Paul McIntyre: Budget bonanza for fat cats

Federal Treasurer Peter Costello flung money far and wide in Tuesday's Budget and big income earners were the biggest grinners with a fruity cut in their income tax levels.

Costello gave away A$37 billion in tax and family benefits with the biggest lollipops going to the fattest cats.

Those on A$150,000 a year, for example, will find an extra A$120 in their pockets each week from July 1. For the two top income tax rates, Costello cut A2c out of the Government take to leave them at A40c and A45c respectively, while the threshold at which the two rates apply has been lifted. When combined with already legislated tax cuts due taking effect on July 1, the A40c rate will kick in at A$75,001, instead of A$63,001, and the A45c rate at A$150,000, compared with A$95,000 now.

The combined cuts will slash the tax bill of a person on A$150,000 a year by 11 per cent but less than 4 per cent for those on average weekly earnings.

The Government's Budget lollies come from a revenue surplus of A$22 billion, which is largely due to soaring commodity prices and corporate profits.

But Costello's decision to hand half his surplus away in freebies has triggered widespread debate about the implications for consumer spending, interest rates and inflation in the next six months.

Economists and business analysts are also clashing about the lack of a strategy from the Government to leverage the boom to increase the long-term growth capacity of the economy.

"We're disappointed that there wasn't more progress made in some of the big nation-building areas, particularly skills, which really was fairly underdone in the Budget," said Australian Industry Group chief executive Heather Ridout. In a recent AI Group survey of more than 500 businesses, 75 per cent cited major difficulties in finding skilled staff as the biggest barrier to growth.

It was a point seized on by the Opposition Leader Kim Beasley in his Budget response. Labour, he said, would ban importing skilled labour and invest heavily in local training and apprenticeships, including a A$3000 bonus for those who completed their tertiary qualifications.

Still, the shorter-term-minded stockmarket jockeys pushed shares into record territory on Wednesday, partly because investors expect the federal Budget to provide a windfall for superannuation funds.

Certainly the biggest news there was Costello scrapping the exit tax on super for people aged over 60.

The present system sees retirees taxed at 15 per cent on savings pots over A$123,000. The new rules, effective from July 1, will see tax savings of A$115,000 on a nest egg of A$750,000, for instance.

The big debate, though, is the direction of inflation and interest rates from changes to income tax thresholds and just how much the tax cuts will actually benefit taxpayers if petrol prices and interest rates keep rising.

If the Reserve Bank lifts the official interest rate by 0.25 more percentage points and average petrol prices rise a further A3c in the next 12 months, the average family will be A$154 in the red after the new multibillion tax cuts. It's also an issue where opinion is highly fragmented - just what will Australians do with that extra money that they think they might have?

Will they spend and put pressure on inflation and interest rates or save?

There have been 13 tax cuts since 1978 and not all have resulted in spending splurges by the punters. Last year when the Government unveiled tax cuts, analysts were surprised that much of it went into savings.

"A year ago we were in the middle of the housing downturn and petrol prices were rocketing up so there was a lot of uncertainty about what was happening in the economy," said the Commonwealth Bank's chief economist, Michael Blythe. "It looks like a fair chunk of those tax cuts ended up in savings of one form or another. There is no hard and fast rule that says tax cuts equals more consumer spending."

Others are more convinced about a consumer spurge. "This is a Budget that is incendiary," said the chief economist at Goldman Sachs JBWere, Tim Toohey, in a research note to clients. "This is a highly provocative and potentially dangerous political strategy."

UBS analyst Scott Haslem said the Budget "puts upward pressure on interest rates" while another UBS trader, Gavin Vanderplank, said: "Within the next six months it's safe to say there's at least an 80 per cent chance of a rate hike."

But defending the Budget before taking off to the United States late on Thursday, Prime Minister John Howard said the tax cuts were economically responsible and would actually reduce the likelihood of further rate rises.

"It won't be inflationary, therefore it won't put upward pressure on interest rates," he said. "If you follow closely what the governor of the Reserve Bank has said, you shouldn't believe for a moment that this Budget will add to the pressure on rates."

Like his Treasurer, Howard said it was "the best way" to help people to offset high petrol prices. "People are paying a lot more for petrol and one of the best ways for people to help people with high petrol prices is to put money in their pockets."

And almost the same words came from the Treasurer at a National Press Club lunch on Wednesday. "I know costs of living have gone up and I know that fuel is an area where it has gone up a great deal," Costello said. But the best response was "putting money back in people's pockets".

Not a hint, though, that the Government would even consider a reduction in its fuel excise of A38.1c a litre - next year it will haul in A$14.6 billion from fuel taxes.

While there are concerns about interest rates from this Budget, Costello did get widespread praise for his super reforms.

NAB economist Jeff Oughton said: "The Treasurer has used the strong economy to implement some useful longer-term reforms, but in the near term has added to inflation risks - and that may be enough to push the RBA into further action."

All ears and eyes are now back on the Reserve Bank.