Education, infrastructure, tax cuts – this is the guts of the 2007 Federal Budget.

“It’s stolen Labor’s clothes” (Kerrie O’Brien). “It’s inflationary” (Chris Richardson). “There’s a lot more election spending to come” (Tony Jones, I think). “What is incredible is just the amount of money … just spending the money coming in … it’s not actually irresponsible” (Alan Kohler, with an air of mild surprise). “It’s an education budget” (Peter Costello). “It’s Christmas for the battlers” (Wayne Swan).

It was a curiously flat performance in the House. Early on Henry described the Prime Minister as (a) very focused; and (b) not happy. Labor did not heckle, and the Coalition failed to cheer until well into the budget speech, and then soberly. But by the time the Treasurer was facing Kerrie O’Brien and his panel of experts he was hyped up like a West Coast mid-fielder, practically manic.

Wayne Swan was forced to agree that most of the Treasurer’s initiatives were good, if overdue or not going far enough. “Christmas for battlers” indeed, with tax cuts, new handouts, one off superannuation co-payments, childcare payments and tax refunds, vouchers for struggling kids to fund private tuition, bonuses for teachers who complete summer schools, extra money for vocational training, three new Tafes, a new “endowment fund” for universities (and no cap on course costs), additional infrastructure spending, signs of concern for the environment, etc, etc.

Labor would retain Costello’s surplus and fund its spending initiatives by rearranging spending priorities. This imposes a fiscal straightjacket but, as Wayne Swan asserted with genuine (or well simulated) passion “Kevin Rudd is a fiscal conservative.”

There is one area of analysis where the Treasurer seems ahead of the mob. He argues that, with a budget surplus of 1 % of GDP, it is impossible to describe the budget as inflationary, as did Chris Richardson. He had fun noting how every other Western nation in envious of our small surplus and “No other country would regard this as inflationary”.

The analytic point is that proper analysis must take account of supply as well as demand. Chris Richardson is from the Treasury and is no dope, but he is focused on demand. The government is increasingly focusing on supply, including incentives to work and to save. This is the fifth budget in which taxes have been cut. The Treasurer was able to quote someone on $30 K pa, whose income tax has been cut by 45 % in these five budgets, this is a telling example. The rise of the overall participation rate is evidence of a strong supply side impact.

This budget also addresses productivity, especially through its education and training and infrastructure initiatives, albeit in the longer term.

But the real kicker is WorkChoices. This was not mentioned in the budget speech, but the evidence is that the new IR regime has noticeably boosted employment and depressed inflation. Against this background, the economy can be run harder for longer without the traditional problem of full capacity leading rapidly to inflation and current account bottlenecks.

The resource boom is helping greatly, and the ultimate test of this government’s stewardship will be how well Australia handles the inevitable downturn. The downturn seems still a long way off, however, and it seems there will be a continuation of current, apparently largely bipartisan, policies (with the notable exception of IR)

Time will tell, but Henry strongly believes this is another responsible budget, one that recognizes, and takes advantage of, the “New Economy, New Gameplan“.

Henry’s Editor, P.D. Jonson, says: “This is another step in Howard’s fightback, delivered by Australia’s longest serving Treasurer and heir apparent. My hypothesis is that the Treasurer and Treasury understand the new economic paradigm better than most and this gives the government a fighting chance in a Federal election held late in 2007.”