Friday, April 24, 2009

Budget Season

Budget season is underway. It’s that time of year when the speculation, and the leaks, about just what will and will not be included in the Federal Budget really begin to ramp up. It follows the extended lead-up period where a cavalcade of interest groups put forward their wish lists for government spending, usually including calls for increased spending and reduced taxes. In the current economic climate most of these spending requests are described as an opportunity to stimulate the economy.

Throughout all this the government has maintained that the extra boost to the first home buyers grant is scheduled to end at the 30th of June, despite almost everybody pleading for it to continue. The argument is that it has clearly been a success in helping to prop up the real estate industry. Today’s Telegraph says they have the exclusive story that the increased grant will be extended in the Budget, but in a modified form to further favour new construction. Whether this an intentional leak, and unintentional leak, or merely speculation, it would make sense to focus the benefits more specifically on new construction. I suspect that the story is probably right, and that the modified form of the grant will both redirect the focus away from existing properties and set the stage for the boosted grant to be phased out at a later stage rather than simply cut off.

Of course, most people would see the continuation of the grant program as good news, not withstanding those who argue that it acts to inflate prices, and the usual practice with Budget leaks is to leak the bad news, and sometimes even exaggerate it, so that when the announcements are made on the night everybody has already been softened up and might even breath a sigh of relief because the news isn’t so bad after all. That being the case, it is unlikely that the government will stick to it’s advertised timetable and simply cut off the grant at the end of June, but at the same time, don’t expect it to remain in its present form.

Speaking of bad news, it would seem that high income earners might be in for tax increases to help pay for the promised boost to age pensions. While the phrase tax increase is almost never welcome, there is some speculation that top marginal tax rates might rise to clip the incomes of some of our high fliers. There is considerable logic to this if such a move is applied to incomes that are many multiples above the average wage. But rather than increases to income tax for the wealthy, it is far more likely that they will be hit in other ways. For example, the concessional tax rate for superannuation contributions is likely to be scaled back for high income earners who essentially use it as a way to reduce their total tax and who are likely to be wealthy in retirement anyway even without the tax concession.

It is also likely that the subsidy for private medical insurance will be means tested. If that’s the case, it is unfortunate that money which is currently spent on health, even though in an indirect fashion, is really only going to go propping up the bottom line, rather than being redirected into public hospitals where it is desperately needed.

So far there hasn’t been too much bad news leaked, so it’s tempting to wonder just how harsh this budget will turn out to be, even though the government keeps telling us it will be tough. The problem of course is that if it is not harsh enough the deficit blow out will lead to an ongoing debt burden which will ultimately cripple the recovery, while if it is too harsh the economic downturn will cut much more deeply into the lives of everyday Australians.

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