The Australia Institute 2018 Budget Review

Welcome to The Australia Institute’s 2018 Budget Review. Our team of economists and researchers have cast their eye on a range of areas in the Budget, some of the ‘big ticket’ items and some perhaps the government thought would go unnoticed.

The key takeaway from looking over this budget is the assault on the jewel in the crown of Australia’s progressive economic architecture — our progressive taxation system. We see a government more concerned with tackling the overhyped problem of budget creep, rather than the very real problem of wage stagnation for workers and growing inequality. In fact, our research shows the longterm effect of the tax cut package sees high income earners as the big beneficiaries with the top 20% receiving 62% of the benefit.

Unfortunately, the government is also persevering with its company tax cuts for big business even though our research has consistently shown that the economic case for one of the biggest revenue giveaways the country has seen, has well and truly collapsed.

Meanwhile, the growing community sentiment to raise Newstart has been ignored. In fact the opposite has happened and the Government has retained cuts to Newstart for new recipients by abolishing the clean energy supplement. One Nation’s wish of ‘whacking’ ABC funding come budget time has been granted. Our public broadcaster not only faces an $83.7 million dollar funding cut, but also a new efficiency review as it begins negotiations to renew its triennial funding agreement.

There was, however, some positive news in the Budget, with Scott Morrison taking on board the Australia Institute’s longstanding work regarding the Pension Loan Scheme and has expanded it to pensioners — a proposal we explored back in 2014. Congratulations to the Treasurer.

We hope to see the Treasurer take on more of the Australia Institute’s economic ideas in the future.

I will be discussing some of these issues on Q&A on ABC TV on Monday night. Tune in if you can.

Ben Oquist
Executive Director

The Budget is about priorities

by Matt Grudnoff, Senior Economist

The great thing about the federal budget is it shows what the government’s real priorities are. Politicians spend the rest of the year telling everyone how important their particular issue is but it is only at budget time that we see if the government really thinks it was important enough to fund.

As you listen to the endless budget interviews from the Treasurer and Prime Minister you’re going to hear them say things like “well that’s all we can afford at this time.” What this actually means is we didn’t think it was important enough to fund. We thought other things were more important. The government has hundreds of billions of dollars to spend. It can afford to fund anything it wants but it can’t afford to fund everything it wants. So ‘we can’t afford that’ actually means we want to fund other things.

This means the budget should be looked at it two ways. What are the things the government thought were important, that is the things it decided to fund. But also what were the things the government didn’t think were important, the things it chose not to fund.

The centrepiece of the budget is an enormous income tax cut over 7 years. This is unusual because the budget papers only show the impacts of policy changes over 4 years. The big parts of the tax cuts start in the 5th year, just outside the budget’s forward estimates; hiding the real impacts of these tax cuts from public view.

This tax cut is a radical change to our income tax system. It is not simply an income tax cut but rather it is moving Australia to a flat tax. The jewel in the tax system is the progressive nature of our income tax. It means those who can afford to pay more do. Moving from a progressive system to a flat tax system means a big tax cut for those at the top and very little for those at the bottom. If this tax cut is implemented in full then those on low incomes will be paying a bigger share of total income tax and those at the top will be paying a smaller share.

A simple way to look at this is to compare two taxpayers. Someone earning $40,000 per year will get a tax cut of $455 per year, while someone earning $200,000 will get a tax cut of $7,225 per year. Some might say that of course someone on $200,000 will get a bigger cut, after all they pay more tax. But someone on $200,000 earns 5 times more than someone on $40,000, but their tax cut is 16 times larger.

This is the problem with flattening our progressive tax system. High income earners will get an oversized tax cut, completely out of proportion to their incomes.

At the Australia Institute we have been calculating how much of the tax cut will go to high income earners and how much goes to middle and low income earners.

Using the latest taxation statistics we have constructed a model of income tax. We have broken all taxpayers into 100 groups from the lowest income earners to the highest. Inflating income by nominal GDP and calculating how much each group pays as the income tax cut is introduced; we can calculate the amount of the tax cut each income group gets.

We then split Australian taxpayers into three groups, high income earners (those in the top 20% of taxpayers), low income earners (those in the bottom 30% of taxpayers) and middle income earners (the remaining 50% of taxpayers).

The table below shows how much of the tax cut each group gets after the tax cut is fully implemented in 2024.

High income earners are by far the biggest winners from this tax cut. They get about twice the proportion of the tax cut as middle income earners, despite the fact that there are less than half as many as there are middle income earners. High income earners get over 60% of the tax cut, while middle income earners get only about 30% of the cut.

Low income earners largely miss out, getting only 7% of the value of the tax cut. This means high income earners get about 9 times more in tax cuts than those at the bottom.

If we look even more closely, we see that the further up the income scale you go, the bigger the benefit. While the top 20% (high income earners) get 62%, the top 10% (very high income earners) get about 40% of the tax cut.

If we look more closely at low income earners we see that while the bottom 30% (low income earners) get only 7% of the cut, very low income earners (the bottom 10% of taxpayers) get just 1.5% of the tax cut.

The figure below shows the proportion of the tax cut going to each decile.

While this tax cut has some parts that are designed to give relief for those on middle and low incomes, it is clear that the actual result of this tax cut is to hand out billions of dollars to high income Australians.

Cutting income tax because we experience an upswing in the economy is something we have seen before and last time it didn’t end well. Howard and Costello cut taxes and increased spending during the mining boom, in the process destroying the ability of the budget to raise revenue in more normal economic times. The result was 10 years of deficits with the current government using them as an excuse to cut government services.

The massive tax cut proposed in this budget could well have the same effect. This means if the massive income tax cut for high income earners is passed then in future we could be facing a similar budget to the 2014 horror budget when school funding, welfare, hospital funding, and higher education were cut.

We have seen this movie before. Slashing income taxes just leads to deficits further down the track and more horror budgets.

One interesting aspect of this year’s budget is that high income earners are getting traditional tax cuts (that show up as an increase in your income each payday.) While those on low and middle incomes are getting a tax refund (that only shows up after you do your tax return.)

So when would it be most helpful for those on low incomes to get their tax cut? While a lump sum at the end of the financial year is nice, most people on low incomes live paycheck to paycheck and a lump sum at the end of the year doesn’t pay for groceries, it doesn’t put petrol in the car and it doesn’t pay for the kids’ school excursions.

So why is the government choosing to give tax cuts this way to low income earners? The answer goes back to Amanda Vanstone’s ‘hamburger and a milkshake’ tax cut. The government is actually giving very little to those on low and middle incomes, only around $10 per week. While $10 per week doesn’t sound like much a $520 bonus at the end of the year sounds like so much more. But some quick calculations show they are actually the same. Politicians have learned that if you’re handing back a small amount it’s better politically to give it as an annual lump sum rather than give it out weekly.

So low income earners are missing out on help each payday because of the political optics of the tax cut.

Magical wage growth underpins the budget forecasts

by Matt Grudnoff, Senior Economist

Wage growth is at record lows in Australia and has been for many years. There are large parts of the population who are actually seeing their real wages go backwards. So it might come as a shock to most Australians to know that the budget is predicting big increases in the near future. Is it time to break out the champagne?

Unfortunately no. We have seen these magical predictions before. In fact last year when we reported on this we called it the wage growth unicorn.

If we look at all the wage growth predictions for this government we can see a depressing pattern. Big wage growth predictions followed by flat or falling wages.

According to the budget, wages are predicted to increase from slightly over 2% to 3.5% in three years’ time. If it happened it would be a massive turn around. Given the government’s previous efforts in wage growth prediction you could be forgiven for being highly sceptical. And yet it is these predictions that largely underpin the small surpluses predicted in the out years.

So why are wages so low and when will they increase? Wage rises occur when workers have bargaining power. Because of a concerted effort by multiple governments over the years, the power of workers has been eroded and now they simply don’t have the bargaining power to demand higher wages.

The government has claimed that higher jobs growth will make workers scarcer and when this happens businesses will have to start paying them more. The government regularly points to record growth in employment and has been promising wage rises for some time.

But a quick glance at the number of unemployed people shows that while more jobs are being created this is not leading to a shortage of workers. There has been no decrease in the number of unemployed. This is in large part because the growth in employment is just keeping up with new entrants into the labour market.

The figure below shows the number of unemployed since the election in 2013 of the current government and the red line is the period of jobs growth that the government is so proud of.

So: little bargaining power coupled with no decrease in the number of unemployed means that wages growth has stagnated.

For wages growth to increase we would need to see real changes to industrial relations laws that tilted the rules back in favour of workers. This is highly unlikely from a government that fought the last election on changes that would reduce the power of workers.

The other way would be if we saw a massive increase in employment which led to a fall in the number of unemployed and a big drop in the unemployment rate. So does the budget predict this? The budget actually shows a big drop in employment growth. Employment growth almost halves from a current rate of 2.75% this year to 1.5% next year. The unemployment rate is also expected to remain largely flat falling slowly over the next four years from 5.5% to 5%.

Neither of these predictions justifies a big pick up in wages. The final result will likely be missed targets in the out years and less revenue collected. Revenue the government is trying to spend on company and income tax cuts.

Do you remember the debate about whether the budget had a revenue or spending problem? The Australia Institute led the debate pointing out it was a drop in revenue caused by a combination of the GFC and unsustainable income tax cuts from the Costello years. The government would not have a bar of it. According to Hockey and then Morrison after him, the budget had a spending problem and the solution was the slashing and burning of government services.

Well this budget there was far less talk about a spending problem but the Treasurer was still keen to trumpet $41 billion in spending cuts. Most of that came from school and hospital funding and foreign aid cuts. But were those cuts really responsible for the reduction in the deficit?

While spending has fallen marginally, it has been a big increase in revenue that has driven the deficit down.

While spending has fallen by less than one per cent of GDP, revenue has increased by almost three per cent of GDP. In fact if all the savings the government have claimed had not occurred and spending remained at the same level when the government came to power in 2013, the budget would still predict a balanced budget in 2021–22.

But one thing is certain, you won’t hear the Treasurer admit he was wrong. He is ideologically locked into spending being the big budget beast that needs to be slayed.

Funding uncertainty for the NDIS

by David Richardson, Senior Research Fellow

The government says it ‘is fully funding its share of the National Disability Insurance Scheme’. That seems a major inconsistency; either the government is guaranteeing the scheme or leaving open a funding gap in the event that a state/s fails to deliver. There is the question of whether fully funding the scheme actually means providing for everyone deemed eligible to take part in the scheme. Moreover, some of that would be the responsibility of the NDIA, a statutory authority not directly accountable to the government.

The stakeholders have indeed raised serious issues and perhaps in the future the best way forward would be a traditional guarantee that can only be offered by way of a standing appropriation to meet the needs of all who qualify. An earlier paper by the Parliamentary Library pointed out the funding arrangements for NDIS are complex and risks ‘future instability of financing’.

We have to agree.

Read David Richardson’s full analysis of NDIS funding uncertainty here.

Expansion to Pension Loan Scheme

by Ebony Bennett, Deputy Director

The move to expand the under-utilised Pension Loan Scheme (PLS) in the federal budget to allow pensioners access to the scheme is a welcome change, and credit where it is due: congratulations to Scott Morrison for delivering this budget breakthrough.

This is sensible economic reform which will allow those on the aged pension to effectively access some of the value of their home without having to sell it.

The PLS, which is effectively a government run reverse mortgage, has the potential to make a real difference to people’s lives. Giving older Australians extra cash, at no cost to government, will allow many people to live in their own home with more financial security. The scheme deserves more promotion generally.

It never made sense to exclude pensioners from accessing the scheme while allowing wealthier Australians the right to use the mechanism.

Having the federal government involved in such a reverse mortgage arrangement is sensible economics. The PLS will keep costs down for customers, the financial infrastructure is already in place and over time the scheme will be cost neutral for the government as all loans are repaid and secured against the value of the pensioner’s home.

The Australia Institute proposed an expansion of the Pension Loan Scheme back in our 2014 report: Boosting Retirement Incomes the Easy Way.

Subsequently a collection of diverse Senate cross benchers united to pursue the idea and had it costed by the Parliamentary Budget office: Parliamentary Budget Office Costings of expanded Pension Loan Scheme

More cuts to the ABC

by Anna Chang

The Federal Budget also includes an $83.7 million cut to the ABC in the form of an indexation freeze until 2022, while Minister Fifield has announced another ‘efficiency review’ for the public broadcaster.

Described by Michelle Guthrie as a ‘watershed moment’, this cut has lead to the ABC Managing Director to openly question whether the cut would affect the ABC’s ability to deliver on its charter.

In short, is this the straw that breaks the ABC’s back?

This funding cut is worrying on two counts: firstly because Australia Institute research shows that the ABC is Australia’s most trusted broadcaster. And at a time when so-called ‘fake news’ is at an all-time high and journalism jobs are being cut across the country, has there ever been a greater need for a strong, independent and trusted national broadcaster?

And secondly, because Pauline Hanson’s One Nation party has previously tried to use ABC funding as a bargaining chip and Pauline Hanson herself has told Sky News she wanted to ‘whack’ its funding come budget time, and now the Coalition has clearly listened and delivered.

Meanwhile, on the horizon this year are the rest of the Coalition’s media ownership deal with the One Nation party — explicitly targeted at the ABC — including their ‘competitive neutrality’ inquiry and also Minister Fifield’s new efficiency review as the ABC enters talks to renew their triennial funding agreement with their current funding agreement ending this financial year.

Add your name: Hands off our ABC!

Is it all smoke and mirrors for Aged Care?

by Rod Campbell, Director of Research

Aged care was supposed to be a big winner in the budget. In particular, the Treasurer claimed $1.6 billion over four years would increase home care packages to help older Australians keep living in their own homes. Reading the fine print, however, this good news is hard to find.

Literally it is hard to find because home care and residential care have been combined into one line item, so readers can’t immediately compare this budget with last year’s and see all this extra funding. In the graph below I’ve combined 2017–18 budget’s separate line items and compared them with 2018–19 budget’s combined residential home care line:

Aged care: residential and home care in 2017–18 Budget and 2018–19 Budget

Hard to see this big increase in funding. In fact, 2018–19 funding for combined residential and home care is $56 million lower in this budget than was expected in the last one, as shown in the table below:

The sum of the difference between the two budgets is just $86 million, so either the $1.6 billion increase doesn’t exist, or is going from residential care into home care, or there is some other smoke-and-mirror trick at play.

Worse still, the Budget Papers show that actual numbers of Commonwealth home care packages decreased from 90,763 in 2016–17 to 87,590 in 2017–18.

The real issue here isn’t just money. Aged care, like disability care, is undergoing a massive shift from being largely run by the states to being run by the Commonwealth. This transition is tough for all the organisations involved. There is a lot of good will, but progress is slow. The Australia Institute has published research on this transition and worked closely with Aged Care Minister Ken Wyatt, Homeshare Australia and peak bodies to try to find solutions to some of these policy challenges.

Forget an increase, cut to Newstart still on the books

by Anna Chang

With the growing push to raise Newstart leading to former Prime Minister John Howard joining the call, it is worrying that the Coalition’s ‘zombie’ budget measure to actually cut Newstart is still on the budget papers.

Our research shows that Newstart is already well below the poverty line, the Coalition shouldn’t be driving it even lower.

And while the Senate has refused to pass this harsh cut to support for people living on the brink, it is clear that the Coalition’s insistence to keep it on the books means they are waiting for a more agreeable Senate rather than accept community sentiment that Newstart should be raised, not cut.

Back in 2016, when this cut to Newstart first reared its head, we gathered the names of 32 prominent Australians to tell the Coalition not to cut Newstart. It is well past time to scrap it completely, join the open letter here:

Changes to remote Work for the Dole

by Bill Browne, Researcher

At the Australia Institute, we pride ourselves on making economics understandable. But there are areas — even some that are funded in the budget — that aren’t really about economics at all. One of those is the Community Development Program, Australia’s remote Work for the Dole scheme. Our research earlier this month showed how the people in this program — the vast majority of whom are Indigenous — are unfairly hit with higher work requirements and thousands of financial penalties.

Read the full report on The Australia Institute website here.

The budget flags substantial changes to the CDP, but what matters is how they are implemented. There is enough money already in the scheme to fund meaningful work that pays a fair wage — or to enforce a bureaucratic and punitive scheme. Which approach will the government choose? You won’t find the answer in the Budget.

No one’s surprised by more cuts to foreign aid — but we should be

by Bill Browne, Researcher

Rumours that there would be steep cuts to foreign aid of $400 million per year or more might provoke relief that the Budget announced cuts of “only” $140 million over four years — concentrated in the fourth year.

The problem is that our “official development assistance” (to use its formal title) is already at historically low levels after years of cuts. It needed a big funding boost, not more cuts. Even if we count the increased funding for “ODA eligible” projects like the Asian Infrastructure Investment Bank, Australia won’t come close to meeting its commitments.

The most fundamental of these is the bipartisan target for foreign aid spending to rise to 0.7% of Gross National Income, which dates back to the Howard Government. In other words, of every $100 of output, we should devote 70 cents to foreign aid. A diverse mix of countries, including Turkey, the United Arab Emirates, the United Kingdom and Norway, all meet or exceed that target.

Instead, we give about 22 cents to foreign aid for every $100, and are heading towards giving just 20 cents.

That’s below our 0.7% target, but it’s also:

  • Below the OECD average of 0.31%
  • Below the target in the 2013 budget of 0.5%, which we were meant to achieve last year
  • Less than one-sixth of the Emirates’ contribution of 1.3%
  • Over a billion dollars below the funding level Minister Bishop committed to in 2014
  • Down by a third from the rate that Minister Bishop inherited from Minister Carr, of 0.32%

New Zealand recently announced an additional $670 million in aid spending to make up for past neglect. Our aid budget is just as in need of a big funding boost.

Lower income graduates don’t need more HELP

by Tom Swann, Researcher

The chaotic ‘fixing’ of Christopher Pyne’s failed university funding deregulation agenda seems a long way behind us now. The budget lists few new measures, with the money focused mainly on supporting student places in regional universities. That’s an attempt to compensate for previously announced caps on per-student government funding.

The government is also clawing back uni fees faster from students, with a previously announced HELP loan repayment schedule that sees lower income graduates start paying loans back earlier. In addition, graduates at some higher incomes will repay less, and there’s a new higher income bracket. But the whole point is to get most students to repay more of their loans faster, including on lower incomes. The changes won’t see higher income graduates contribute more over their highly paid careers, rather pay off their loans more quickly.

Good news includes a modest increase in ‘research infrastructure’ funding of around $400m over five years, covering costs of research not covered by grant funding. This should reduce some of the pressure for universities to gouge students to cross-subsidise research. Also good news is the quiet backflip on abolishing the roughly $150 million a year Higher Education Partnerships and Participation Program.

In the VET sector, there’s extra funding to manage VET Student Loans program in the aftermath of previous poor accountability and dodgy private providers.

Funding to coal dwarfs funding to renewables

by Tom Swann, Researcher

You and I pay tax on fuel when we fill up our tank, but many companies get that tax back through the Fuel Tax Credits Scheme,and the biggest beneficiary is the mining industry.

The budget shows the scheme cost taxpayers $6.9 million in 2018–19. That’s up $700m since last year, and now far bigger than all revenue derived from excise on petrol ($6.2 billion). What’s more, the Budget expects this to continue to climb — up to $8.1 billion by 2021–22.

The graph below estimates how much different industries benefit from this tax-free fuel using ATO data from 2016–17.By far the biggest beneficiary is the mining industry, at $3.0 billion or 44% of the total. Coal mining is nearly half of that, at $1.4 billion.

The budget also provides helpful summaries of total spending on “fuel and energy” — $7.5 billion — nearly entirely made up by the fuel tax credit scheme. Just $342 million is “renewable energy” — less than a quarter of the fuel tax credits for the coal industry alone.

Demonstrating how serious the government really is about ‘clean coal’, notable cuts to “fuel and energy” include:

“cessation of funding for … Carbon Capture and Storage Flagships programs in 2018–19, and the cessation of the Coal Mining Abatement Technology Support Package in 2019–20.”

That’s just as well. As our research has demonstrated, Australian taxpayers have spent $1.3 billion on CCS with bugger all to show for it. Maybe the government should stop trying to get the Clean Energy Finance Corporation to fund coal as well.

No mention in this budget of Adani or the Galilee Basin, but prospects for taxpayer funding is still live, with Adani talking to the Export Finance and Insurance Corporation and the Minister giving it the green light to fund these sorts of projects.

What we imagine we can design

by Bill Browne, Researcher

In her post-budget interview with Treasurer Scott Morrison, Leigh Sales wondered how much of the budget’s rosier outlook could be attributed to good economic management, and how much was based on factors outside of the government’s control.

Well, she put it more colourfully — asking the Treasurer: “Has your derrière had a lucky encounter with a rainbow?”

Perhaps unsurprisingly, Mr Morrison did not give the rainbow much credit — but Leigh Sales’ thinking was very much in line with my colleague Jim Stanford’s work on economic management by Prime Minister.

Jim Stanford’s 2016 report — available at the Centre for Future Work’s website here — compares each Prime Minister since World War II against a dozen indicators of economic performance.

Jim Stanford points out that Australia’s strongest growth happened when:

  • taxes were higher (especially on businesses and high-income individuals),
  • collective bargaining coverage was near-universal, and
  • government programs (and the taxes to pay for them) were growing rapidly.

He ultimately finds that:

There is no obvious correlation between … swings in Australia’s economic history, and the policy orientation of the government that oversaw them.

While governments can do a great deal to affect the quality of our lives and the shape of our economy, much is outside of their control.

In other words: it’s got more to do with the rainbow than it does the derrière.

Cuts to the Environment and Climate Change budget

by Hannah Aulby, Researcher

Funding for the Environment Department has been cut again in this year’s budget. Since the 2012–13 budget, funding for the Environment Department has been cut by 37%. At a time when ecosystems are under extreme stress and entire species are threatened, the government is choosing to cut environment funding.

The only new spending on the environment in this year’s budget is the one off $444 million payment to support the Great Barrier Reef 2050 Partnership Program. This program is a partnership between the federal government and the Great Barrier Reef Foundation, which is headed up by business executives, including former oil and gas executives John Schubert and Grant King.

In the 2013–14 budget, climate spending was $5.75 billion. Last year it was $3 billion. In this budget, this is down to $1.6 billion, with projections of further cuts to $1.25 billion in 2021–22. This means that the Clean Energy Finance Corporation, the Australian Renewable Energy Agency (ARENA) and the Emissions Reductions Fund will all be operating with less funding. This is a significant cut compared to the original allocation of funding for ARENA, which was $1.4 billion in the 2012–13 budget. This will severely restrict the ability of the CEFC and ARENA to support new renewable energy projects. The rest of the world is moving ahead with a renewable energy boom and Australia is being left behind, choosing to prop up aging and polluting coal fired power stations instead.

The only new spending on energy is $36.7 million over the next 5 years on regulation change, including implementing some recommendations of the Finkel review, improving the gas market, and supporting the COAG Energy Council.

Climate change is happening. In the summer of 2016/17 records were set for the highest monthly mean temperatures for Sydney and Brisbane and the highest daytime temperatures on record for Canberra. New South Wales recorded its overall warmest summer on record, and Queensland had its second-warmest summer on record.

Meanwhile Australia’s emissions keep increasing, with a 1.1% increase over the year to September 2017.The government could choose to cut our climate pollution by investing in renewable energy, and could help communities deal with climate change by investing in climate adaption programs.

Better consumer control for our energy data

by Dan Cass, Strategist

The budget includes $44.6 million over four years from 2018–19 to establish a National Consumer Data Right, with the budget shared across CSIRO, Office of the Australian Information Commissioner and the Australian Competition and Consumer Commission. This could apply to data in every sector of the consumer economy, depending on how those agencies design the scheme. It should help energy consumers gain access to their own consumption and generation data and then share this with companies who provide services to them, such as managing their energy better or finding a better deal on their electricity or gas. Unfortunately there is no detail at all about how this will be implemented and how it will relate to existing state schemes across the National Electricity Market.

The New Trilogy

by David Richardson, Senior Research Fellow

In the mid-1980s the Hawke/Keating Government committed itself to what it termed a ‘Trilogy’ of budget restraint. This pledged that Commonwealth revenue would not increase as a percentage of gross domestic product (GDP) with similar commitments for spending and the deficit. At that time the latest figures available were for 1984–85 when the budget balance was a deficit of 2.6 per cent of GDP and the tax to GDP ratio was 22.5 per cent while total revenue to GDP was 25.0 per cent. In an effort to appear fiscally ‘responsible’ the trilogy commitment used whatever the then current figures happened to be and, as such, were entirely arbitrary. However, the trilogy seemed to suggest fiscal conservatism when the then government thought fiscal conservatism meant good politics during an election campaign.

The budget papers have for a while mentioned a target tax to GDP ratio of 23.9 per cent which has recently become a ceiling or a ‘speed limit’. When Treasurer Scott Morrison said ‘We have imposed a speed limit on taxes in our budgets, that requires that taxes do not grow beyond 23.9 per cent of our economy’. This was repeated on budget night in the Treasurer’s speech and in the fiscal strategy which says ‘the Government has formalised its tax-to-GDP cap of 23.9 per cent as part of its fiscal strategy to support stronger economic growth’.

The Treasurer’s budget speech also included some observations on spending:

“Real expenditure growth remains below two per cent, the most restrained of any Government in more than 50 years…This will see Government spending fall to 24.7 per cent of GDP, below the 30 year average at 24.8 per cent over the forward estimates.”

In the budget papers themselves there are references to spending restraint ‘bringing it [the spending to GDP ratio] below the 30 year historical average of 24.8 per cent’ and ‘bringing it below the 30 year average of 24.8 per cent’ .

It must be pointed out that the 30 year average is entirely arbitrary and over the 30 years the government has added new functions. On the latter point, the article on the NDIS funding points out that the NDIS spending appears on the federal government books but it is jointly funded by the states and territories. That adds around 0.5 per cent of GDP by including the states’ half in federal spending.

On the projected surplus the Treasurer said ‘Over the medium term the projected Budget surplus rises to over one percent of GDP, without breaching our tax cap, consistent with our fiscal strategy’.

The surplus objective (on average) is curious when we think about it. While it seems to have been accepted rather uncritically, you might get a different response if the Treasurer had said ‘We intend to tax you more than we need to fund government spending’.In the following passage the one per cent surplus becomes a target when the budget papers say ‘The budget repair strategy is designed to deliver sustainable budget surpluses building to at least 1 per cent of GDP as soon as possible, consistent with the medium-term fiscal strategy’ (3–7).

Putting all this together we have a new Trilogy of commitments, a tax ceiling of 23.9 per cent of GDP, a spending ceiling of 24.8, and a surplus of one per cent of GDP. Those figures are consistent when we add in non-tax revenues that vary in the range of 1.6 to 1.9 per cent of GDP over the forward estimates.

However in combination the present trilogy implies a very severe constraint on public sector activity in Australia. This is very serious in the context of an Australian economy that has serious gaps in its delivery of fairness in the income distribution, as well as the provision of services in health, housing, education and many other areas. Artificial constraint in these areas will involve serious social and economic costs.

From all of the team at The Australia Institute, thanks for reading.
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