From a big picture viewpoint, this Budget did not fundamentally change existing fiscal policysettings.
The Budget in 2010/11 and 2011/12 has taken a significant hit from the combination of a lowermining tax take (as depreciation deductions mute taxable profits), carry forward losses from theGFC, a multi-speed (or patchwork) economy and the cost of natural disasters. Thereafter we seea moderate tightening in the fiscal stance – most notable in 2012/13 (see Medium Term FiscalContext).
A key focus of the Budget is the need to deal with the challenges thrown up by the mining boom.Initiatives that reflect this include new training programs with a particular focus on apprentices,increased skilled migration and welfare-to-work measures. There is also the heavily-leaked focuson improving mental health. Business receives some benefits via low indexation of PAYGinstallments and accelerated depreciation on motor vehicles from 2013-14. There is alsoincreased spending on regional areas via health and education. Offsetting this are sharp cuts todefence spending and efforts to increase operational efficiency in the public service. Otheralready announced measures include the natural disaster spends ($1.2bn this year), the floodlevy (raising $1.5bn in 2012/13), the early start to the company tax rate for SMEs and the miningtax (expected to raise $4bn per annum in net terms – ie. post company tax cuts). That said, totalnet new policy spends are only $2bn in 2012/13 and $1.3bn in 2013/14 (for more details seeBudget Measures – In Brief).
While we see the Budget as a credible document, it does little more than bring the Budget(structurally) back to neutrality by 2013/14. One wonders whether it could not have gone furthergiven that (in the Government’s own words) the nation is currently experiencing the largest termsof trade boom in 140 years. As well as preparing Australia to better cope with the strains posed bysuch a boom (through improving skills and availability of suitable labour and dealing with the multispeedeconomy), it would have been more reassuring to have seen some thought given to theadjustment phase when the boom eventually peters out.
Finally, there is nothing in the Budget to change the RBA’s view that tighter monetary policy is requiredin the current environment. Nevertheless, the imminent hikes in the cash rate will not help thechallenges that face some sectors and states in the multi speed economy.
Source: National Australia Bank
Tagged: Interest rates, National Australia Bank, Reserve Bank
