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The budget has landed - but has anything really changed?
By: Andrew Page
This week the Federal Labour government handed down its first budget in around 13 years, and on the whole it seems to have been received fairly well. Of course your outlook will depend on whether you fall within the scope of Mr Rudd's "working families" or not, but it's reasonable to say that there are more winners than losers.
Those at the lower end of the economic spectrum received generous personal income tax cuts, a big increase in spending for public schools and hospitals as well as measures to improve housing affordability. And that's just for starters.
However higher income earners lost entitlement to various welfare payments, will pay higher tax on luxury cars and saw a clampdown on tax minimisation schemes and the treatment of fringe benefits.
Budget effect
Although it's natural for most of us to focus on the immediate impact the budget will have on us personally, it's also important to consider the broader picture. The government has gone to considerable lengths to position the budget as one that will help fight inflation and, given that inflation is running at a 17 year high, it was certainly wise to do so.
But how effective will the budget be in this regard? Although we saw a smaller increase in government spending compared with previous budgets, we did nonetheless see an increase, with a rise of 1.1% expected over the next financial year. Also, in keeping with its election promises the government delivered around $47 billion worth of personal income tax cuts. Both of these factors are going to add upward pressure on inflation.
On the other hand, the budget will certainly save more than it spends, with the surplus coming in at just under $22 Billion. It does look as though the budget will have a greater focus on building new supply capacity. The mineral industry is currently operating at the limits of its capacity, having to deal with chronic skills shortages, inadequate transport corridors and insufficient infrastructure. The budget has sought to address these issues and that will allow the economy to better capitalise on the resource boom while at the same time reducing price pressures.
What about inflation?
So in many ways the budget is really inflationary neutral, and it remains to be seen whether the government's fiscal policy will really assist the RBA in keeping rates from rising. Significant pressures remain in the form of soaring fuel and food costs, and also rising rents. Although economic growth is forecast to slow over the coming year, and unemployment is set to rise, the outlook for inflation and hence interest rates is really unchanged following the budget.
That means that despite the Government's rhetoric, there remains a real chance that interest rates could rise in the coming months. And that's not because the budget was particularly reckless, but simply because there are many factors outside of their control.
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