, there will only be one more chance before the next election year budget. •

13 May 2008

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.