Ian McAuley: Morrison’s budget: 23.9 is the new 42

May 9, 2018

Treasurer Morrison has brought down a pre-election budget. While it has little in the way of handouts, it is carefully designed to wedge Shorten between higher taxes and higher deficits, all based on the absurd idea that there is some merit in a tax cap of 23.9 per cent of GDP.

This budget is remarkably restrained for a pre-election period. Apart from some minor movements in income tax thresholds and a new tax offset, there aren’t the usual pre-election handouts.The big tax cuts are pushed out to 2022, by which time there will have been two federal elections. In other words they’re meaningless.

Earlier this week there was a great deal of media coverage of a $75 billion investment in transport infrastructure, but we shouldn’t expect to see earthworks any time soon, and we will be waiting a long time for that train to Tullarmarine, because there are no appropriations for any of these projects over the next four years. The budget papers simply commit them before 2027-28. Another three federal elections distant.

The tax offset is targeted at middle income earners, who will be paid a lump sum of $530 when their tax returns are assessed. Politically it’s cleverer than a $10 weekly tax relief, which would hardly be noticed in an average pay packet. And it may provide a boost to the struggling retail sector.

Whether it will give the government a bounce in opinion polls is another question. The Essential Poll released on the morning before the budget revealed health care, age pensions, education and affordable housing to be the public’s priorities. Only 17 per cent of respondents thought tax cuts should be the government’s priority.

Although it lacks the usual pre-election boondoggles, the budget is clearly strategically designed to give the Coalition a pre-election advantage.

One form is in a reduction in ABC funding, which I estimate as a cut of $128 million up to 2020-21. In the lead-up to an election it would be so if convenient if the airwaves could be cleared of the voice of independent media. (Has this been a payment for Hanson’s support for corporate tax cuts?)

The other is in the form of razor-thin cash surplus of $2.2 billion in 2019-2020. At 0.1 per cent of GDP that’s a tiny surplus.

Such precise fiscal forecasting is impossible. For example, last year’s budget forecast was for a deficit this year of $26 billion, but it has come in at $18 billion, mainly because there was a big jump in company and income tax receipts in the last six months. These were driven, in part, by a bounce in iron ore and coal prices, but it’s anyone’s guess where commodity prices will be by the end of 2020.

Even though the $2.2 figure is confected, however, it is presented as a surplus. Come pre-election time when all those fiscal forecasts are prepared (another work of creative fiction) it will wedge Shorten into either running into deficit or increasing taxes over 23.9 per cent of GDP, a figure Morrison has called a “speed limit”.

That figure has no more claim to meaning, however, than Douglas Adams’ 42 as the “Answer to the ultimate question of life, the universe, and everything”.

Perhaps what he really means is:

 You ignorant masses may want more public goods, but we know better. Even if cost-benefit studies show that we would prosper with more teachers, better health care and more devotion to our fragile environment, we’ve decided to hand the money back to you to spend in the private sector. On poker machines, on private health insurance, on road tolls. That’s where corporate profits are to be made – in the private sector. Not in public goods.

It’s patronising.

It should be noted that his 23.9 percent is a Commonwealth target. State and local governments also raise taxes, and they are at the sharp end of demand for public services. Most of those services – health care, school education and policing – are intrinsically labour-intensive. Because they cannot enjoy the labour-displacing benefits available in other sectors of the economy, the cost of providing such services rises faster than overall economic growth. Unsurprisingly, therefore over the last ten years state government and local government taxes have risen from 4.7 to 5.9 percent of GDP.

Apart from access to GST revenue, states have a narrow tax base. Payroll tax, motor vehicle registration, stamp duties, and property transfer taxes are all unfair and inefficient. Even if restricting Commonwealth taxes to 23.9 per cent of GDP had some virtue (and it doesn’t), forcing states into raising higher taxes from their limited tax base certainly doesn’t have any virtue.

In any event, at 29.8 per cent of GDP (23.9 per cent Commonwealth plus 5.9 per cent state and local) Australia has very low taxes by international standards. The average taxation revenue of other prosperous OECD countries is 36 per cent of GDP and some of the world’s most successful economies collect even more tax: Germany’s taxes are 38 per cent of GDP, Denmark’s 46 percent.

On this blog last month Mike Keating, former Secretary of the Departments of Prime Minister and Cabinet and Finance, put the case for our country establishing a higher revenue base. Similarly, in our work Governomics: can we afford small government? Miriam Lyons and I debunk the belief, so strongly held by Morrison, that low taxes are good for the economy.

Carved in stone above the doorway of the Internal Revenue Service Building in Washington is the quote from the liberal jurist Oliver Wendell Holmes “Taxes are what we pay for a civilized society”.

Why is Morrison denying us the opportunity to spend a little more to enjoy a more civilised society?


Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development.




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