Brian Fallow: Boldness allows decent stimulus

Bill English has delivered a bolder Budget than the signs and portents led us to expect.

It goes further in income tax relief, especially for those earning less than the average wage, and it provides business with a tax cut earlier than hoped for and ahead of the Australians.

This has to be paid for, but there is a crucial timing gap between the paying Paul and robbing Peter sides of the deal.

The result is the Budget avoids the potential trap of being too austere and fiscally virtuous too soon, when the economic recovery is still in a young, frost-tender stage.

For the year ahead there is a decent stimulus in yesterday's numbers. Government spending is set to rise nearly $6 billion or 9 per cent in the coming year.

Much of the surge is one-offs, such as the compensation for superannuitants and beneficiaries for the 2 per cent rise in the cost of living the GST increase will inflict and transfers to foresters and industrial emitters under the emissions trading scheme.

The net effect is a $10 billion Budget deficit, 5.1 per cent of GDP, which is wider than the current year's $8 billion and 4.4 per cent.

But now is the right time for a bit of fiscal laxity, from the standpoint of households and the mass of small businesses chasing the consumer's hard-earned dollar.

The labour market is weak, income growth is sluggish. Mortgage rates are set to start rising, while real wages shrink as the forecast 2.4 per cent increase in nominal wage is dwarfed by a 5.9 per cent rise in in the cost of living over the year ahead.

That fall in real wages will be at least partly offset by income tax cuts, and while the spike in inflation will be temporary, the tax cuts stay.

What the Government has sacrificed is the goal of a fiscally neutral tax package, at least up front. The deficit in the coming year will be nearly $500 million larger than it otherwise would have been. It is a small price, worth paying.