Michael Keating. The 2016-17 Budget. Part 1 of 2.

May 5, 2016

The Turnbull Government’s Budget for 2016-17 reflects an essentially ‘steady as she goes’ fiscal strategy. Not that that is a fault – indeed it can be a virtue, especially when matched against the give-aways in other previous pre-election budgets.

Furthermore, we could not have realistically expected any other sort of Budget, given the extent to which the Government had narrowed its options before Budget day. In addition, a policy of matching every new spending initiative by a saving, is bound to produce minimal change; not least because cutting existing programs typically generates more opposition than the support for the new initiatives. But that said there are a few interesting and useful initiatives in this Budget.

First, the changes to superannuation go further than just about anybody expected. While the big super funds will not welcome the consequent reduction in the funds that they have to manage, the changes should be widely supported by all but the top 4 per cent of superannuants, as better targeting the tax concessions and improving equity. In particular, I welcome the changes that should help women with broken work patterns. I think, however, that it would have been better to have reduced the threshold for the increased 30% tax on superannuation contributions to $180,000 rather than the proposed $250,000 per annum; the lower $180,000 threshold would then correspond with the threshold for the maximum income tax bracket.

Second, the other useful initiative is the new approach to assisting young unemployed people make the transition into employment. This represents a marked improvement on the Abbott Government’s harassment of these young people, as if their unemployment was purely their own personal fault. Of course, there are risks that the new approach might be exploited by unscrupulous employers – and that has happened in the past – but this approach does seem worth trying. My main concern is that governments tend to spread the funding too thinly with labour market programs, in favour of assisting more people with the limited funds available, but at the risk of dropping the quality of the assistance to the point where it loses effectiveness.

Nevertheless, overall, and in stark contrast to the 2014 Budget, this Budget does seem to generally pass the test of ‘fairness’. Perhaps the biggest future concern for fairness is that the Government clearly intends to increase the fees paid by university students to cover an average of 50% of course costs, instead of the present average of 40% of course costs. So far as I am aware there is no evidence that the private benefit from a university education is as high as 50% of the course costs, in which case this change will be unfair and it will very likely particularly impact on enrolments by disadvantaged students.

I also think that it would have been fairer if the Government had kept the deficit repair levy in place which affects the people in the top tax bracket. After all the deficit is as far as ever from being repaired, and lower income people have been called upon to make bigger sacrifices to help repair the deficit in the past, and they are not now going to get any relief.

The major criticism of this Budget, however, is that it does not really represent any further progress towards achieving fiscal repair and a return to surplus. On the relatively optimistic Budget projections we are being promised that a surplus will be achieved by 2021. But we have heard that one before, and many have ceased to believe such projections.

Of course, some will say why should we worry? Certainly Australian Government debt is not high. Even at its projected peak in 2017-18 it will still represent only 19.2 per cent of GDP, much less than half the ratio for the US. And as for the rating agencies they lost all credibility after their incredibly optimistic ratings leading up to the Global Financial Crisis, and they still seem happy to give the US Government a AAA rating.

Instead, the real concern about continuing budget deficits is that they have already greatly reduced Australia’s capacity to respond to the next external shock to our economy. Furthermore, these deficits are continuing even after twenty-five years of uninterrupted economic growth in Australia. While on the other hand, the risks of an external shock are if anything increasing as the world economy continues to be highly volatile and uncertain, with the outlook for China – our most important trading partner – being perhaps especially problematic.

Frankly Australia needs a more ambitious medium-term approach to Budget Repair. The Government, however, continues to proclaim that this repair must come from more restraint on the expenditure side, and rules out increases in taxation; even if this is achieved by reductions in tax concessions, which really are an alternative form of expenditure.

The reality is that on the evidence in this Budget, this Government is running out of options to further reduce expenditure. The Government has made great virtue of its claim that since the 2015-16 MYEFO all policy decisions have been more than fully offset, resulting in a small surplus over the four years of $1.7 billion. But this claim is itself suspect. The claimed surplus of $1.7 billion over the next four years is dependent on a projected net surplus from policy decisions of $5.9 billion in the final year, 2019-20. In the other years, policy decisions have in fact added to the budget deficit, including as much as $3 billion in the forthcoming financial year. While the likelihood of the net $5.9 billion saving being achieved in the last year is highly problematic.

In addition, this budget is continuing to factor in $13 billion of previous expenditure savings and $1.5 billion worth of revenue increases that have not passed the Parliament. Maybe that will change after the election, and maybe it won’t. In fact, the likelihood seems to be that following the election even if the Government is returned it will not have a majority in the Senate, in which case it really needs a better fiscal strategy to repair the Budget.

Instead of continuing to remove funding from a lot of small programs, with a loss of services – especially cultural and welfare services – the Government needs to refocus on achieving improvements to the efficiency and effectiveness of the big spending areas such as education, health, infrastructure and defence (as discussed in my article “Fixing the Budget – Part Two” and published in Fairness, Opportunity and Security). But even if the rate of growth in the Forward Estimates for these expenditure functions were reduced by as much as a feasible two percentage points per annum, it is doubtful that would be enough to restore a Budget surplus equivalent to around 1 per cent of GDP which is the medium term target.

Furthermore, this pre-election Budget strongly suggests that this Government does not envisage that the majority of Australians actually want smaller government. Thus the overall Budget outcome according to the Government’s own figuring is that, even in four years’ time, in 2019-20, total receipts will still represent 25.1 per cent of GDP and payments will represent 25.2 per cent of GDP – both higher than under Labor’s last year in office in 2012-13 when they were 23.0 and 24.1 per cent respectively.

As the Balanced Budget Commission of experts, appointed by the Committee for the Economic Development of Australia, found Australia has a revenue problem rather than just an expenditure problem. Furthermore, that Commission identified sufficient revenue options that had a reasonable chance of gaining majority support to play the major role in restoring the Budget to a satisfactory surplus (see my post 29 March 2016).

In sum, sooner or later politicians will find that they have to talk about the revenue options if we want to maintain the present nature of our society and the social obligations that involves. And frankly the sooner that conversation begins the better. But unfortunately don’t expect that conversation to happen over the next two months of this election campaign.


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