A comfortable budget

May 13, 2008

Contrary to the pre-budget spin, this budget was a fairly comfortable ride for the Rudd Government. The key, as in the past several years, is that revenue is simply overwhelming any serious problems the Government - whichever government - might have.

The first Swan budget is far less aggressive than the first Costello budget in 1996-96. Costello actually cut outlays in real terms, by 0.5% in real terms in 1996-97, and 2.1% in 1997-98, laying the groundwork for a budget move into the black.

The economy Swan inherits is stronger and can arguably take more punishment - but his budget aims to only slow growth in outlays, from 5.9% in real (inflation-adjusted) terms in the 2007-2008 election year, to 1.6% a year in each of the next four years.

The revenue picture is continuing to be transformed by Australia's huge commodity price-induced resources boom, and the tax income it is generating.

The total tax take in Costello's first year was $125 billion, equal to 17.6% of Gross Domestic Product. In the current year to June, tax receipts will be $286 billion, or 23% of GDP, and in 2008-2209, tax will rise to $299 billion, or 24.6% of GDP.

Company tax was $19.7 billion or just 15.8% of total tax revenue in 1996-97, and will rise from $66.5 billion in 2007-2008 to $73.5 billion in 2008-2009, or almost 25% of GDP.

With that kind of money pouring in, it's difficult to make a real meal of the budget settings. The big risk, as Swan correctly observed ahead of the budget, is that overly expansionary budgets will give an already strong economy too much extra fuel: this unadventurous budget has probably avoided that risk.

The signal to the markets is that, while the outlooks remains uncertain and subject to possible external shocks as the subprime credit crisis unfolds, the Rudd Government is not fighting shadows, and not creating budget settings that of themselves will significantly influence the outcome. Boring for some, but for a new government operating amid flighty capital markets, it's an important starting message.

mmaiden@theage.com.au