Tuesday, October 16, 2007

Tuesday column: Rudd will inherit an economy that is stunning and getting better

The Treasurer Peter Costello says Labor is “flummoxed” by his audacious promise of tax cuts worth $34 billion.

He is probably right. He sprung it on Labor with no notice, and more importantly no advance warning of how much money the next government would have to fund its promises.

By releasing the funding document, formally called the Mid-Year Economic and Fiscal Outlook, at the same time as he released the policy (and by making neither available to journalists before yesterday’s press conference as is his pattern) he caught all of us by surprise.

But a glance through the 260-page Treasury economic update makes it clear that he’ll have no difficulty funding $34 billion of tax cuts, no difficulty funding a zero effective rate of tax for the first $20,000 earned, and no difficulty cutting the top marginal rate of tax to 40 per cent with most of us paying 30 or less – none whatever.

The government is rolling in money as never before...

Despite what you’re told, it’s not the fruits of good economic management. If that was the case, the managers would have foreseen it.

Just five months ago at budget time the Treasury forecast tax revenue for the financial year ahead of $231 billion. It’s had to up the forecast to almost $236 billion. The Treasury has found an extra $5 billion of tax revenue without trying.

And don’t think that’ll be the end of it. If things keep going the way they have been it’ll end up with several billion dollars more throughout the financial year than this latest updated forecast suggests.

For years now reality has been better than the Treasury’s best guesses and better than its updated improved guesses.

Money is rolling into the Treasury from much higher income tax collections (as more people are employed), much higher company tax collections (as exporting companies bank their earnings and pass them on to the Australian companies that supply them) and much higher capital gains tax collections as increasingly more expensive shares and houses are bought and sold.

Government spending is increasing as well, but at nowhere near the same rate. The document released yesterday shows that in just the last five months the government has entered into new commitments not foreseen at Budget time that will cost it an extra $1.6 billion in the current financial year.

Many of them look to you and me like election commitments – $1.2 million for a community street soccer program, 2.3 million on NetAlert, an extra $51 million for Tasmania’s Mersey Hospital and so on – it all adds up.

Some of it is part of the normal business of governing – an extra $265 million for the Northern Territory Emergency Response and an extra $223 million in disability assistance.

The point is that so much money is coming in, unforeseen, that the government can announce almost any new spending or tax program it likes and still have unforeseen income left over.

The document released yesterday suggests that it has an extraordinary $4 billion available to it to promise to spend during the current financial year without endangering its budget surplus target of 1 per cent of GDP.

The 1 per cent surplus target is bipartisan and unrealistically small given the flood of money coming into Australia.

Labor won’t criticise it, perhaps because it wants to be seen to be able to match the Coalition’s generosity.

Others, such as Chris Richardson of Canberra’s Access economics, think that leaving the target at 1 per cent is irresponsible given the flood of extra income set to hit us if demand from China and India push up coal and iron ore prices by another 25 per cent.

Chris Richardson was silent yesterday. The Access switchboard said he would be making no more statements on anything connected with the election “until there was a result”.

Which probably means that Access has been hired by Labor to do its campaign costings. Expect an announcement within days.

It is not that Labor doesn’t trust the Treasury and Finance to cost its promises; it is just that the rules require it to submit its requests for costings “through” the Prime Minister.

As I observed a few weeks ago there’s no requirement for it to submit the request in a sealed envelope. Under the rules the Prime Minister gets to read the lot, which is why Labor will announce that it isn’t going to play by those rules.

In preparing the Mid-Year Outlook released by the Treasurer yesterday his department did more than admit that it has once again been caught by surprise by an acceleration in the torrent of money flowing the government’s way.

It also admitted to having been caught by surprise by a jobs market that’s on fire.

At Budget time in May in what should have been one of its easiest forecasts the Treasury had to say where it thought Australia’s unemployment rate would be in the three months to June. It should have been easy because May falls in those months. It picked 5.25 per cent.

In the event, just weeks later it discovered that the actual rate had been 4.3 per cent – hugely less, and an indicator of just how much the Treasury has been caught by surprise by the strength of Australia’s economy, along with just about everyone else.

Right now Australia’s unemployment rate is 4.2 per cent. The ACT’s has fallen to an unprecedented low of 2.4 per cent.

The latest figures suggest that there are only 4,606 people unemployed in the ACT. For every three of them, there are four vacant jobs on offer.

Three other Australia’s states - Queensland, the Northern Territory and Western Australia - already have an unemployment rate with a ‘3’ in front of it.

The Prime Minister’s promise of a nationwide unemployment rate with a ‘3’ in front of it, delivered as he launched his campaign on Sunday, looks entirely achievable.

The Treasury has dramatically upped its forecasts for household income, household spending and business investment.

Its forecasts suggest that we are living in uncertain times, but incredibly good times.

The main downside risks identified by the Treasury are those connected with continued drought and international financial market volatility and an associated worldwide economic downturn.

We are used to the first, and the second doesn’t look likely.

The Treasury paints a picture of an economy in irrepressibly good health, one set to keep surprising the government on the upside for years to come.

No wonder Kevin Rudd is so keen to take over.