The Australian Budget for 2005-06 (our fiscal year is from 1 July to 30 June)was ‘brought down’ (introduced) in the Australian Parliament last night (Tuesday 10 May) by Treasurer Peter Costello. It is his and the Howard Government’s tenth Budget.
Traditionally, the first Budget after an election in Westminster system countries is a tough budget, where election promises are broken, taxes increased, and benefits cut. The wisdom has always been that this is the Government’s opportunity, furthest from the next election, to take unpopular measures.
Something strange is going on in Australia.
Last night’s Budget proposed income tax cuts of A$21.7 billion over four years.
More below the fold…
As one economic journalist put it:
This is actually a ground-breaking, precedent-setting budget: a giveaway budget that comes after the election rather than before. If you didn’t know better, you could wonder whether it presaged a dash to the polls.
Trouble is, last year’s budget was the biggest-spending pre-election budget in memory, and then there were the further big-ticket promises wheeled out in the election campaign.
So what’s going on here?
Two things in my view. First, the strength of the Australian economy means that Government coffers are overflowing with tax revenue from record corporate profits, increased world prices for Australian mineral exports, and record levels of employment. The Government has actually been embarrassed by the unexpected high level of tax revenues. Unfortunately this may be a short-lived fiscal windfall.
The headline hype about tax cuts for all conceals what is really going on (or down!): 90% of wage earners will receive an income tax cut of A$6 per week, while those earning over A$125,000 per annum (a very small proportion of the population) will receive A$60 per week. Those who lose most from the Budget are some sole parents and disabled people, who will suffer an A$40 per week benefit cut if they don’t satisfy new work tests: having to work at least 15 hours a week if they are able. The Budget also cuts the ‘safety net’ support for families who have high medical bills. All this, when the Budget promises a surplus of A$8.9 billion, or about 1% of Australia’s GDP.
This is the Liberal Party (Australia’s version of the Republicans or the UK Conservatives) delivering on their underlying rob-the-poor and pay-the-rich agenda.
But there’s a second thing happening. These tax cuts make little sense in either political or economic terms, but they can be seen as part of an internal Liberal Party fight over the leadership. Costello is the deputy Liberal leader, and feels that it’s time for John Howard to relinquish the Prime Ministership after 10 years at the top, something he hinted he would do upon turning 64 several years ago. As Ross Gittins says in the article linked above, Howard and Costello have “managed to turn the Budget into an in-house popularity contest”. Essentially, each is trying to curry favour with the backbenchers (Government Party Members of Parliament who will vote for the leader if there is a contest) by introducing electorally popular tax cuts.
So over the next few weeks and months, we’re going to hear more on the manouevering over Australia’s leadership. Personally I’m betting that Peter Costello won’t have the courage to directly challenge John Howard’s leadership. I think he’s trying to psych Howard into committing to a retirement date. I can’t see any reason why the Liberals would vote to replace the leader who has given them four election victories in a row – particularly when the latest opinion poll shows that Howard is more popular than Opposition Leader Kim Beazley, but Costello is not.
What would be the significance of a leadership change? Not much in foreign policy terms or economic policy. But Costello is a little more liberal on social issues than Howard, and has been a strong supporter of declaring an Australian Republic. Howard, whose personal views are rooted in the small-minded, insular suburban Australia of the 1950s, is an ardent Monarchist and a social reactionary.
I’ll keep you posted.
