Depending on which newspaper you read, yesterday’s Mid-Year Economic and Fiscal Outlook leads us to believe that we will either have further tax cuts come next May, or we won’t:

Tim Colebatch in The Age: “Australians can look forward to another round of pre-election tax cuts next year despite the economy entering a third year of slow growth, as the drought and flat business investment have led the federal Treasury to slash its forecasts for 2006-07.”

David Uren in The Oz: “Peter Costello has cast doubt on election-year tax cuts after forecasts for the 2007-08 budget surplus fell $1 billion short of expectations.”

As Stephen Mayne highlighted yesterday, Treasury has an obvious tendency to underestimate budget surpluses, so there is likely to be at least an extra couple of billion for the Government to play with, despite the impacts of the drought and flat business investment. The truth of the matter is that another round of expansionary fiscal policy will, in all likeliness, force more rate hikes, with inflation still above the top end of the comfort range.

But there are politics at play here too, and the Howard Government will be weighing up the benefits of tax cuts with the costs of rate hikes. The real challenge is for the Howard Government to be fiscally generous, to attract votes, but in a responsible manner, so as to not add to inflation. It’s a tough game.

The mid-year budget forecast also posits that, due to the impacts of the drought, unemployment will rise from 4.6% to above 5%. However, according to a Roy Morgan End of Year Poll to be released today, Australian workers have retained their overwhelming sense of optimism regarding their job security and abilities to find work.

Despite the introduction of the contentious Industrial Relations legislation, 81% (down 2% from 2005) of Australian workers say their current job is safe. Also, a majority of Australian workers (63%, up 1%) said that if they did become unemployed, they would be able to find a new job fairly quickly. Also, only 40% of Australians believe that unemployment will increase from the current 30-year low – while 56% believe unemployment will remain at 4.6%, or fall even lower.

An international comparison by the Gallup International Association finds Australia at seventh position out of 58 countries surveyed for both job security and ability to find a new job – a great result for our economy.

Read more at Henry Thornton.

Peter Fray

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