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Australian Budget 2017: Is this really the blueprint for a rosy future?

May 16, 2017
Economics

Our experts look beyond the politics of the government's latest plan

Australia's conservative Coalition government appears to have had an ideological change of heart. Gone is the traditional abhorrence of "tax and spend" in its 2017 Budget.

And there's a new embrace of big government in plans for infrastructure projects worth $75 billion during the next 10 years, along with health and education initiatives that were previously strengths of the Labor Opposition.

The government's political intentions were duly noted at the annual UNSW BusinessThink Budget Roundtable, where an expert panel comprised UNSW Business School professors Richard Holden and John Piggott, lecturer Kathrin Bain, and Centre for Social Impact CEO and professor Kristy Muir.

Holden, a professor of economics, says the Budget waves a "white flag to being able to get things through the Senate". Piggott, director of the ARC Centre of Excellence in Population Ageing Research, describes the blueprint as generally "strategic".

"One of the commentators on [Budget] night said, 'It almost reads like an election budget but the election's two years away'. Actually, it's only one by-election away," Piggott says.

"And it strikes me that some of this is: 'What happens if I have a close by-election six months from now? I could lose the government.' And there's some early protection built into this Budget.

"I think broadly speaking it was a more central Budget. It was more reflective of community attitudes than the 2014 Budget, or even the 2015 Budget, and so there's a return to some form of normalcy.

"I think the infrastructure spend, and the emphasis on the infrastructure spend, even though much of it was pre-announced, is encouraging because there's sort of a change of attitude that we don't have to mediate all this through the private sector, that the public sector can undertake some of this." 

'One in three [young Australians] are either unemployed or underemployed. And what a job assistance package is not going to do is create a job' 

– kristy muir






The surplus game

 The Budget predicts a return to a surplus of about $7 billion in 2020–21. Holden points out that governments, particularly during the past seven years, have long claimed we would be back in surplus at the end of the forward estimates period "and we never have been".

"I'm not saying we never will be, but this is just the game," Holden says. Treasurer Scott Morrison could hardly "go out there and say, 'It's going to be terrible four years from now'."

Last year, forward projections were based on "very bullish, nominal GDP growth, the likes of which we hadn't seen for over a decade". This year, hopes are pinned on wage price growth.

Says Holden: "Wage growth has been at or below about 2% since the [global] financial crisis period of 2007–08. And they're forecasting it to be [more than] 2% this year, going into 3%, and up to 3.75% by the end of the forecast period.

"And that's a really big driver of the repair to the deficit and moving into surplus because real wage growth – or wage price growth – drives tax receipts, and overall that's where the story's coming from.

"But it just hasn't happened for a very long time, and it hasn't happened in the US, and it hasn't happened in Europe, and it hasn't happened in the UK.

"It could happen – we'd like to see it happen – but it's a very bullish forecast and I think we should be concerned about that."

A more concrete source of revenue is the Budget's "levy" on the five biggest banks, a tax of six basis points on 70% of their liabilities, expected to raise $1.6 billion a year for the next four.

Holden describes the measure as "unbelievably populist in almost every respect", and notes the Treasurer has avoided explaining the fiscal arguments behind it, preferring instead to "reprise some version of the Willie Sutton line when asked, 'Why do you rob banks?' 'Because that's where the money is.' And that's essentially what he's done.

"And so the banks aren't very happy about it, but in reality this is just a tax on everyone sitting in this room. The last time we saw something like this was when APRA increased regulatory capital requirements by 25 basis points. That was paid 0% by shareholders, 100% by customers, and I expect something along the same lines to happen here," Holden says.

The fairness mantra

 The government has cited fairness as an objective of the Budget. Muir notes "some great and welcome investments in some key social areas", but she doesn't believe it's going "to address the gaps in inequality that we're seeing between the richest and the poorest". About 13% of Australians live in poverty.

 And on the issue of wage price growth, she points out there hasn't been any increase, in real terms, for someone on social security, such as Newstart, since 1994.

 "So what we haven't seen is any addressing of poverty levels – and people living in poverty are a particularly vulnerable group," Muir says.

 "The other group that I think has come out as being really vulnerable in this Budget are young people. We will see young people benefit from decreasing inequalities in our primary and high school settings; so good education is a great win. And there have been some investments in job support for job-seekers.

 "But if you're a young person in Australia, one in three are either unemployed or underemployed. And what a job assistance package is not going to do is create a job."

 The new infrastructure projects should generate jobs when they eventually get under way. But so far, all the talk has been "about bricks and mortar and physical investments in roads and rail and bridges and airports", says Holden. 

 "But social investment goes a lot further than that, and it's been notable the government hasn't talked about investment in human capital, about higher-quality, better-paid teachers, investment in preventative medicine, investment in all sorts of other social infrastructure that we know is incredibly important and very, very high-value, and high-returning."

'There's some very minor tinkering with negative gearing in some of the deductions you can claim, but no significant changes, [nor with] capital gains tax' 

– kathrin bain






Integrity measures

According to the panel, a key weakness of the Budget is the lack of systemic tax reform.

"There were tax grabs, and we can debate how appropriate they were," says Piggott. "But the broad tax reform is still missing, I think, except in small pieces. And where the pieces exist, they tend to go in an anti-revenue direction – not necessarily in a bad direction.

"But if you take the corporate tax cuts, I think that's an example of a broad tax reform that's inching forward. But that needs to be broader."

Bain agrees "it really wasn't much of a Budget in terms of structural tax reform".

"There were really no major changes," she says. "Obviously the Medicare levy is increasing slightly, and the temporary budget repair levy is being phased out as had been intended. But there really isn't much in terms of the broad-based tax reform.

"A lot of the changes we're seeing in terms of GST and capital gains tax are really more tax integrity measures – making sure that the correct amounts of tax are collected.

"There's some very minor tinkering with negative gearing in some of the deductions you can claim, but no significant changes, [nor with] capital gains tax. So, it wasn't an exciting budget in that sense, but we didn't expect it to be because as has been noted, it's an election budget, it's a political budget. The government won't be willing to try to tackle those hard tax issues," Bain says.

 

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