Treasurer, Ralph Willis, faces a difficult half year. He will have to balance some strongly competing interests to ensure the Australian economy remains on the recovery path. His essential dilemma arises out of the very nature of the recovery.
Company profits and the share market are rising strongly (perhaps too strongly). Consumer and business confidence is improving as is business investment, though less vigorously. Meanwhile, unemployment remains static. Employment is always last to recover. So the Government’s high recession-driven social-welfare demands are not abating. In satisfying them, the Government has to spend. Yet high government spending can jeopardise the fragile recovery. With a high budgetary deficit the Government has to borrow. This in turn puts pressure on interest rates and inflation. To date the good interest and inflation environment has underpinned whatever recovery there has been. Take them away and the recovery is endangered.
The task for Mr Willis and his colleagues, therefore, is to meet the needs of unemployed and others affected by the recession without allowing the deficit to run at recession levels, indeed they must sure it is reined in. Further, they must resist the temptation to skim off any of the budgetary self-correction for pet programs. The budgetary self-correction is where receipts rise and spending of their own accord without any policy changes as the country comes out of recession. Increased business activity causes higher taxes and more employment meaning lower social security payments.
There is some evidence that the receipts side of self-correction is under way; they are much higher at this stage of the year than was forecast in the August Budget. The spending side of self-correction, however, is some way off. As the receipts come in, the temptation is for the Government to spend them with make-work schemes and the like, or to relax the pressure to control spending on general programs.
The May Budget presents a great opportunity for the Government so send an early confidence-boosting message that it will resist this temptation. However, the May Budget also presents a potential pitfall. The reason for bringing the Budget forward to May was to enable businesses to take Budget changes into account in their planning for the financial year beginning in June. Let us hope that was the real reason and not that the Government would get the advantage of a full year's revenue in any changes it made to tax.
At this fragile stage of the recovery, the Government needs to refrain from imposing extra costs on business, continue the drive for public-sector efficiency, seriously question the worth of some government programs and to look again at the tax mix. The last of these is politically the most difficult. Any attempt to reduce the taxes on jobs (payroll) and exports (wholesale tax) and increase the taxes on consumption will be snapped up by the Opposition as hypocrisy in the light of the Government's attack on the GST last election. None the less, the Government must seriously look at the tax mix as part of its Budgetary strategy.
As it works towards the May Budget (and departments are doing that right now) the Government should seize the opportunity which it correctly created by using it as an impetus to confidence, business investment and the growth that will create jobs and avoid the pitfall of increasing tax and spending which can only do the opposite. The fragile recovery has to be nurtured, not nipped in the bud.