Sunday, May 18

Labour’s first budget for over a decade

This first Budget handed down recently by our newly elected Labour Government was similar in outcome to those spending cuts initiated by the former Coalition (which was in office for the past 3 terms in Australia) in its first term in office before it embarked on lager scale spending programme which aggravated inflation. I think that’s much less likely to happen with this Government.

The underlying surplus of 1.8% of GDP at just under $22 billion was higher than I expected. The major surprise announcements were the new infrastructure funds to be created of $40 billion and the removal of the current exemption for condensate, which is a light crude oil, extracted from natural gas and now will be subject to existing crude excise fees. The Infrastructure Funds are basically created from the surplus this year and next since the Government is debt free and adds to an existing $20 billion Future Fund. It’s a frugal budget appropriate to our high inflation situation which has been well received by the financial markets. The withholding tax provisions on foreign investments are to be progressively reduced to 7.5% by 2011 which has immediately resulted in several large offshore super funds investing here and the government hopes this provision will enable Australia to become the financial hub for the Asian region.

There were a number of additional measures such as excise increases on popular premixed drinks and additional taxes on luxury cars which had mooted beforehand.

There were disappointments however; I would have thought we could afford to be more generous in the provision of foreign aid (set at $3.7 billion) the environment and to indigenous Australians. In economic terms the danger is that while the Govt, is at pains to indicate this budget will ease inflationary pressures, most initiatives have considerable time lags. You could say at least it’s a budget that will not make things any worse and that finally after 2 years the ongoing conflict between monetary policy (the need for high interest rates to dampen inflationary demands aggravated by Government spending exceeding inflation) and fiscal policy has been removed as both are now pointing in the same direction. Terms of Trade are anticipated to rise another 20% this year and at that rate don’t be surprised if the expected surplus of $22 billion starts to balloon to a much larger figure in a year’s time.

It has been estimated Australia will need another $500 billion in infrastructure investment within the next 10 years. The ongoing surpluses combined with investment funds allocated from Super funds, currently amounting to 3 trillion and growing, should comfortably cover these requiremnts looking forward into the medium term. Another aspect concerns the skills shortages in implementing these huge infrastructure projects which is being addressed by the annual migrants intake expected at 180,000, up 30,000 on last year. That’s a lot of people who will be buying homes! Nevertheless the amount of household debt still remains very high and although mortgage arrears are at very low levels (around 1%) this also remains of a continuing concern.


susan said...

I read just a few days ago that a number of American cities are planning to remove the highways that were built in order to allow suburban commuters to get to their jobs faster. Old neighbourhoods were torn apart with alacrity in the 60's and beyond and, although it appears to be a good idea to get rid of the toxic monstrosities, I'm wondering who will pay for it now. Making solid, rational plans hasn't been at the top of any government's list here in a long time.

Seraphine said...

I keep thinking when the price of oil comes down, inflation figures will come down rather quickly.
Oil can't stay at this level forever, can it? What?

Cart said...

I'm still puzzling over this budget. Rudd appears to have left himself a range of future options as the effects roll out.
Still, I'm pleased we are moving back to a more Keynesian approach.

lindsaylobe said...

Hi Susan, Sera and Cart.
Susan~ it’s to be hoped the highways will be more environmntally friendly with adjoining parkland; nature walks wetlands restoration areas and tree plantings which has been the case more recently.

There is also an emphasis on rail and port facilities with similar considerations.

Sera ~Nobody really knows the answer to oil prices. It’s made doubly difficult by the lack of reliable data on world oil reserves, whats thought to be still left in the ground. I note that oil has now risen to above $134a barrel due to supply constraints as the high prices are not generating any more supply, the beginning of the so called peak oil phenomena which was first predicted way back in the seventies. It would seem preferable we had more time to plan, and some say the 200 year inflation adjusted chart point to oil being at its natural level and we may see future declines.
My bet is oil will continue to rise, at least covering the next few years but its anyones guess.

Cart ~Due to the large accumulated surpluses available to spent in the future (giving the impression then when spent we will have a massive deficit) we need to refine the Budget papers. What we need is a separation to present recurrent expenditure, where there needs to be surplus and below that summary any investment in long term type projects spending which can be financed from the previous accumulated surpluses dependant upon current economic conditions.

Best wishes

Cart said...

"...more generous in the provision of foreign aid"
I couldn't agree more with that sentiment, though I wonder if it might not be part of another restructure.
A review of DEFAT has been mooted. I think we really should be lobbying to remove aid from trade, as has developed over the past few decades.
The AWB fiasco was really about aid tied to trade, and Rudd of all people should be fighting that one.
Economically we need to moderate our foreign income anyway, so that forcing trade deals on the back of aid must actually hurt us now.
Not to mention it is just plain bloody obscene to tie aid in with trade.

Just some idle thoughts on a cool, wet afternoon.

Seraphine said...

I've decided to have a vodka mojito and call it good.

Seraphine said...

Iceland is peaceful for a
reason. I can't think why
anyone would to go to war
over it, unless it's to steal
geothermal power. That's why
it's the most peaceful nation
on earth. Besides, if I lived
on an island, I'd want it to
be tropical. I prefer palm
trees to ice, generally
speaking, sand over rock,
shorts instead of sealskin.

lindsaylobe said...

I also prefer warmer climates but I thought you may be interested in the world peace index. It’s only in its second year of publication and to some extent must be subjective although it does use 24 different statistical indicators. Have a vodka mojito and good look !
best wishes

gfid said...

i admire your ability to illuminate a very large picture, Lindsay.... i tend to obsess over details. it's much easier to hug a tree than a whole forest. i guess we need both to keep things in balance, hm? sadly, none of our world powers seems to strive to be known for their peacefulness, or for their long-term sustainability and respect of the planet. if America has a brand new SUV parked in the driveway, Canada and Australia, to name the familiar, will go deeply into debt to have one too.

Seraphine said...

I think right now many
Americans would *love* to
GIVE their SUVs to the
Canadians and Australians.

lindsaylobe said...

Hi Gfid & Sera
I agree we need to work together, beginning with those at the sharp end so that the big picture is disseminated from the ground up in that order. The peace index and or wellbeing manifesto’s are interesting initial attempts to convince powers its citizens would delight in their being known more for their peacefulness and long-term sustainability than their military and economic dominance. We have copied America; the equivalents are still being sold! but hopefully there is change in mindset occurring Sera!
Best wishes