The government has extended the energy payment to people on Newstart – after excluding them only days ago.
Treasurer Josh Frydenberg said the decision was made at a meeting on Tuesday night of Scott Morrison, Finance Minister Mathias Cormann and himself. He indicated it was about smoothing the passage of the measure through the parliament.
There was widespread criticism of the exclusion of Newstart recipients from the payment, which will be A$75 for a single person and $125 for a couple.
The money is due to go out very soon and the government needed the legislation to pass immediately. While Labor had flagged it would support the one-off payment, the legislation could have been amended, because the government is in a minority in the House of Representatives.
The payment was originally set to be confined to those on the age pension, disability support pension, carers payment, parenting payment single recipients, and veterans and their dependants receiving payments.
The extension, which will also cover those on Youth Allowance and other working age payments, bringing the number of recipients to five million, will add some $80 million to the original cost of $284.4 million.
Labor seized on the backdown, seeking to suspend standing orders to move a motion in the House saying the government’s backflip “has already blown an $80 million hole in the budget”, and showed the budget was “unravelling less than 24 hours after it was delivered”.
The motion condemned the government for “only looking after the top end of town and treating vulnerable Australians as an afterthought”. The attempt to suspend standing orders failed.
Frydenberg, speaking to the National Press Club, explained the original exclusion by saying three-quarters of people on Newstart moved off it within 12 months, and 99% of people on it received another payment.
“They get a parenting payment or they get a family tax benefit payment, whereas when you’re on the Disability Support Pension or on the aged pension, you tend to be on it for longer, and that seems to be – that is your principal form of payment”.
Frydenberg said the change “will secure the passage of the piece of legislation through the parliament”.
Appearing on the ABC Q&A on Monday, Liberal senator Arthur Sinodinos could not say why Newstart recipients had been excluded from the payment. “The short answer is I don’t know why,” he said. He also said he thought Newstart was too low.
The Morrison government’s pre-election budget has not been the bonanza some predicted. It is a fairly modest affair.
But calculations by the the National Centre for Social and Economic Modelling, based at the University of Canberra, show the budget will widen the gap between rich and poor. This is because changes to the tax and welfare system most benefit those paying tax. Those who don’t earn enough income to pay tax benefit least.
The centre has calculated the impact of the the federal budget’s tax and welfare transfer changes by families, age groups and Commonwealth Electoral Division.
The most significant tax changes are the two stages of tax cuts in 2022-23 and 2024-25. In 2022-23 the point at which the marginal tax rate increases from 19% to 32.5% will lift from A$41,000 to A$45,000. In 2024-25 the marginal tax rate on incomes between A$45,000 and A$200,000 will be reduced to 30%. The top tax rate of 45% (which now kicks in at A$180,000) will apply to any income above A$200,000.
The threshold on which no income tax is paid remains the same, at A$18,200.
Other tax changes involve increases to the Low Income Tax Offset (LITO) and the Low and Middle Income Tax Offset (LMITO). The LMITO (available for those earning more than A$48,000) will increase from A$530 to A$1,090 from this financial year, while the LITO will increase from A$645 to A$700 in 2022-23.
More income, more benefit
The benefit of the 2024/25 tax cuts on high-income families will be dramatic, as seen in Figure 1, which shows the effect of the changes over three years (2019-20, 2022-23 and 2024-25) by income.
The important point to note is that changes to marginal tax rates and the income tax offsets affect anyone paying tax. There is absolutely no benefit to anyone not paying tax. Which is why there is very little gain for those on incomes below $40,000 (the top of the second income quintile in Figure 1). The gain for those in the first income quintile (who mostly earn no private income) is even lower.
Figure 2 shows that the cohort that would gain the most in 2019-20 are those aged 26–35, by an average by A$245 a year for men and A$213 a year for women. This is mainly due to the change in the Low and Middle Income Tax Offset.
By 2024-25, the cohort gaining most are men aged 46–55, by A$795 a year, and women aged 46-55, by A$759 a year. This is mainly because the tax changes in 2024-25 provide greatest advantage to high-income earners, as shown above.
Figure 3 breaks down the impact by family type and income quintile. Couples with children gain the most for all years. By 2024-25, couples with children in the highest-income quintile gain an extra A$4,573 a year, while those in the lowest quintile get just A$114.
The main reason for this is that couples with children commonly have both parents working and paying tax, therefore tax changes benefit these families more.
In the first year (2019-20), the Low Income Tax Offset and Low and Middle Income Tax Offset mean middle-income earners gain the most (although it is still Quintile 4 gaining the most in this first year). By 2022-23 the tax cuts benefit higher-income households more.
When it comes to the impact by Commonwealth Electoral Division (Figure 4), we can see that by 2024-25 urban areas gain the most, and regional areas the least.
This is because households in urban areas tend to have higher incomes, and the tax cuts in 2024-25 mean electoral divisions with higher income households will benefit the most.
Effect on poverty rate
The budget’s effect on the poverty rate – the proportion of households living on less than 50% of median income – is to reduce it by 0.2 percentage points by 2024-25. This is a fairly small reduction. But due to the tax cuts in 2024-25 raising the net incomes for high-income households, this means income inequality will be higher.
The 0.2 percentage point decrease compares to an 0.8% percentage point reduction that NATSEM’s modelling estimates would result from raising the Newstart allowance by A$75 a week from what it is now.
The message from this analysis is that the changes to the tax and welfare system in this budget benefits those with higher incomes and who are paying tax, with little to no gains in future years to some of those low income earners who aren’t paying tax.
An Easter weekend in an election campaign might be a bit of a challenge for a pair of leaders who were atheists. But fortunately for Scott Morrison and Bill Shorten, declared believers, it wasn’t a problem.
Both attended church services during the so-called campaign cease-fire that the main parties had proclaimed for two of the four days.
Morrison on Sunday was pictured in full voice with raised arm at his Horizon Pentacostal church in The Shire, where the media were invited in. On Friday he’d been at a Maronite Catholic service in Sydney.
Sunday morning saw Shorten at an Anglican service in Brisbane, his family including mother-in-law Quentin Bryce, former governor-general.
Neither leader was hiding his light under a bushel.
Church, chocolate and penalty rates
Sunday was an opportunity to wheel out the kids, chasing Easter eggs (Shorten) or on the Rock Star ride at Sydney’s Royal Easter Show (Morrison). This was campaigning when you’re not (exactly) campaigning.
The minor players weren’t into the pretend game. For them, the relative restraint on the part of the majors presented rare opportunity. Usually Centre Alliance senator Rex Patrick would have little chance of being the feature interview on the ABC’s Insiders.
But while Friday and Sunday were lay days for the major parties Saturday was not (and Monday won’t be either).
For Labor, Easter has meshed nicely with one of the key planks of its wages policy – restoration of penalty rate cuts by the Fair Work Commission. Even on Sunday, Shorten pointedly thanked “everyone who’s working this weekend”.
It was the start of Labor’s campaign focus turning from health to wages this week, when it will cast the election as a “referendum on wages”.
Turnbull resurrects the NEG
The weekend standout, however, was the intervention of Malcolm Turnbull, who launched a series of pointed tweets about the National Energy Guarantee (NEG).
Turnbull was set off by a reference from journalist David Speers to “Malcolm Turnbull’s NEG”.
“In fact the NEG had the support of the entire Cabinet, including and especially the current PM and Treasurer. It was approved by the Party Room on several occasions”, the former prime minister tweeted.
“It had the support of the business community and energy sector in a way that no previous energy policy had. However a right wing minority in the Party Room refused to accept the majority position and threatened to cross the floor and defeat their own government”.
“That is the only reason it has been abandoned by the Government. The consequence is no integration of energy and climate policy, uncertainty continues to discourage investment with the consequence, as I have often warned, of both higher emissions and higher electricity prices.”
He wasn’t finished.
“And before anyone suggests the previous tweet is some kind of revelation – all of the economic ministers, including myself, @ScottMorrisonMP, @JoshFrydenberg spent months arguing for the NEG on the basis that it would reduce electricity prices and enable us to lower our emissions.”
“I see the @australian has already described the tweets above as attacking the Coalition. That’s rubbish. I am simply stating the truth: the NEG was designed & demonstrated to reduce electricity prices. So dumping it means prices will be higher than if it had been retained. QED”
“The @australian claims I ‘dropped the NEG’. False. When it was clear a number of LNP MPs were going to cross the floor the Cabinet resolved to not present the Bill at that time but maintain the policy as @ScottMorrisonMP, @JoshFrydenberg& I confirmed on 20 August.”
(Frydenberg, incidentally, has lost out every which way on the NEG. As energy minister he tried his hardest to get it up, only to see it fall over. Now he is subject to a big campaign against him in Kooyong on climate change, including from high-profile candidates and GetUp.)
Turnbull might justify the intervention as just reminding people of the history. But it is damaging for the government and an Easter gift for Labor – which is under pressure over how much its ambitious emissions reduction policy would cost the economy. It also feeds into Labor’s constant referencing of the coup against Turnbull.
Turnbull’s Easter tweets are a reminder
the Coalition sacrificed a coherent policy on energy and climate for a hotchpotch with adverse consequences for prices;
it dumped that policy simply because of internal bloodymindedness, and
the now-PM and treasurer were backers of the NEG, which had wide support from business.
Shorten has strengthened his commitment on the NEG, indicating on Saturday he’d pursue it in government even without bipartisan support.
“We’ll use some of the Turnbull, Morrison, Frydenberg architecture, and we will work with that structure,” he said.
Given the hole it has left in the government’s energy policy, pressing Morrison on the economic cost of walking away from the NEG is as legitimate as asking Shorten about the economic impact of his policy.
Infrastructure spending is one of the central themes of Treasurer Frydenberg’s budget speech. His headline announcement was the promise to increase the ten-year federal infrastructure spend from the A$75 billion announced last year to a target of $100 billion.
Major projects previously announced – like the Melbourne Airport rail link, Western Sydney’s north-south airport rail link and Queensland’s Bruce Highway upgrade – are affirmed. A fast rail connection from Melbourne to Geelong is added. Also added are nation-wide packages of roadworks targeted at reducing congestion and improving regional freight corridors.
So the announcements continue the infrastructure program detailed in the 2018-19 budget, as promoted regularly in the government’s expensive “Building Our Future” advertising campaign that gives prominence to the government’s ten-year “Infrastructure Pipeline”.
The Parliamentary Library has been unable to locate any public document which provides a transparent overview of [the federal government’s] total infrastructure commitments.
One suspects that scrutiny over coming weeks of the $100 billion infrastructure spending promises will be thwarted by a repetition of this lack of transparency.
Why are infrastructure needs so great?
The national population growth story is the key framework for assessing the Coalition’s infrastructure plan. Between 1901 and 1948, the nation grew steadily, but modestly, from a population of 3.8 million to 7.7 million. Then the population surged on the back of a post-war baby boom and an expansion of immigration. The population grew by between 2.0 and 2.5 million people each decade from the 1950s through to the 2000s.
But in the last decade, the nation has added nearly 6 million people, with the east coast cities overwhelmingly hosting the increase. Urban infrastructure planning and spending have lagged. Both quality of life and economic productivity have been affected adversely as a consequence.
The infrastructure spending in this budget responds to community concerns about these declines.
The Future Fund was also created to cover public service pension liabilities. That fund is now custodian of over $150 billion worth of assets.
Dissolving pension liabilities is wise economic management. Australia’s problem is that this resolution took place at the expense of national capital works spending. Around this time, the state-owned utilities that had taken responsibility for the roll-out of post-war infrastructure – with their regular, predictable annual capital works budgets and their vast in-house planning and delivery offices – were on their last legs.
The loss of committed funding and the erosion of the utilities stalled infrastructure delivery at a time in Australian history when it was most needed. The urban infrastructure projects for coping with the acceleration of urban growth are only now coming on stream.
New funding streams have had to be found, led by a new round of state-based asset sell-offs – in New South Wales especially – and new models of private sector delivery, ownership and operation. Pretty much all new urban infrastructure projects in Australia are now some sort of private public partnership.
But, as this budget confirms, private sector involvement in infrastructure spending and delivery needs to be leveraged on the back of public funding and protected from project risk by a raft of government measures. An important risk amelioration measure involves decision-making technologies.
Here, the growing expertise within the federal government’s Infrastructure Australia unit is increasingly important. Established by the Rudd Labor government a decade ago, IA struggled for legitimacy for many years. Now we can see Infrastructure Australia’s priority lists – based on its independent assessments – dominating government budget announcements. Indeed, the government’s ten-year Infrastructure Investment Pipeline is a very close reproduction of Infrastructure Australia’s national priority listing. Which is a good thing.
Why the focus on roads?
The problem, of course, is that rather than infrastructure steering urban growth, as would have been the case had the Howard Coalition government not dramatically lowered the level of national capital works spending, infrastructure spending now chases urban growth.
Not surprisingly, the Morrison government packages a bundle of roads spending as “urban congestion” measures, acknowledging that transport planning has been inadequate.
The concentration on roads spending also acknowledges that the millennial growth surge in our cities has been geographically perverse. Greenfields residential projects are rarely aligned to public transport systems. And jobs growth has been a mix of CBD obsession and suburban scatter.
The result is congestion of antiquated CBD-centric public transport systems and suburban journey-to-work patterns that make retrofitting of public transport an impossible task.
No doubt there will be criticism of this budget’s apparent obsession with roads spending. The unfortunate reality is that large sections of our cities are stuck with the roads-based configuration that was instilled into their DNA from the get-go. Roads – not rail – are the thoroughfares that define transport options across our new suburban areas into the future.
Getting used to road spending and having constructive things to say about road use are a major challenge.
The shortlist features six renewable electricity pumped hydro projects, five gas projects, and one coal upgrade project, supplemented by A$10 million for a two-year feasibility study for electricity generation in Queensland, possibly including a new coal-fired power station.
The study is unnecessary, because the GenCost 2018 study by CSIRO and the Australian Energy Market Operator already provides recent cost data for new power generation in Australia. It shows that new wind and solar farms can provide the lowest-cost electricity, even when two to six hours’ worth of storage is added.
Hence there is no economic case for new coal-fired power in Australia. After a century of coal, it should not be subsidised any longer.
While Queensland and Victoria have state government policies to drive the rapid growth of large-scale solar and wind, New South Wales does not even have a renewable electricity target. Yet the retirement of large, old coal-fired stations is in the pipeline: Liddell, nominally 1,680 megawatts, in 2022 and Vales Point, nominally 1,320MW, possibly in the late 2020s.
Coal baron Trevor St Baker bought Vales Point from the NSW government for the token sum of A$1 million in 2015. He wants to refurbish it and run it until 2049 – and his plan has made it onto the government’s shortlist.
Given that Vales Point is now arguably a A$730 million asset, St Baker has made a huge windfall profit at the expense of NSW taxpayers, and so a government subsidy to upgrade it would be unjust.
Unfortunately, the newly elected NSW Liberal-National Coalition government has no policies of substance to fill the gap left by retiring coal stations with large-scale renewable electricity. It will therefore be up to the federal government after the May election to provide reverse auctions with contracts-for-difference, matching the policies of the ACT, Victorian and Queensland governments. Also, increased funding to ARENA and the Clean Energy Finance Corporation is needed for dispatchable renewables (those that can supply power on demand) and other forms of storage.
Driving the change
The transition to renewable electricity is already well under way, as even the federal energy minister Angus Taylor admits. The low costs of solar and wind power are driving the change. To maintain reliability, dispatchable renewables (as opposed to variable sources such as solar and wind) and other forms of storage are needed in the technology mix.
Batteries excel at responding rapidly to changes in supply and demand, on timescales of tens of milliseconds to a few hours. But they would be very expensive for covering periods of several days, even at half their current price. So there is a temporary role for open-cycle gas turbines (OCGTs) to meet demand peaks of a few hours, and to fill lows of several days in wind and/or solar supply.
Small-scale pumped hydro, in which excess local renewable electricity does the pumping, has huge potential for storage over periods of several days, but takes longer to plan and build, and has higher capital cost per megawatt, compared with OCGTs.
Small-scale pumped hydro should be the top priority for the federal program. In particular, the off-river proposal by SIMEC Zen Energy, which is part of Sanjeev Gupta’s GFG Alliance, will use a depleted iron ore pit and provide cheap, reliable, low-emission electricity for both GFG’s steelworks at Whyalla and other industrial and commercial users.
Hydro Tasmania’s proposed “Battery of the Nation” would involve building a new interconnector across the Bass Strait, together with possibly three new pumped hydro plants. It’s very expensive and is already receiving A$57 million in federal funding. Its inclusion in the shortlist is worrying because it could soak up all the program’s unspecified funding for pumped hydro.
Furthermore, the need to greatly increase Tasmania’s wind capacity to deal with droughts appears to be an optional extra, rather than an essential part of the project.
Little information is available for the other shortlisted pumped hydro projects. UPC Renewables is proposing a huge solar farm, together with pumped hydro, in the New England region of NSW. In South Australia, Sunset Power (trading as Delta Electricity, chaired by Trevor St Baker), in association with the Altura Group, is proposing an off-river pumped hydro project near Port Augusta, and Rise Renewables is proposing the Baroota pumped hydro project. BE Power Solutions, which does not have a website, is proposing pumped hydro on the Cressbrook Reservoir at Crows Nest, Queensland.
Pumping for Snowy 2.0 (which is not part of the program) will be done mostly by coal power for many years, until renewables dominate supply in NSW and Victoria. Therefore, I give low priority to this huge and expensive scheme.
To sum up, new coal power stations and major upgrades to existing ones are both unnecessary. They are more expensive than wind and solar, even when short-term storage is added – not to mention very polluting.
A few open-cycle gas turbines may be acceptable for temporary peak supply during the transition to 100% renewable electricity. But the priority should be building pumped hydro to back up wind and solar farms. This will keep the grid reliable and stable as we do away with the old and welcome the new.
This article is part of a series examining the Coalition government’s record on key issues while in power and what Labor is promising if it wins the 2019 federal election.
Politicians often invoke the word “reform” to convey the significance, or gravitas, of a particular policy change they are proposing.
However, the tax policies implemented over the six years of the Abbott-Turnbull-Morrison government should be more aptly described as: no reform, lots of tinkering, two blunders and some lost opportunities.
To be fair to the leaders of the Coalition, both Abbott and Turnbull began their prime ministerships professing a large appetite for tax reform.
In opposition Abbott and his treasury spokesman Joe Hockey had promised a major inquiry. Hockey said it would pick up where Labor’s Henry Tax Review left off:
We thought the Henry Tax Review was going to be a proper process. Now, that has obviously been an abject failure. We’ve said – Tony Abbott announced
in Budget and reply speech – we will have a proper process for proper tax reform, and whatever comes out of that process, which will be a white paper, we will take to a subsequent election, seeking the mandate of the
Australian people – their approval.
Marginal changes to superannuation tax further added to the complexity of the tax system as a whole. The current superannuation system disproportionately rewards higher income earners because most contributions are taxed at the same low rate (15%) regardless of the taxpayers’ income tax rate.
The Coalition’s response was to apply a 30% tax on contributions for those earning $250,000 or more (down from the previous threshold of $300,000) and to cut the cap on concessional contributions from $30,000 ($35,000 for those aged 49 and over) to $25,000. And it capped at $1.6 million the amount that could be transferred into the “retirement phase” where fund earnings in retirement were exempt from tax.
Alongside these marginal changes, there was also a failed attempt to cut the company tax rate (only the tax rates for small companies were cut) and a muddled discussion about the progressivity of the income tax system.
All in all, many a tinker, but no reform.
Human-induced climate change is compromising the sustainability of our planet. The only way to solve it is by changing incentives using the economic toolkit at our disposal. The Carbon Tax was a good tax. It shifted the costs of pollution onto those who created it, instead of subsidising processes that damaged the environment.
No solution to climate change is possible without corrective taxes.
At some point we’ll have to climb that mountain again, assuming the mountain is not underwater before politicians come to their senses.
The repeal of the Minerals Resource Rent Tax was also a step backwards. By taxing rents (excess profits) instead of profits, it avoided the disincentives created by traditional company taxes. And, it was a good example of the kind of taxes that could eventually replace or supplement company tax.
…and lost opportunities
Changing the GST could have ensured at least one significant contribution to overall tax reform. At 10%, the rate is relatively low by international standards and applies to a shrinking share of spending, as more and more of our money is spent in places or on goods that aren’t taxed.
These factors, combined with the fact that GST is difficult to evade and less costly to administer, suggest that broadening the base is low hanging fruit on the tax reform tree, ripe for picking.
Instead, it may as well be forbidden fruit from the Garden of Eden. We’ve gone in the wrong direction by adding even more exemptions and cutting short talk of increasing the rate.
All up, the government’s approach over the past six years has largely been piecemeal. It also managed to dismantle two of the most significant tax reforms that could have contributed to a more sustainable tax base in the long run.
Would Labor be better?
It remains to be seen whether a Labor government will be able to achieve more. Some of the party’s proposed changes, such as the treatment of capital gains, head in the right direction, but what it is offering falls short of comprehensive reform.
At the same time, many of its proposed changes will add additional complexity, fail to account for interactions within the entire tax system and use tax exemptions to reach goals that could be better achieved with payments.
Many an international tax reform was engendered by crisis, so there’s hope, of a sort. The opportunity still remains to get in early before weaknesses inherent in the current system become grossly apparent.
What we’ve got is unfair and its complexity rewards those with the resources to pay to understand and exploit it. It is overly reliant on income and company tax in place of indirect taxes, like consumption tax, and it tries to achieve too many disparate objectives, without consideration for the workings of the family and social security payments system.
There is much scope to improve things. What we need most are fearless leaders, from all sides of the political spectrum, who treat comprehensive tax reform as important and can work together to achieve it.
For the government this “election budget” is an exercise in juggling. On the one hand, it is throwing out voter bait. On the other, it is running hard on the theme of economic responsibility.
For the second budget in a row, there are highly generous tax cuts, amounting to A$158 billion over a decade. This is on top of the earlier $144 billion.
The government wants this election to be all about tax.
The tax cuts you will get, now and later. The “higher taxes” that Bill Shorten would impose – by cracking down on negative gearing and cash refunds for franking credits. And by claiming that Labor’s climate policy is a “carbon tax”.
A theme in Treasurer Josh Frydenberg’s speech was that the government was taking its initiatives “all without increasing taxes”.
Under the budget’s tax cuts, low- and middle-income earners would pocket up to $1,080 within weeks of the election – for families with a dual income, this amounts to $2,160.
The government points out that its tax cuts are the most generous since John Howard’s time. But two things might be noted about this comparison. The 2007 tax package has since been much criticised for being irresponsible – and Howard did not win the election of that year.
Despite earlier speculation, the Coalition won’t try to rush any of the tax package – which includes a reduction in the 32.5% rate to 30% from July 2024 – through parliament this week.
The government wants to set up as much of a contrast between itself and Labor on tax as possible. Frydenberg told a news conference the tax bills were “a package” covering the immediate tax relief and the rate change. The government was asking the public “who do you trust?” to deliver lower taxes.
Finance Minister Mathias Cormann said: “We are just not prepared to haggle with the Senate in the next 24 hours.” It was up to the Australian people to back the government in, he said.
But in a game of bluff and counter-bluff on tax, Labor could simply match the immediate relief – which it did instantly.
This neutralises part of the tax argument, although the government can still highlight the contrast between its longer-term tax regime and Labor’s “higher taxing” agenda.
On economic responsibility, the budget’s boast is for a $7.1 billion surplus next financial year – the first surplus in 12 years. “The budget is back in the black and Australia is back on track,” Frydenberg told parliament, as he outlined the growth of surpluses to a total of $45 billion over four years.
We can be sure that in the election campaign Labor will match or even better the budget’s surplus figures.
Shadow treasurer Chris Bowen has learnt from the experience of the last election, when the Labor program came in with a slightly worse fiscal bottom line over the forward estimates than the government’s. The difference wasn’t huge but it was enough to be a political handicap.
The budget’s economic projections seem credible enough, although there is the perennial question over its forecast for wages growth – 2.75% in 2019-20 and 3.25% in 2020-21.
The fact that early in the imminent election campaign the departments of Treasury and Finance produce a detailed economic outlook imposes a discipline on the pre-election budget. A government that tried to fiddle the forecasts would quickly get caught out.
Frydenberg’s speech was notably sombre about the outlook for the economy, despite saying the fundamentals were sound.
“There are genuine and clear risks emerging both at home and abroad,” he warned, highlighting the cooling of the residential housing market and global trade tensions.
His words are a reminder of how quickly things can change – including the prospect of strong surpluses projected into the future. Good economic times suddenly turned bleak in the early days of the Rudd government, as a result of the global financial crisis.
The budget provided a nice reality check on the beat-up the government indulged in over the medevac bill. Remember all the hyperbole Scott Morrison sprouted, when he said he was going to have to spend more than $1 billion reopening Christmas Island?
The budget includes just $178.9 million to manage the transfer of people from Nauru and Papua New Guinea for medical treatment, $3.2 million to increase the police presence there and $3 million to reinforce the campaign to discourage people getting on boats.
The government says that if it is re-elected it will repeal the medevac bill and close the Christmas Island facility by July 1 – returning any people who have been transferred back offshore.
Questions to the office of Home Affairs Minister Peter Dutton this week about whether anybody had been transferred under the new legislation received the response that no comment was being made.
Morrison told his party room on Tuesday, before the budget, that three dates were available for the May election – May 11, 18 or 25. The general expectation is that he will announce the poll quickly. The budget might look benign, but the government does not want an extended period of Senate estimates next week which would facilitate picking it apart.
In his budget speech tonight Treasurer Josh Frydenberg announced that under a Coalition government we will see a decade of surpluses that will “continue to build toward 1% of GDP within a decade”.
He went on: “we climb the mountain and reach our goal of eliminating Commonwealth net debt by 2030 or sooner.”
But a funny thing happened on the way to paying off the debt.
As the budget papers point out, net debt as a proportion of Gross Domestic Product (GDP) is predicted in the budget to peak at 19.2%.
You might ask, then, how do we get from 19% to 0% debt/GDP in ten years if we’re generating a surplus of 1% per annum?
A small part of the answer is that with the economy forecast to grow at 3% a year, GDP is a fair bit bigger 10 years from now. And a 1% surplus of a bigger GDP number is a bigger dollar surplus. This has a larger impact on net debt.
That’s part of the story, but not much of it. If we make the most generous assumptions in favour of the treasurer and his surpluses (even if you believe them), they’re only paying down about two-thirds of the debt.
The case of the vanishing debt
So how does the treasurer get the rest of the debt to disappear?
The budget documents, voluminous though they are, don’t have the answers. But there are only a handful of logical possibilities.
First, let’s unpack what net debt is. Net debt is basically the gross debt issued by the government (for example, by issuing government bonds) minus the assets the government holds.
The surpluses Frydenberg announced help reduce gross debt. So, the debt-disappearing act has to involve some assets getting bigger.
The leading possibility concerns the Future Fund (Australia’s sovereign wealth fund). Simply put, if the Future Fund earns, say, 8% per annum, then those assets are going to be growing a lot faster than GDP. This reduces debt to GDP quite apart from anything else.
Another way to think about it is that the Australian government is running a big hedge fund with a lucrative profit opportunity. If it can earn 8% per annum while the government is funding this with debt that costs less than 2% (as is the case currently, given yields on 10-year Australian government bonds), then that’s a great deal.
Don’t get me wrong, I’m fine with that. But to the extent that debt reduction is coming from the Future Fund, it has nothing to do with fiscal rectitude.
An even more obscure possibility is that asset values are being hypothetically affected by assumptions about the interest rate the government will pay on its debt. Currently, it is about 1.72%, but the budget documents suggest a return to long-run historical levels of around 5
First, that seems very unlikely to happen in a post-GFC world. Second, it’s unclear that it’s of a sufficient magnitude to explain away the vanishing debt. And third, it’s an accounting artefact, not a matter of economic substance. Again, whatever it is, it’s not fiscal rectitude.
The only other possibilities are even more remote. A massive increase in the value of the essentially defective National Broadband Network? A colossal spike in student loan repayments while future students pay their own way? Nope and nope.
Should we be aiming for zero net debt?
Another question altogether is whether it is wise to reduce government debt to zero in the coming decade.
Fiscal discipline is good and avoiding structural budget deficits is important.
But as I’ve written before, we live in an age of “secular stagnation”, where there is a glut of global savings chasing too few productive investment opportunities and where economic growth is permanently lower than in previous decades.
As former US Treasury Secretary Larry Summers has pointed out, in a secular-stagnation world it will likely take a lot more government spending to sustain full employment and reasonable wages growth without financial bubbles.
Or, to put it another way, if the Australian government can borrow at less than 2%, there are a lot of attractive public investments in physical and social infrastructure that should be made. The idea of “Social Return Accounting”, which the UNSW Grand Challenge on Inequality launched last year and I wrote about here, offers a framework for thinking about this.
The live hand of Peter Costello
The treasurer presumably didn’t mean to be ironic when he said of the down-to-zero debt paydown:
Only one side of politics can do this… John Howard and Peter Costello paid off Labor’s debt.
But it is ironic that Peter Costello’s Future Fund is doing a good deal of the heavy lifting in paying off Josh Frydenberg’s debt.
The Morrison government has delivered an election-launch budget with big personal income tax handouts to attract voters and a A$7.1 billion 2019-20 surplus to display its economic credibility.
The budget – the first brought down by Treasurer Josh Frydenberg – doubles the tax relief that average earners were due to receive within weeks, from $530 in last year’s budget to $1,080.
This outbids the relief that Labor promised last year. But the opposition immediately announced it would support the tax cuts that begin on July 1 “for working and middle-class people”.
“This is essentially a copy of what we proposed last year, and they are simply catching up to us,” Labor’s Shadow treasurer, Chris Bowen, and finance spokesman, Jim Chalmers, said in a statement.
“The Liberals are so out of touch that they’ve given a much smaller tax cut to two million Australians earning less than $40,000. Labor will fix this and give these working people the tax relief they deserve,” Bowen and Chalmers said.
The surpluses will build over time – projected to total $45 billion over the next four years. “Surpluses will continue to build towards 1% of GDP within a decade,” Frydenberg said. The government’s goal was to eliminate Commonwealth net debt by 2030 or sooner.
He said the government’s economic plan restored the nation’s finances without increasing taxes, strengthened the economy and created more jobs, and guaranteed essential services, while tackling the cost of living.
For the 2019-20 year, economic growth is forecast at 2.75% and wages are forecast to increase by 2.75%. Unemployment is expected to be 5%.
One major saving in a budget that avoids widespread cuts is changing the social security income assessment model, saving more than $2.1 billion over five years.
The change will simplify and automate the reporting of social security recipients through the Single Touch Payroll. From July 2020, recipients who are employed will report income that is received during the fortnight rather than calculating and reporting their earnings. The government says this will greatly reduce overpayments.
The budget anticipates a substantial amount of additional revenue – $3.6 billion through cracking down on tax avoidance by large corporations, multinationals and high-wealth individuals.
As the government flagged ahead of the budget in a series of specific announcements, the budget includes an extensive infrastructure program, which it says it has boosted to $100 billion over the decade.
Frydenberg announced a four-fold increase in the Urban Congestion Fund – from $1 billion to $4 billion.
The fund will include a $500 million Commuter Carpark Fund to “improve access to public transport hubs and take tens of thousands of cars off our roads”.
Budget measures also target small and medium-sized businesses with an increased and expanded instant asset write-off. The write-off will rise from $25,000 to $30,000 per item and be extended to businesses with a turnover of up to $50 million.
There would be a $525 million skills package, including the creation of 80,000 new apprenticeships in industries with skills shortages. Incentive payments to employers will be doubled to $8,000 per placement. New apprentices will also receive a $2,000 payment.
Ten new training hubs will be established connecting schools, local industries and young people in regional areas with high youth unemployment. The government is also promising $62 million to boost students’ literacy, numeracy and digital skills, as well as further funding to increase the participation of women and girls in science, technology, engineering and maths.
There is also $453 million to extend preschool education, enabling 350,000 children to have 15 hours of early learning a week in the year before school.
Responding to Labor’s promise to unfreeze the Medicare rebate, the budget provides $187.2 million over four years to reintroduce indexation to all remaining general practitioner services.
It offers $527.9 million over five years for the recently announced royal commission into violence towards and abuse of people with disabilities.
The budget contains a new $3.9 billion Emergency Response Fund to “ensure additional resourcing is available to support future natural disaster recovery efforts”.
A $100 million Environment Restoration Fund is to deliver “large-scale environmental projects”, including protecting the habitats of threatened species, the coasts and the waterways and cleaning up waste.
Frydenberg warned about the economic outlook, saying: “The fundamentals of the Australian economy are sound but there are genuine and clear risks emerging both at home and abroad.
“The residential housing market has cooled, credit growth has eased and we are yet to see the full impact of flood and drought on the economy. Global trade tensions remain.”
Bowen and Chalmers said: “Scott Morrison has delivered an election con, filled with the same Liberal cuts.
“This is a Budget from a government that has given up governing. There is no plan for wages, no plan to tackle power prices, no plan to address climate change, and no plan for the future”.
Business was basically positive. The Business Council of Australia described it as both “a strong and responsible budget that delivers a surplus, lowers personal income taxes and invests in jobs, health, education and infrastructure. This is the payoff for the community from spending discipline and hard work.”
The Australian Industry Group said the stimulus inherent in the budget “is a timely and welcome boost for a slowing economy at a time of wavering business and household confidence”. But it criticised the cut in migration.
The ACTU slammed the budget as failing the fairness test. “It’s a cynical attempt to buy votes, but Morrison and Frydenberg are giving with one hand and taking away with the other.”
The Brotherhood of St Laurence attacked the budget for failing to do for more for the disadvantaged, including providing no increase to Newstart.