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Australia: Who Gets the Credit for This Quietly Robust Budget?
Source: smh.com.au
Source Date: Wednesday, May 12, 2010
Focus: Internet Governance
Country: Australia
Created: May 17, 2010

The debate between the government and the opposition over this fundamentally solid budget is going to revolve around who gets the credit.The new resources rent tax and 25 per cent higher tobacco excise are big money-spinners for the government - the resources tax will raise $12 billion in its first two years to 2013-14 and the excise hike will raise $5.2 billion in the next four years - but the really big shift that enables the government to predict a small surplus by 2012-13, three years earlier than expected, comes from what the econocrats call parameter variation.

Strictly speaking, parameter variation is the change you get when you didn't actually initiate a policy change to produce it. And the government calculates that since the 2009-10 budget it has delivered a positive impact that is going to lift tax revenue by $95 billion, and the underlying cash balance by no less than $83.3 billion in the four years to 2012-13.The variations that produce this outcome all basically flow, of course, from Australia's unexpected failure to follow the rest of the Western world into recession last year, and its quickening recovery from the mild downturn it did experience, as overseas demand for our resources re-ignites.

There are more people in work and still paying taxes than expected a year ago. Those who lost jobs are getting new ones more quickly than anticipated, shifting from being government income receivers to income generators and taxpayers.Household demand has stayed relatively strong, swelling company profits and company tax revenue.And the spectre of asset price deflation has receded, to be replaced in the residential property sector by price gains that are shoring up capital gains tax revenue.As I said, these are windfall gains, strictly speaking. They haven't been tagged to any particular initiative, even though they are the main source of the improved economic and budget outlook.

But the government is going to want to take a lot of the credit. It will say that its fiscal stimulus was crucial to keeping the economy moving when it could have tipped over into a lengthy recession. And it will say it has been able to save most of the gains that were not in the forward budget estimates a year ago, because it has honoured its pledge to hold spending to a maximum increase of 2 per cent a year, in real terms. That's zero per cent, or even mildly negative, once inflation is taken into account and it compares with annual growth that averaged 3.7 per cent in the decade that led to the global financial crisis.The opposition will of course say the government is just a bunch of spivs who got lucky. Lucky to have had the Reserve Bank cut rates swiftly when the crisis set in, having taken them high enough ahead of it to create rate-cutting headroom - and lucky to have China and the resources-hungry Asian economy on its doorstep.

I would say they are both right. We are indeed a lucky country. The same policies elsewhere would not produced these results. But by spending big initially to help prevent Australia descending into a recession and keeping a lid on spending as the recovery developed, the Rudd government went a long way to laying the foundations for this budget recovery. After a series of policy backflips, its management of the economy during the crisis is one of its best election selling points, as today's quietly robust budget underlines.
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