MICHAEL KEATING. The 2017 Budget – A welcome change in direction. Part 2 of 2

Budget repair was never going to be easy. That is one reason why it has taken so long with quite a few false starts. While some of the individual decisions in this Budget are debateable, overall the quality of the policy changes is good. Probably a greater concern is that some very significant policy issues haven’t been adequately addressed. 

In this second part of our Budget assessment we consider the quality of the main expenditure and revenue decisions in this Budget. For this purpose it is convenient to focus on broad areas of government policy, rather than trawl through the minutiae of each and every decision.

Education

Apart from the decision to finally consider tax increases, the decisions on education are probably the most significant in this Budget. Most importantly, Australia is set to achieve a ‘needs-based’ schools funding system.  This is a critically important reform. Also, given that some schools are clearly over-funded, with the total over-funding amounting to $5 bn. per year, it was, or should have been, inevitable that some schools would lose, and that some would gain more than others. Labor’s attempt to avoid this logic by huge funding increases came at a cost that was frankly unaffordable, and at a cost to other higher priorities. We should all applaud this Government for its political courage in making these changes, and get behind them.

My one reservation is that while the Commonwealth funds will be available to the States and the administrators of the Catholic system on a needs basis, the Government says that there is nothing to prevent those authorities from continuing to ignore needs when they determine the total funds available to each school within their jurisdiction. Frankly that is not good enough. If the Government asks Parliament to appropriate money so that schools are funded on a needs basis, then the Government has an obligation to ensure that the funds are used for that purpose.

Many young people are angry about the increases in university fees and the new repayment arrangements for their debts. But the amount that each individual should contribute to the cost of an education that is not available to all, is clearly a value judgement. In making that judgement it should be remembered that what is proposed will still mean that the taxpayer is paying for more than half the cost of each course, while numerous academic studies suggest that it is the individual who stands to reap more than half the benefit from a university education.

Health

The two main changes are to spend:

  • $1 bn. to unfreeze Medicare rebate payments, starting from the 1st of July, and
  • $1.2 bn. to put extra drugs on the pharmaceutical benefits scheme, offset by savings on the price of other medicines.

Both of these decisions are good, and will help improve the sustainability of Medicare.

Frankly the idea of legislating to protect Medicare and paying the levy into a special fund, is no more than smoke and mirrors. The fact the Government feels it needs to make this change seems to be principally an acknowledgement of their poor past record in health.

Income support

While the Government has mostly embraced reality, based on a better appreciation of the nature of our society, when it comes to welfare Coalition governments seem determined to limit assistance to those who are deemed deserving and to harass those who are not.  Tightening the eligibility rules for NewStart is not going to create more jobs or more job-ready applicants, and just represents more futile harassment. One cannot help wondering if this decision represents any more than a crude attempt to pander to the prejudices of Pauline Hanson and some of the government parties faithful. Big savings are regularly promised from this sort of crackdown, but the evidence is never provided about how much was actually saved.

Affordable housing

The Government made brave promises before the Budget that it would have a comprehensive package to ensure future housing affordability. Frankly this package doesn’t cut the mustard.

As the Government has itself insisted, the most important reform would be to change the planning laws to allow greater density in the inner and middle suburbs where the jobs and quality services are. Australian cities have the lowest density in the world, and the density in these suburbs hasn’t changed in decades, while the cities have spread ever further outwards. But there is not a lot that the Australian government can do to increase the supply of well-located dwellings, which is the key to affordable housing. Instead it can influence the demand, but here the Budget decisions will not make much difference to affordability for first-home buyers.

The decision to allow saving for a deposit to enjoy the same tax relief as superannuation is the least bad of the various proposals to allow people to access their superannuation savings for home purchase. But this decision, while it improves incentives to save, it doesn’t really enable these people to actually save much more. Similarly the decision to allow homeowners older than 65 to make non-concessional contributions of up to their superannuation from the sale of their homes is useful. It probably will encourage more downsizing, but will not make a great deal of difference to housing supply.  A bolder decision, that would have had a bigger impact on downsizing and housing supply, would have been to include part of a pensioner’s home equity in the pension means test.

But as has been widely remarked the outstanding omission from the housing affordability package was any real action to make negative gearing less profitable and to reduce the capital gains discount for housing investors. These should have been part of any serious housing affordability package.

Infrastructure

The Government has trumpeted its decision to spend another $75 bn. on transport infrastructure projects to 2020-21. This might be money well spent if we could be confident that the projects had been properly evaluated, but as readers of this blog will know, we cannot be confident of that.

Indeed, research by the Grattan Institute found that ‘in the past five years, over $2.6 billion of Commonwealth money has been committed to transport infrastructure projects before the proposals were even submitted to Infrastructure Australia, much less evaluated’.  This by-passing of proper evaluation processes is especially prevalent at election time, and in the Federal election in July 2016, the Coalition Parties made specific election commitments to 21 transport infrastructure projects, each over $100 million, of which only 5 had been placed on the Infrastructure Australia approval list. In the absence of any better information it is assumed that many of these unevaluated election commitments will be funded from the $75 bn. promised in the Budget.

One big project that we do know a little about is the Melbourne to Brisbane railway at a presently estimated cost of $8.4 bn.  It is rumoured that this project has a benefit/cost ratio of 1.1.  However, given that it is not expected to break even in half a century, and also the risks involved, there is no chance that it could have a positive benefit/cost ratio if a proper discount rate had been applied.

Apart from the likely sheer waste of money for most of this proposed infrastructure spending, the other concern is what has been left out. In particular, as readers of this blog have learnt, more investment in upgrading the NBN to allow more connections to the premise would be highly warranted, but unfortunately rather than admit its past mistakes, the Government has chosen to ignore this essential infrastructure.

Taxation

The principal new revenue measures in this Budget are:

  • An increase in the Medicare levy of 0.5 per cent in two years’ time
  • A tax of 0.06 per cent on the liabilities of the five major banks
  • A Skilling Australians Fund Levy on employers of foreign workers.

The increase in the Medicare levy is a disguised way of dressing up an income tax increase. In my view it should be supported, as it represents a reasonably fair way of raising extra revenue that is needed. On balance, I support the bank tax for the same reason, although I recognise that it is discriminatory and not an efficient tax.

What is missing

While this Budget deserves an overall tick, there are a number of problems that it skirts around or even ignores completely.

First, as previously noted the projections in the Intergenerational Report show that this Budget will not deliver a sustained Budget surplus. More will have to be done. What is needed is:

  • An in-depth review of long-term expenditures focussing less on who should benefit and more on the effectiveness and efficiency of programs. As readers of this blog will know a good place to start would be with the health system, but ensuring that we get more effective infrastructure spending might well deliver even greater savings.
  • A similar review of taxation would be desirable, focussing on how much revenue will be needed over the next few decades and the best way to raise it. In the meantime there are also some other immediate possibilities for raising more revenue, starting with negative gearing, the rate of capital gains discount, and a carbon tax. It would also have been better if the Government had retained the deficit repair levy.

Second, the issue of climate change and Australia’s energy security hardly received a mention in this Budget. However, these issues are not going to go away, and in a few months the Chief Scientist will report on these matters. It is clear that putting a price on carbon will be central to providing the security needed to ensure adequate future energy investment as well as dealing with climate change.

Conclusion

It has been widely speculated that this Budget may present difficulties for the Government with its own supporters. Furthermore, these difficulties may well increase when the Chief Scientist reports.  Already it is clear that to get this budget passed Turnbull will have to face-down some of his own supporters, and he better get used to that as this situation is likely to repeat itself again in a few months. On the other hand, if Turnbull does stick to his principles, this Budget could turn out to be a very positive turning point for the Government.  It would then clearly establish that at last Turnbull is his own man.

Michael Keating was Secretary of the Department of Finance from 1986 to 1991.

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2 Responses to MICHAEL KEATING. The 2017 Budget – A welcome change in direction. Part 2 of 2

  1. Keith MacLennan says:

    Pathetic
    No price on carbon
    Still a perverted tax incentives to ïnvest”in non productive assets ie housing.
    So we remain a nation of house flippers and vendors of soil which we sell to smart countries

  2. Ian Bell says:

    I’d just like to correct Michael Keating’s statement regarding Inland Rail, without wishing to imply I have concluded support for the project. He says: “It is rumoured that this project has a benefit/cost ratio of 1.1. However, given that it is not expected to break even in half a century, and also the risks involved, there is no chance that it could have a positive benefit/cost ratio if a proper discount rate had been applied”.

    Unfortunately he has got facts wrong here. The BCR assessed by Infrastructure Australia was 1.1 and that by the proponent (ARTC) much higher at 2.6. The key difference is discount rate, with the former being computed at 7% real and the latter at 4% real. Quite a different meaning then to Mr Keating’s 2nd sentence results – it becomes wholly misleading.

    Putting aside whether the work by ACIL Allens and PwC for ARTC was sufficiently sound or not, I understand that IA’s guideline for discounting has not changed post-GFC whilst the RBA cash rate has fallen from 7.25% to 1.5% and bond yields have plummeted such that Treasury Indexed bonds maturing 2040 are selling off real yields below 1% pa.

    The UK now uses real discount rates of 3% and 3.5% for longer-term projects, and yet Australia has not adjusted its guideline at all for the new reality.

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