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.