The Australian
economy is again picking up momentum with growth likely to be above trend in
2006. With the mother of all resource booms and the recent sell-off of the
Aussie dollar, the big issue for the second half of 2006 is likely to be
overheating and, dare we whisper, inflation. And we advise, following Basil
Fawlty: “Don’t mention the CAD!”

The budget is in
surplus, and pressure is building on Treasurer Peter Costello to start the hard
grind of another round of tax reform. So far he is resisting this pressure
manfully, and one can only admire his fortitude as virtually every galah in the
pet-shop, including Henry, believes he should give in gracefully. One
recognises, of course that the Treasurer wishes to avoid adding fuel to an
already buoyant economy which the latest data says is already picking up speed.

The answer here is
to announce some goalposts for real tax reform, including a 30% top
marginal rate of income tax and the number of years in which it will responsibly
be achieved – such as 5 to 8 years. Simple arithmetic suggests that the annual
reduction in the top rate should be manageable in a buoyant
economy.

Whether (or when)
cash rates again begin to rise in 2006 lies in the lap of the gods. As we have
said for some time, RBA Governor Ian Macfarlane will do everything he can to sit
on his hands at least until his choice of successor is signed on for the
traditional seven year term. Recent economic news, however, strengthens the
case that the next move in rates is far more likely to be up than
down.

But the big question for Australian economic policy remains, as it
has been for some time: when will the Treasurer grasp the nettle of
serious tax reform?

Read more at Henry Thornton here or for Henry’s full article, as
seen in The Oz, click here.

Peter Fray

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