2008/09 Federal Budget
15 May 2008
Econtech has produced an economic analysis of the 2008/09 Federal Budget. It was presented by Econtech Director,
Chris Murphy, at a National Tourism Alliance (NTA) function
held in Parliament House on 14 May 2008 and sponsored by Diageo. The presentation sought to answer the
question: "What does the Budget mean for Australia, the tourism industry and you?
The Budget
Budget conditions are currently very favourable because of the high
terms-of-trade and low unemployment. However, conditions will become less
favourable in the years ahead for three reasons. First, markets expect
moderation in commodity prices after 2008/09, reducing the terms-of-trade. Second,
unemployment has begun to creep up from a low of 4% and is forecast by
Econtech to reach 5% in 12 months. Third, the IGR has highlighted the
future blowout in health spending due to the ageing population and other
factors. It is important to run a large surplus in 2008/09 to avoid the
Budget falling into deficit when the budget environment inevitably becomes more
challenging.
For 2008/09, policy measures in the Budget reduce the Budget surplus by $9.9 bn. This substantial
fiscal stimulus includes $7.1 billion from the personal income tax cuts.
This fiscal stimulus arises because of decisions taken by the former Howard Government. Up to the
Pre-Election Fiscal Outlook (PEFO), the Howard Government announced measures to reduce the Budget
surplus (fiscal balance) for 2008/09 by $10.8 bn. The Rudd Government has subsequently achieved net
savings of $0.9 bn, leaving the overall result of a fiscal stimulus of $9.9 bn.
Given that the net saving achieved by the Rudd Government is close to zero, its fiscal decisions to date
will have a broadly neutral effect on the economy. The fiscal stimulus in the Budget arises primarily
from the personal income tax cuts announced by the Howard Government and largely adopted by the Rudd
Government.
The Rudd Government has announced 2008/09 budget savings of $7.1 bn. However, this is a gross saving
figure, before allowing for the effect of its new initiatives. The net saving figure is $0.9 bn,
as noted above.
The Australian Economy
Econtech has revised its economic forecasts to take the Budget into account.
The Budget forecasts a mild economic slowdown whereas Econtech expects a more pronounced slowdown. Thus,
while the Budget forecasts GDP growth of 2.75 per cent, Econtech expects economic growth of only 2.25 per cent.
This difference arises because Econtech believes that current difficult financial conditions will have
a bigger adverse effect on investment than forecast by Treasury. Thus, while Treasury forecasts
strong real growth in business investment of 8.5 per cent, powered by the resources boom, Econtech
forecasts business investment growth of only 1 per cent. Econtech's forecast reflects its assessment of
the impact of Reserve Bank increases in official interest rates, and
greater caution in financial markets leading to unofficial interest rates increases and tighter
credit availability, especially for riskier borrowers.
The pronounced economic slowdown is expected to lead unemployment to creep up to 5 per cent by this
time next year. The silver lining of the slowdown cloud is that inflation is expected to moderate to be 2.75
per cent by the June quarter 2009, so that the next move in official interest rates should be down.
The Tax Review is a very welcome initiative. The Howard Government achieved
important tax reform by replacing sales tax with a more broadly-based GST and
making the company tax rate more internationally competitive. There are three
areas ripe for reform by the new Government. First, the bases for payroll tax
and land tax should be broadened. Second, a further cut in company tax is now
needed to restore its international competitveness. Third, the high effective
marginal tax rates facing low and high income earners should be further reduced.
You and the Personal Income Tax Cuts
The personal income tax cuts were assessed using Econtech's Personal Income Tax Model (PITM). This model
uses the latest ATO data on the distribution of taxable incomes.
PITM produces very similar estimates to Treasury's income tax modelling. When the
tax cuts are fully phased in in 2010/11, PITM puts the annual cost at $14.2bn,
very similar to the Budget estimate of $13.9bn.
The tax cuts are deepest for lower income earners, reflecting the emphasis on
raising the Low Income Tax Offset. Post 2008/09, there are no adjustments to the
top two tax brackets so the percentage of taxpayers on the top two marginal tax
rates will start to rise again.
Allowing for both the tax and social security systems, low and high income earners face the
highest effective marginal tax rates, so targetting tax cuts on them gives the biggest boost
to economic incentives.
The Tourism Industry
The tourism industry is being hurt by high oil prices and the strong Australian dollar. The
Tourism Forecasting Committee (TFC) is predicting annual growth in real spending over the
next three years of 4% for inbound and zero for domestic, which are both low rates by
historical standards.
The Rudd Government will release a National Tourism strategy in June 2009. The
Budget includes $6.4 million in spending on new tourism programs for 2008/09.
However, this is easily out-weighed by a substantial increase in the passenger
movement charge.
Download the assessment of the 2008/09 Federal Budget.
For more information, email Dinar Prihardini or phone her on (02) 6295 0527.
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