Editorial - 2008-09 Budget wrap-up

The Labor Government inherited an enviously healthy surplus ($20 billion) and no debt so the task of honouring its election promises was a relatively painless exercise.

The Government has essentially limited new spending to delivering election promises, which have been offset by savings in tax concessions and means-testing a range of middle class welfare. Taxpayers earning more than $150,000pa will bear the brunt as they face cutbacks in family tax benefits, baby bonus, dependant spouse offsets and child care benefits. The $150,000 threshold now appears to be the dividing line between ‘struggling families’ and ‘well-off families’. For example, the new education rebate initiative is unlikely to be available to so called ‘well-off families’ as it is reliant on parents been entitled to family tax benefit part A which is already means tested.

The rate of growth in Government spending has finally slowed to 1.1% in real terms, which is the lowest for some time. Pork barreling of budget surpluses in handouts has finally been contained. The Government policy with respect to windfall gains is to bank rather than spend which represents a more disciplined approach. A significant portion of the current surplus and future surpluses will be hived off into special purpose investment vehicles to be spent at a later date on rebuilding Australia’s neglected infrastructure. If this money is well spent in future years when the economy begins to slow, it might provide a much needed stimulus to ensure our economic growth continues unabated.

The broadening of the definition of income to include salary sacrifice contributions to super, for example, will have significant implications for end of year tax planning. Taxpayers who salary sacrifice into super to obtain benefits such as the co-contribution and other Government entitlements will not have these opportunities after 1 July 2009.

The doubling in the threshold for the Medicare levy for singles and an increase to $150,000 for families has been long overdue. Taxpayers Australia  has lobbyied the Government for this threshold to be indexed for inflation since it was introduced back in 2000. The catch-up effect of many years of neglect will cause the heath insurance industry some pain. The Government expects over 400,000 individuals to exit health insurance, placing more pressure on the public hospital system.

The Labor Government honoured its commitment to transparency by including the GST in the budget’s revenue figures for the first time. The previous Government’s omission of the GST from the nation’s public accounts understated the total tax take of the Federal Government. The argument that all the money went to the states and the commonwealth simply collects it for them on their behalf was a ploy to understate tax receipts. By including GST, the level of tax as a proportion of GDP increases by 3.8% and exposes the Howard Government as the highest-taxing administration of the past 40 years.

The Labor Government has passed its first test of ecomonic management by cutting back on some of the genererosity of the Howard era and limiting the growth in Government spending. The task of winding back more Government spending remains the challenge for future budgets. As far as improvements to our tax system, we will have to wait until the outcome from the comprehensive tax review are known before we see significant reform to the tax system.