Scott Morrison’s budget contains two big initiatives and many small ones. It plays it safe politically, yet big questions hang over whether it can deliver even its own modest goals. At its core is a genuine policy initiative, yet the packaging in which he wrapped it is basically PR spin.
Its primary goal is, of course, political: to win the election. It won’t lose many votes, but whether its central package – its “ten-year enterprise tax plan to support jobs and growth” – does enough to provide the government with a convincing narrative for the long campaign ahead remains to be seen. It will take a lot of selling skills, and the trust of the electorate, and that’s been run down in recent weeks.
Two big problems hang over the budget. For all the rhetoric about “living within our means,” Morrison reports no progress in reducing the deficit or slowing the growth in debt. Two years ago, the 2014 budget forecast that by now the deficit would be a tad over $10 billion. Now, the treasurer has budgeted for a deficit of $37 billion. In 2016–17, the government plans to spend $1.09 for every $1 it earns.
In other words, nothing announced last night is “fully funded.” Despite avoiding the worst of the global financial crisis and experiencing continued growth and relatively low unemployment, we will be running a large deficit for the ninth year in a row. That is not good fiscal policy. This treasurer’s promises that the deficit will fall rapidly ahead are no more reliable than the same promises his predecessors gave us.
Belonging to a cult that relies on spending cuts to get us back in the black has a price – and we’re paying it. Revenues in the year ahead are expected to be 1.5 per cent of GDP lower than in the post-GST Howard years, and spending 1.6 per cent higher. That’s more than $25 billion out in each direction. The net impact of the Coalition’s policy decisions since it took office has been to marginally increase the deficit it promised to reduce.
You can always argue that cutting the deficit now would hurt economic growth, so we should put it off for later. That has essentially been the government’s policy since winning office, and it still is: deficit reduction will come, it’s just over the next hill. But then the next hill is succeeded by another hill, so we put it off again. That’s why Australia’s budget deficit is now in the top third among the thirty-nine advanced economies, and the International Monetary Fund estimates that, excluding interest bills, it is the sixth highest. No wonder the ratings agencies are getting nervous.
The budget’s second problem is that its optimistic forecasts of rising growth ahead – especially in actual dollars, including inflation – came out the same day as the Reserve Bank cut interest rates because it was concerned about low growth ahead, especially in actual dollars (including inflation).
The statement by governor Glenn Stevens highlighted four concerns: slowing employment growth in 2016, “unexpectedly low” inflation, the rise in the dollar since last September’s lows, and what he saw as a cooling in the housing market. (The latest home price figures suggest that judgement may be premature.) The key paragraph of his statement sums it up: “Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.”
Morrison’s attempt to persuade us that the Reserve’s decision was driven by low inflation is spin. That is not what the governor said. His focus was on improving the prospects for sustainable growth, which clearly implies the bank is worried that sustainable growth is no certainty.
Treasury’s forecasts for real growth are plausible – 2.5 per cent in 2016–17 rising to 3 per cent a year later – but its forecast that growth measured in actual dollars will rebound to 4.5 per cent and 5 per cent in the two years is towards the optimistic end of the range. Treasury accepts the widespread view that iron ore and coal prices are set to plummet after their unexpected surge in recent months. But it forecasts a smaller fall than other analysts expect, and predicts iron ore will average $55 a tonne, as against the $39 a tonne it forecast last December. If that proves optimistic, as it has in the past, Treasury concedes that this will blow yet another hole in the budget forecasts, with a lasting 10 per cent fall in mineral prices knocking $5.4 billion off the budget balance over a full year.
A super idea…
As I noted last month, the International Monetary Fund is seriously worried that the world has become “more exposed to negative risks”: China’s borrowing binge, the turbulence in financial markets, and the deteriorating political environment in Europe and the United States caused by rising inequality and millions of refugees and opportunity seekers crossing their porous borders. The IMF’s fiscal affairs director, Vitor Gaspar, warned governments to prepare plans for worse times ahead and bunker down by building “fiscal resilience”: broadening the tax base, “scaling back or ending ineffective tax incentives,” cutting poorly targeted or wasteful spending, and improving efficiency in delivering government services.
One bit of Gaspar’s advice is reflected in one of the two big changes the budget proposes. Its reforms to superannuation go much further than anyone expected – and much further than Labor proposed – in cutting back the tax breaks for high-income earners and “high net worth individuals.” They really go back to the spirit of the original Keating–Kelty plan, in which tax concessions for superannuation were designed to provide for an adequate/comfortable retirement, rather than unlimited wealth accumulation.
The old Labor model ensured this by setting what it called “reasonable benefit limits,” which put a cap on the amount of superannuation savings that would be eligible for tax concessions. Rich people hated this, so the Howard government swept it away and made super a tax-free vehicle for retirees to accumulate wealth.
Now Turnbull and Morrison have blown the whistle on this, and restored the original purpose. Under their changes:
• There will be a cap of $1.6 million on superannuation savings eligible for tax-free treatment, and this will be retrospective. Retirees and savers who are already above the cap can transfer excess savings into a separate account whose earnings will be taxed at 15 per cent.
• Transfers into superannuation accounts from non-concessional contributions (non-work-related contributions, that is) will be capped at $500,000 over an individual’s lifetime.
• Concessional contributions from work-related earnings on top of the normal employer contributions will be capped at $25,000 a year.
• A range of new concessions will be introduced to improve the superannuation balances of people in a range of groups. Those aged sixty-five to seventy-four will be able to put extra money from any source into their own or their spouse’s account. Those with superannuation balances below $500,000 will be able to “catch up” by making contributions outside the normal rules. We will be allowed to contribute to the balances of a spouse earning less than $37,000, and a tax offset will be introduced so that low-income earners do not pay more tax on super contributions than they do on their other income.
• Anyone under seventy-five will be allowed to claim income tax deductions for personal superannuation contributions. This is presented as allowing others to get the same benefits as those with salary-sacrifice arrangements, but a cheaper way of levelling that playing field would be to end the salary sacrifice rort altogether.
There is more, but the full detail is beyond our scope here; you can read it in the government’s own version, “Making Our Tax System More Sustainable,” or consult your financial adviser. By 2019–20, the budget estimates the tougher rules will be raising an extra $2.6 billion of revenue, while the new tax breaks for low-income and older people will be costing $1.75 billion – $750 million of it from the new tax deductions.
It won’t provide the fiscal benefits we might have expected. Within the new $1.6 billion limit, the tax-free super introduced a decade ago by Howard and Costello remains intact. The new income tax deductions will heavily favour high-income earners; it would be a better package without them. The income threshold for paying a higher tax rate on contributions has been reduced only slightly, from $300,000 a year to $250,000, despite widespread reports that it would be cut to $180,000. And like the new deductions, the overall tax benefits from superannuation remain excessive and weighted towards high-income earners; the Greens are still the only party to advocate adjusting superannuation tax rates so that everyone gets the same tax benefit per dollar contributed.
It’s a better policy than we might have expected. It’s a better policy than Labor has produced. But it won’t end the super tax rorts, and it won’t satisfy those who have been leading the campaign to end them. In a pre-election budget, however, it was a brave move in the right direction – although the budget papers tell us only 4 per cent of us will be made worse off, and one suspects most of them are rusted-on supporters of one side or other.
… a taxing idea
But the big winner from this budget, if the government is re-elected, is corporate Australia. Against all expectations, the Turnbull government has singled it out for the biggest prize in the barrel: a cut in the company tax from 30 per cent to 25 per cent by 2026–27. Small businesses earning less than $10 million a year would have their rate cut to 27.5 per cent in the year ahead, and the benefits would be extended gradually to bigger and bigger firms, especially after 2020–21 when the government now tells us we will see the elusive budget surplus.
This is the centrepiece of the government’s “ten-year enterprise tax plan,” which it says will generate jobs and growth. According to one school of economic thought, reducing corporate tax rates attracts increased investment, both global and domestic. This in turn generates more growth, and that growth generates jobs and raises the tide for everyone. While Treasury secretary John Fraser has made no secret of his scepticism, Treasury as an institution has long supported a lower company tax rate, and the budget papers cite its forecast that the impact of the cut will eventually lift GDP by 1 per cent – about $16 billion a year in today’s money.
There’s no denying the logic: cutting company tax makes business more profitable, and if you make business more profitable it will tend to invest more, pay more and create more jobs. But those who have tried to estimate those gains have come up with widely differing figures. The Treasury modelling, like all modelling, is an educated guess, not a fact.
Politically, slashing taxes for corporate Australia is a breathtaking move. A government heading into a close election spends up big to buy a huge prize, then awards it to the most unpopular kid in the room? Sir Humphrey would call it courageous. Liberal MPs in marginal seats could feel the pain. Labor can hardly believe its luck.
At one level, you can say it’s a credit to Turnbull and Morrison that they have not let the unpopularity of the big end of town stop them supporting business when they believe it’s creating growth and jobs. It sharpens the contest with Labor, which has grown in popularity the more it refines its policies and its campaigning to highlight the issue of fairness. Both sides are competing on what they believe in; that’s good for us.
But whatever the merits of cutting company tax, the timing is extraordinary. Yes, Britain has done it, but Britain is one of the few Western countries running a bigger deficit than we are, and it suffers from living next door to Ireland, which operates as a de facto tax haven. Shadow treasurer Chris Bowen is correct in saying that the ten years of company tax cuts are uncosted and unfunded (the first four years are costed but unfunded). It’s a bit like removing the deficit reduction levy before you remove the deficit.
But we can get an idea of the ultimate cost by applying the 25 per cent tax rate to the expected 2016–17 company tax take. It would cost us (other taxpayers) $11.5 billion a year, rising to $15 billion by 2019–20. That’s more than the entire budget support for universities and TAFEs combined. It’s almost four times the amount we give in official development aid (which, net of administration costs, will be just $2.9 billion in 2016–17). It’s more than the government will be spending on all transport infrastructure combined. It’s a big amount to gamble on the hope of a long-term payback.
… and some political risks
The rest of the budget was more normal. Work for the Dole will be restricted to the long-term unemployed, and the money saved would go to a promising-sounding program, the Youth Jobs Path, to place unemployed young people in pre-employment training followed by internships in business. The government will once again pause indexation of Medicare benefits, which means that those who pay doctors’ bills will face even higher costs. And another $2 billion of spending cuts have been flagged in 2019–20 but for some reason were kept out of the budget announcements.
Once again, the government has also used the coward’s way of delivering spending cuts. In the past two years it has cut the budgets of agencies and departments by 5 per cent through an annual 2.5 per cent “efficiency dividend.” Now it proposes two more years of 2.5 per cent spending cuts, followed by further cuts of 2 per cent in 2018–19 and 1.5 per cent in 2019–20. This means the 5 per cent spending cuts so far under this government – on top of the more gradual cuts under Labor – will be followed by cutting a further 8.25 per cent over the next four years. That forces each agency and department to do less, without the government having its fingerprints on the inevitable cuts to services. It makes life hard for institutions like the National Gallery of Australia, which is forecast to shed almost 10 per cent of its staff in the coming year.
Despite the budget’s efforts to contain political risks, they are clearly there. At most, one in three taxpayers will see any tax relief, and the government’s largesse on company tax and the lifting of the surcharge on high-income earners might not be greeted with acclaim around the kitchen tables. The decision to back away from tackling negative gearing could well become a negative over the long campaign. Some people will face cuts in welfare benefits, more disability pensioners could be forced to look for jobs, and some of the well-off superannuants could turn against it.
And then there is the government’s discrimination against Victoria. At a time when Melbourne is bursting at the seams with its population growing at twice the pace in the rest of the country, the Coalition has allocated it, at best, just $4 billion for new infrastructure projects over the six years to 2019–20, compared with $25 billion to be shared between Queensland and New South Wales. For the year ahead, it promises to spend just $328 million in Victoria, but $2.7 billion in New South Wales, $1.6 billion in Queensland, more than $1 billion in Western Australia, and $383 million in South Australia.
Over the six years, compared with equal per capita funding, Victoria will be short-changed by more than $6 billion. Presumably the Turnbull government believes this is not the kind of issue that decides people’s votes. Time will tell.
That said, this is a clearly political budget that tries to give effect to some core Liberal Party principles. It will be sold as boosting small business, as helping it to go out and invest and employ people. Some voters may feel they’ve heard that before, but it could be a song they like to hear. Again, time will tell. •