May 31st 2003

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Articles from this issue:

COVER STORY: The Twilight of the Elites

EDITORIAL: The issues the Budget ignored

NATIONAL AFFAIRS: Budget proves paralysis in family policy

Family Law Act: the damage continues

SUGAR: A return to feudal agriculture?

STRAWS IN THE WIND: Tories favoured / West Europe model

How water rights can be eroded: lessons of the Barmah-Millewa Forest

ECONOMY: Where the Budget leaves us

HEALTH: Over-the-counter sale for morning after pill?

OBITUARY: Tom Perrott (1921-2003)

Why Washington is warming to India

President Vicente Fox and Mexico's demographic threat

TAIWAN: SARS response shows strength of democracy

Dollar drive 'dumbs down' the media

BOOKS: FORCED LABOR: What's Wrong with Balancing Work and Family?, Brian Robertson

BOOKS: Italian Travel Pack CD

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The issues the Budget ignored

by Peter Westmore

News Weekly, May 31, 2003
The Federal Budget is both an economic and a social document. It sets the parameters for the future direction of the Australian economy, and additionally, influences Australian individuals, families and companies through its taxation and investment policies. Separately, the Federal Government exercises indirect influence on interest rates.

Whatever the short-term benefits of a surplus Federal Budget, the long-term effects of a Budget which does little to address the difficulties of single income families, and which tolerates a further increase in the high level of national debt, must be negative.

The major change introduced in the Budget is a reduction of the marginal income tax rate, targeted at low and medium-income earners. While the change, worth around $5-6 a week to low-income earners on around $25,000 a year, will at least partly address the problem caused by 'bracket creep', the fact is that as incomes increase with inflation, the proportion of income paid in taxation increases automatically.

Marginal rates

It is probably true that the main reason why the Government reduced marginal tax rates in the first place is that if it had not done so, it would have faced widespread criticism as average income earners are pushed into the next highest tax bracket.

But in reality, the concession is so minor that the Tax Office will still raise more money from income tax in the current year, showing that the $2.4 billion foregone will be entirely swallowed up by additional tax paid by people moving into higher tax brackets.

As the proportion of government income from individuals (and families) continues to increase, the economic position of the single income family has become more difficult, forcing an increasing number of mothers into full-time or part-time work. The single income family is becoming an endangered species.

This problem will not go away. There needs to be a simplification of both payments and taxation arrangements affecting families, so that the full impact of government policy can be more fully understood.

The government needs to seriously address bracket creep by indexing tax thresholds to inflation, and overhauling the family payments system that sees people facing marginal tax rates of up to 80% as they move from low to middle incomes.

A separate issue is the Federal Government's complacency over the surging level of Australia's foreign debt, which has risen from around $24 billion in 1983 to $354 billion, just 20 years later. It is currently rising at around $30 billion a year.

The significance of national debt was addressed by David Landers in his major study, The Wealth and Poverty of Nations.

He said: 'I have heard serious scholars say that the United States need not worry about its huge trade deficit with Japan. After all, the Japanese are giving us useful things in exchange for paper printed with the portrait of Gorge Washington. That sounds good but it's bad.

'Easy money is bad for you. It represents short-run gain that will be paid for in immediate distortions, and later regrets.' (p 172-73)

The US and Australia are living beyond their means, on finance from the financial markets. The price we pay is the loss of industry to imports, and the cost of servicing and repayments of these foreign debts.

The Federal Treasurer, Peter Costello, has responded to criticism of Australia's foreign debt levels by pointing to the fact that since the Coalition Government was elected in 1996, the government's contribution to the foreign debt has fallen dramatically. However, the fall in public sector debt has been outweighed by a massive increase in private debt. Arguably, public sector debt has been replaced by private sector debt.

One reason why the Government has not dealt with this issue is that capital inflows have fuelled the growth of the Australian economy, helping to keep official growth levels among the highest in the developed world.

The problem is that borrowed money imposes a future drag on the Australian economy, as interest on borrowings must be repaid. Currently, $22 billion leaves Australia every year in interest payments and dividends.

The recent jump in the value of the Australian dollar - against the US dollar in particular - is already having an adverse effect on Australian exports (which are mainly in agricultural products and minerals), and will make imports cheaper.

The effect will be to worsen the balance of payments deficit, and increase in the foreign debt. The great uncertainty is what happens when the foreign lenders lose confidence in the ability of this country to repay its debts.

In other countries where this has happened recently (such as Indonesia and Argentina), the effects have been a partial collapse in the banking system, a rapid devaluation of the currency, and mass unemployment. It is, of course, possible that the effect on Australia might be less serious.

But a rapidly increasing foreign debt will undoubtedly give the lenders greater influence over economic policy within Australia, and could well be decisive on issues such as the further privatisation of Telstra.

  • Peter Westmore is President of the National Civic Council

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