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Thursday, May 18, 2006

Peter Costello Bought me a Beer


The Chancellor: Peter Costello
Australia has just had a budget. Beeing the penultimate budget before a general election it contained much of the gumph you might expect. However it was also quite a clever one as Australia's current financial situation gives the chancellor a fairly sizeable sum to throw around - over $10bn this year alone.

Australia, after a long period of what it's population sees as fairly high taxes, has got a measure of control over it's public spending and eradicated government debt. There is no budget defeceit and no public sector borrowing. Unlike almost every other westernised country in the world Australia is in the black.

The cash for the chancellor's recent generosity hasn't just come from taxing the populace but an Australian economic boom powered by the mining industry. Oz has minerals and they are relatively cheap. Oz is also sells to the fastest manufacturing economy on the planet, China.


The PM: John Howard
You might have expected a chancellor with that amount of money to use to throw it around and gloat a bit. Peter Costello though is after John Howard's job and doesn't want to appear reckless; this may be his last budget as chancellor after all. Howard is almost certain tostep down before the next election having been in power for 10 years. Costello is seen as the natural successor.

Much of the budget spend was on infrastructure - Australia's roads could do with a bit of attention - there was additional spending on childcare and support for families. All good commendable stuff. It's all pretty boring really so what's the clever bit? The clever bit of this budget is that there were notr the predicted vote winning cuts in income tax. Instead Costello tinkered with the tax thresholds.

Unsurprisingly like most taxation systems Australia's derives most of its' income from the tax bands where the majority of the population pays its' tax, in the middle tax bands. The 30% tax band, the second one from the bottom, has been carefully manipulated so that 80% of Australians pay the vast majority of their income tax in this band. The bottom Threshold has been pulled up and the top end extended upwards massively. Much the same has happened with the next tax band up, at 40% has been massively extended upwards.

The net effect of this is that not a great deal has changed for the middle income earners. The average Aussie brings in about $53k a year and their income tax burden will be 1.6% lighter. Low income earners do better; someone on $30k is 2.7% better off, but this is before low income benefits are taken into consideration. The percentages are a bit deceptive here as the dollar amount is the same $822 that has come out of the bottom 2 tax bands. The rescaled tax bands mean that very low and high-end salary earners benefit the most whilst things are not too different for anyone earning below $75k. In fact the biggest benefitters percentage wise are people earning towards $150k coming in at 4.3%, or $6,500. After this point the percentages start to fall again, though obviously the fact that this is more money doesn't.

What's happening here is that the chancellor is taxing people at virtually the same rate but giving people money back in the form of tested benefits - they are primarily available to families. This has allowed the chancellor to put through what is virtually a tax and spend budget whilst giving benefits to lower earners and not driving off the high earners so that the economy stays lively. Interesting strategy, it might just work.

How did I do? With most of Australia I will be a little under $16 a week better off after 1 July. With beer at around or below $4 a glass Peter Costello has effectively bought me a beer Monday to Thursday. The Aussies have a word for someone who does that: mate. The chancellor's prospects look pretty rosy.