This year's budget a chance to exercise Swan's priorities (smh - Financial Year)

While politicians go about merrily promising lower taxes and higher spending, it's the job of economists to point out that the honey pot has a bottom.

Financial Year

It's a lesson to keep in mind as the federal budget nears on May 8. Budget day is not just the social event of the year for reporters who attend the annual lock-up in Parliament House. It is an important chance for the Treasurer to outline to taxpayers how the government is spending their valuable dollars.

Budget Deficit

Because budgets, at their heart, are also about how to allocate scarce resources: taxpayer dollars. Of course, politicians can always lift taxes to fund whatever spending they like. But in the long term this would crush economic growth and hardly improve re-election chances.

The gold standard of budgets is to raise taxes in the least distorting way and spend them in the most welfare-enhancing way.

All taxes distort economic decisions but some taxes are less bad. Taxes applied on immovable objects such as land, or mineral deposits, are the most preferred by economists. Taxes on consumption, such as the GST, are generally also considered OK (we all eat). Taxes on labour are the least preferred (people might stop working, or work less).

On the spending side of the equation, money spent by government is likely to have the biggest welfare-enhancing effect when directed to the poor. Studies have shown that while more money does make people happier, there is a certain income point beyond which it becomes very expensive to purchase additional units of happiness.