The budget’s dirty secret is the hikes in tax rates you’re not meant to know about



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The wheels of the economy will grind more slowly because of undeclared tax rate hikes in the budget.
Shutterstock

Steven Hamilton, George Washington University

As I mentioned a few days ago, Treasurer Josh Frydenberg and Prime Minister Scott Morrison recycled three pretty big tax ideas in the 2019 budget, each one originally from the 2018 budget but supercharged, and in one case doubled.

The ideas were:

  • eventually eliminating the 37% bracket to make the tax system flatter;

  • upsizing the Low and Middle Income Tax Offset to A$1080; and

  • increasing the value of business investments that may be written off.

Today I’ll deal with the second: the Low and Middle Income Tax Offset, also known as the LMITO or lamington.

In last year’s budget it was to be worth up to $530 per person, but this year the government intends to more than double that to $1,080. And they’d do so retrospectively, so that by the time people put in their 2019 tax returns, many will get a tax cut more than twice as big as originally expected.

(As it happens, the operative word is “intends”. In budget week Morrison said the Tax Office would be able to make the changes “administratively” without the need for legislation. He didn’t have time to introduce the leglislation and Labor would broadly support it. Last week in its official pre-election overview of the government’s finances, the public service said no. It would need “the relevant legislation to be passed before the increase to the Low and Middle Income Tax Offset can be provided for the 2018-19 financial year”.)

The idea of the lamington

But let’s examine the idea of the lamington anyway because it does have bipartisan support and will become law and part of the tax scales. On one hand, it will deliver a welcome boost to taxpayers on middle and low (but not the lowest) incomes. On the other hand, it will push up a key marginal tax rate and kill incentives in a way the Treasurer hasn’t yet acknowledged.

The offset is a gift of $530 (soon to be $1080) slipped into the tax returns of everyone who earns between $48,000 and $90,000.

People earning more than $90,000 will get less of the offset as their income climbs, up to an income of $125,000 when it the offset will vanish. Low earners will get $200 (soon to be $255), climbing to the maximum of $530 ($1080) as their income climbs from $37,000 to $48,000. People with an income too low to pay tax won’t have any tax to offset, and so will get nothing.

Described in dollar terms as I just have, it’s easy to understand. You can work out the tax cut you’ll get, and the Coaltion has helpfully prepared tables to let you see.

But it is possible to describe the changes in another way, not in dollar terms, but as a new set of marginal rates. And this is where they get interesting, and unattractive.

As a longer-term goal, the Coalition says it wants most taxpayers to pay the same unchanging marginal rate of 30% for all incomes between $45,000 and $200,000. It believes that high marginal rates and frequently changing marginal rates sap incentive.

By 2024 it wants the tax scale to look like this:



Commonwealth budget papers

Frydenberg says the lower, flatter scale would incentivise “people to stay in work, to work longer, to work more”.

So you would think he wouldn’t want to make it bumpy, or lift the marginal rate, which is exactly what his LMITO does.

What the lamington does to those rates

You won’t find the following chart anywhere in the budget papers, but it is what the offsets in this budget and in the last one will do to the tax scale for the next four years before they are replaced by the flatter scale.

First, here’s what we are told the rates look like today:



Australian Tax Office

Now, here’s what they will actually be when you take account of the existing Low Income Tax Offset (or LITO) and the promised supersized Low and Middle Income Tax Offset (LMITO) in the budget.



Derived from Commonwealth Budget Paper 2, 2019

The graph is lumpy in part because the LMITO is clawed back at the impressive rate of 3 cents for each extra dollar earned between $90,000 and $125,000.
This means it adds 3 cents to the marginal tax rate in that range, pushing it up from 37 cents to a high 40 cents, before at higher incomes it falls back to 37 for taxpayers earning more than $125,000.

Bizarrely, it means the party that has pledged to abolish the 37% rate because it saps incentive has decided to first boost it to 40% over a substantial range of incomes.

The graph is lumpy further down the income scale for another reason: as the LMITO climbs between $37,000 and $48,000, the separate LITO is is clawed back.

Below are the “including offsets” and “excluding offsets” scales together, to enable you to see the differences. The tax rates people will face are those including offsets.



Derived from Commonwealth Budget Paper 2, 2019

The graph clarifies the trade-off at the heart of the lamington: it targets tax relief at low and middle earners at the necessary cost of higher rates further up the income scale.

How much of a problem is it? Well, that depends.

It’s a classic example of what economists call the equity-efficiency trade-off.

Arthur Okun, an adviser to US President Lyndon Johnson, described it thusly: redistributing income is like transporting water from one place to another in a leaky bucket – you can do it, but you’d better be prepared to lose some water as you ae doing it.

In much the same way, you can restrict tax cuts to low earners, but that means high earners have to face higher marginal rates which to some degree will shrink economic activity.

The critical question is how much it will shrink economic activity, how leaky is the bucket?




Read more:
Mothers have little to show for extra days of work under new tax changes


It worsens incentives for the roughly 700,000 Australians earning between $90,000 and $125,000. For every additional dollar each of them earns, the government will take away an extra 3 cents. That might not sound like much, but the evidence suggests it will have an effect.

How? Well, the tax rate increase lowers the benefit of generating additional taxable income. And there are a range of ways to avoid generating additional taxable income. The most obvious is working fewer hours, for example by not working overtime or by working fewer days per week. Secondary earners (often women returning to work after maternity leave) are particularly prone to that kind of response.

But it also could mean not going for promotions or pay rises where they take effort, for example by not gaining extra skills or not putting in additional work effort. And, as I found in a recent study, it could involve claiming more deductions to put a brake on your taxable income.

What will the lamington cost us?

Relying on data for the Australian tax system, I find that a 3 percentage point increase in the marginal tax rate results in an average reduction in taxable incomes of around 0.6%. For someone earning $125,000 per year, that amounts to a reduction in taxable income of $750 per year, by any of the means described above or others.

If we assume the average affected person earns in the middle of the relevant range, that implies an aggregate reduction in taxable income of almost half a billion dollars a year from the 3 percentage point tax increase. That means around $300 million less in consumption and saving and around $200 million less in income tax revenue, all because of LMITO.

That half a billion per year is the real, measurable, and unavoidable cost of targeting the Coalition’s tax break. When economists talk about “distortions” or “deadweight losses” created by tax increases, that’s what they mean. It is the cost of fairness. Whether that cost is worth paying is an open question. The government has evidently decided that it is. And now we can decide at the ballot box, ideally armed with proper information.

But it is of concern that the presentation of the policy – while politically attractive – obscures the genuine increases in marginal tax rates the Coalition’s changes will bring about, and thereby their real economic costs.

Eliminating most offsets and concessions, as recommended by the Henry Tax Review in 2010, would do the tax system good. And it do all of us good by making it easier to see what we are being asked to vote for come election time.




Read more:
A simpler tax system should spark joy. Sadly, the one in this budget doesn’t


The Conversation


Steven Hamilton, Assistant professor, George Washington University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Discontent with Nationals in regional areas could spell trouble for Coalition at federal election



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The Nationals, led by Michael McCormack, are facing significant challenges in several seats.
AAP/Mick Tsikas

Chris Aulich, University of Canberra

The Coalition has been buoyed by the re-election of the Berejiklian government at the recent New South Wales state election. But this in turn has been tempered by the poor performance of the National Party. The Nationals suffered swings averaging 20%, primarily to the Shooters, Fishers and Farmers Party (SFF) but also to well-known independents.




Read more:
View from The Hill: NSW result gives federal Liberals a boost in the mind games


The SFF’s Roy Butler captured an 18% swing against the Nationals to win the seat of Barwon, and in Murray, the SFF‘s Helen Dalton defeated the sitting National member, Austin Evans, with a 20% swing. In Wagga Wagga, sitting independent Joe McGirr comfortably retained the seat he won in the 2018 byelection, and in Dubbo, the Nationals held on in spite of a swing of 23% against them.

So why is the Nationals brand on the nose in regional Australia?

When the party leaders Warren Truss and Malcolm Turnbull signed their Coalition agreement in 2015, it was accompanied by a “side letter”, unusual for these agreements. It placed water management in the agriculture portfolio under the watch of then-deputy Nationals leader, Barnaby Joyce, and restrained the government from changing its climate and marriage equality policies.

This was described by many at the time as a clear win for the Nationals, but it now looks more like a poisoned chalice.

In the 2019 federal election, several Coalition-held regional seats are being challenged by independents. Many of these independents say they are standing because of the inability of governments to manage water resources. Southern farmers, irrigators and residents clearly agree with this assessment by recently conducting a tractor and truck protest in the centre of Albury.



Other independents cite declining standards of living in the bush as their motive for standing. New NSW state member, Roy Butler, argues that regional communities are losing health services, jobs and investment in infrastructure. This is reflected in the average life expectancy in regional Australia, which is increasing marginally, but at a significantly lower rate than in urban areas. Butler has also taken up concerns about water, describing the “shameful mismanagement of water in the Murray-Darling”.

Nor has the recent federal budget been a circuit breaker for regional Australia. Analysts have concluded that regional Australia (and older people) would benefit the least from the Coalition’s tax cuts to 2024-25, with middle- and high-income city dwellers faring best. Importantly for many in the regions, little attention was paid in the budget to water management.

The Nationals have also been accused by many in regional areas of favouring the big irrigators, ignoring climate change and being out of touch with the electorate. National leaders have not helped by blaming the ABC for “setting rural policy” (Barnaby Joyce) or the drought itself (Darren Chester).

These complaints of regional neglect have manifested in the nomination of a number of strong independents in the federal election. In the Northern NSW seat of Cowper, former independent MP Rob Oakeshott is challenging the Nationals’ Pat Conaghan. Needing a swing of less than 5%, this seat is now very much a marginal one.

While independent Cathy McGowan is not seeking re-election in the Victorian seat of Indi, her supporters have endorsed another independent, Helen Haines. However, Haines faces a tight contest against former Wodonga Mayor and National, Mark Byatt. She has inherited McGowan’s grassroots organisation, Voices for Indi, which has mounted a campaign drawing support from both the centre and the right. Hubs of the “orange independent movement” have been established throughout the electorate to act as policy touchstones, as well as providing feedback to the candidate.

In Farrer, Albury Mayor Kevin Mack hopes to unseat the Liberals’ Sussan Ley by adopting a similar grassroots campaign to that in Indi. The “Voices for Farrer” group is frustrated by the failure of MPs to address health, education and transport issues, and the inability of government to resolve the water crisis in irrigation areas.




Read more:
One Nation, guns and the Queensland question: what does it all mean for the 2019 federal election?


The sprawling regional seat of Mallee in Victoria has been held by the Nationals for 70 years and received a swing of 25% at the last election. However, sitting member Andrew Broad is not recontesting, leaving political life under a cloud. Local farming identity, Ray Kingston, another former local mayor, is standing as an independent. It is likely he will win votes from the Nationals, but whether or not it will be enough is debatable. Kingston echoes the refrain of other regional independents when he says “country people aren’t silly, they know we don’t get looked after”.

It has often been argued that there is a disconnection between what voters want and what their representatives are prepared to do. It manifests itself in issues such as marriage equality, climate change mitigation and population policy more generally.

In regional areas, the independents movement has focused on health and education and above all, water management. Frustration with the Nationals is clear. As Roy Butler says, “the loss of regional seats is the price [the Nationals] paid for regional neglect” in NSW.

It may also be a price that the federal Coalition has to pay.The Conversation

Chris Aulich, Adjunct Professor at the University of Canberra, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

View from The Hill: Can $55 million get Clive Palmer back into parliamentary game?



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UAP’s Clive Palmer: “We think we’ll win six Senate seats”.
AAP/Michael Chambers

Michelle Grattan, University of Canberra

Can Clive Palmer buy his way back into federal parliament? The former MP, who for a while wielded enormous Senate power, expects to spend about $55 million on an advertising splurge in his bid to do so – and a good deal more if that’s what is needed.

In fact, he says he has budgeted for $80 million for his United Australia Party’s campaign, although he doesn’t think so much will be spent.

The UAP has already expended some $31.7 million in the seven months to mid-April, according to Nielsen figures reported in The Australian. Palmer’s billboards are prominent in the southern states as well as in the north.

One of the major parties has found people in its tracking research recalling the Palmer ads, even singing along with the jingle.

The UAP – successor to the Palmer United Party – is starting to show up in opinion polling.

Palmer, who is running for a Senate seat in Queensland, tells The Conversation the UAP will stand candidates in all 151 lower house seats, and will be sending “every Australian [voter] how to vote cards directly”.

ABC election analyst Antony Green believes the only prospect for the UAP is a Queensland Senate seat. But Palmer “will be competing with One Nation, the Greens, the third Labor candidate, the third LNP candidate, Katter’s Australian Party. I can’t see how he outpolls the Greens or One Nation”.

Green doesn’t give Palmer much of a chance but prudently notes, “he’s proved us wrong before”.

Unsurprisingly, Palmer says: “We think we’ll win six Senate seats”.

In Senate polling done in February-March for the Australia Institute, a progressive think tank, the UAP was on 2% nationally, and 3% in Queensland. (One Nation was on 8% nationally and 11% in Queensland in this poll. In the latest mid-April Newspoll, One Nation was 4% nationally.)

In the Australia Institute polling last November, UAP polled 1% nationally and in Queensland. New polling about to be released by the Australia Institute will show the UAP vote continuing to strengthen from its position early this year.

The quota in a half-Senate election is 14.3%, but if Palmer got a vote of about 6-7% he would have a chance of a Senate seat. Even a modest Queensland UAP vote could be relevant in the lower house via preferences, although whether the voters would follow a ticket is another matter. UAP will announce its position on preferences later the week.

The Courier Mail’s national affairs editor Dennis Atkins says: “LNP people tell me they’re picking [the UAP] up at above 10% in some seats – they say it’s the usual coastal/regional suspects of Flynn, Capricornia, Dawson, Herbert and Leichhardt.

“Labor people say they haven’t seen the party at 10% but that he’s knocking on the door of that number. Both sides agree there could be a hidden Palmer vote which people won’t admit to considering.

“I think he’ll make an impact in quite a few seats and if everything went right for his party he could end up fighting [One Nation’s] Malcolm Roberts for the last Senate seat, presuming the Greens fall short.”

In the run up to the election, Palmer has promised to pay outstanding entitlements to people thrown out of work with the collapse of his Queensland nickel refinery in 2016.

In all the circumstances, the workers might have been sceptical when it was reported the payments would only come through after the election. Palmer says that some $7-8 million will be paid in the next week into a solicitor’s trust fund, which would hold the money until the claims were finalised.

Palmer is both undeterred and unchastened by his experience between 2013 and 2016. Of his three senators elected in 2013, two – Jacqui Lambie in Tasmania and Glenn Lazarus from Queensland – split away from PUP during the term. The third, Dio Wang, from Western Australia, was defeated at the election. Palmer himself did not recontest the Queensland seat of Fairfax that he won in 2013.

Palmer says the PUP was “naïve” in 2013 – it had only been formed shortly before the election. Lambie and Lazarus had no previous experience and “cracked under pressure,” he says. “The candidates this time are much more hardened”.

He stands by the PUP policy record in the Senate, which included torpedoing some of the harsher parts of the Abbott government’s badly-received 2014 budget and certain measures that would have wound back some of Labor’s climate policy architecture.

*UPDATE: NEWSPOLL FINDS STRONG UAP VOTE IN KEY MARGINALS *

Newspoll – published in Tuesday’s Australian – shows a strong UAP vote of 14% in the Queensland marginal seat of Herbert, held by Labor, where the UAP is running former State of Origin rugby league player Greg Dowling.

The UAP is polling a substantial 8% in the WA seat of Pearce, held by Attorney-General Christian Porter.

In two other lineball marginals polled by Newspoll, the UAP was on 5% in the Victorian Liberal seat of Deakin, and on 7% in the NSW Labor seat of Lindsay.

“Averaged across the four seats, Mr Palmer commands about 8 per cent of the primary vote, eclipsing One Nation,” the Australian reported.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

View from The Hill: Joyce could be facing waves at a judicial inquiry after the election


Michelle Grattan, University of Canberra

It’s hard to believe Barnaby Joyce really wants to lead the Nationals again. Of course everyone knows he does, desperately, but his unhinged ABC interview with Patricia Karvelas on Monday showed a breathtaking absence of political judgement or personal restraint.

Joyce went on the program to defend his conduct in the 2017 A$79 million water buyback from two Queensland properties owned by Eastern Australia Agriculture (EAA).

Regardless of how his approval of this deal will ultimately be judged, his shouting, interruptions and at times absurd language drowned out any chance of his getting his points across.

Joyce loyalists will see it as Barnaby-being-Barnaby. But it was further reason for Nationals to despair about the parlous state of their party, as they watch an ineffective leader and an out-of-control aspirant.

The Joyce interview made it harder for the government to manage this big distraction in a messy second campaign week.

The controversy over the water purchase is based on an old story; the election has enabled it to be resurrected for a powerful fresh spin around the political circuit.

Water expert Quentin Grafton, professor of economics at the Crawford School at the Australian National University, lays out the issues.

Grafton estimates the Commonwealth paid about $40 million too much for this water. He identifies three areas of concern: the government’s failure to get value for money (remembering this was floodwater, which is unreliable); the lack of transparency in the deal, and the nature of the process – a negotiated sale rather than an open tender.

Much has been made of EAA being a subsidiary of Eastern Australian Irrigation (EAI), which is based in the Cayman Islands, a tax haven. This does, however, seem an irrelevance in the context of the value for money issue.

Also, it is one thing to say tax avoidance structures should be cracked down on, quite another to suggest the government should decline to deal with a company with a structure that accords with the law.

There has also been talk about Energy Minister Angus Taylor. As a business consultant Taylor helped set up the two companies and was a director of each.

But according to Taylor’s office he ended all links before entering parliament, never had a direct or indirect financial interest in EAA or any associated company, had no knowledge of the water buyback until after it happened, and received no benefit from this transaction.

So the questions in this affair centre on the conduct of the Agriculture Department and its then minister.

Grafton says: “Either the public servants were incompetent in relation to understanding value for money – or there’s an alternative explanation.”

The department is sensitive, taking the unusual step during Easter (and in the “caretaker” period) of issuing a statement defending its actions. It said it had done “due diligence”. The water purchase had been consistent with Commonwealth Procurement Rules “and paid at a fair market rate, as informed by independent market valuation,” the statement said.




Read more:
Australia’s ‘watergate’: here’s what taxpayers need to know about water buybacks


Joyce is known in general to have been a meddling minister.

In this case, he insists he followed departmental advice in approving the purchase, and had been at arms length from the deal.

“My role was never to actually select a purchaser or to determine a price,” he told a Tuesday news conference. But he approved the authority to negotiate without tender, and imposed conditions, including having the department report back to him before finalising the deal.

The current Minister for Agriculture and Water Resources, David Littleproud, tried to stem the damage on Tuesday by asking the Auditor-General to inquire into the matter. Littleproud added a political twist, requesting the audit to look back as far as 2008, to encompass Labor’s period.

But this wasn’t going to satisfy Labor in an election campaign.

The opposition had demanded documents by the end of Tuesday; predictably, it didn’t get what it wanted.

Bill Shorten had already flagged the need for a judicial inquiry.

Late Tuesday, environment spokesman Tony Burke accused Scott Morrison of “trying to cover up his government’s incompetence, chaos and potential misconduct”.

“It is now clear that there needs to be an independent inquiry into the Eastern Australia Agriculture scandal, with coercive powers so that Australians can get the truth,” Burke said. (That inquiry, however, wouldn’t be probing Labor deals.)

If Labor wins on May 18, yet again we will see a government launch an investigation into the conduct of its predecessor. If this comes to pass, Joyce will find himself in the witness box, a prospect he seems to relish – at least now.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Shorten promises $2.3 billion package to relieve costs for cancer patients


Michelle Grattan, University of Canberra

Bill Shorten has promised his government would introduce a A$2.3 billion four year package to slash cancer patients’ out-of-pocket costs, and has committed $1 billion to give extra tax relief for low income earners, above what they would get from Tuesday’s budget.

In his budget reply on Thursday night, the opposition leader pitched to voters on a Labor strength – health – declaring his cancer care plan would be the “most important investment in Medicare since Bob Hawke created it”.

Shorten rejected the government’s second and third tranches of tax cuts, due to start in 2022-23 and 2024-25 and worth about $143 billion of the $158 billion ten year package. The last stage was a “radical, right-wing, flat tax experiment”, far off in time and skewed disproportionately to a relative few, he said.

Stressing Labor’s economic responsibility, Shorten recommitted to delivering “stronger surpluses, paying down debt faster” than the government.

“What we need is a fighting fund for the country, a strong surplus to protect us from international shocks”, he said.

He attacked the government – which has a $7.1 billion surplus in its budget for next financial year – for “shortchanging the NDIS [National Disability Insurance Scheme] by $1.6 billion, to prop up a flimsy surplus forecast”.

Shorten – who in his speech referred to his late mother Ann’s battle with breast cancer – said the cancer care plan would provide for millions of free scans and consultations, and cheaper medicines.

Cancer “is frightening, it’s isolating, it’s exhausting”. And all too often, it was impoverishing, he said.

“For so many people, cancer makes you sick and then paying for the treatment makes you poor. And that’s a fact that I think a lot of Australians would be surprised to learn.

“Because if you haven’t been through it yourself, you might not realise that all those vital scans and tests and consultations with specialists aren’t fully covered by Medicare. Instead, they cost hundreds of dollars, adding up to thousands, out of your own pocket,” he said.

One in four women with breast cancer paid more than $10,000 for two years of scans and tests, he said. Some men with prostate cancer were paying more than $18,000. Most people with skin cancer – and Australia has the highest rates of this cancer in the world – paid more than $5000 for the first two years of treatment.

Each year 300,000 people who needed radiology did not get it, because they couldn’t afford it.

People needing treatment for cancer were often not well enough to work, so they were already under massive financial strain, Shorten said. Those living in regional areas had the extra costs of travel and accommodation.




Read more:
Shorten’s budget reply will outbid government on tax relief for low income earners


A Labor government would:

  • invest $600 million towards eliminating all out-of-pocket costs for diagnostic imaging, with up to six million free cancer scans funded through Medicare – reducing out-of-pocket costs from hundreds of dollars to zero. This would include MRIs too. At present only half the MRI machines were covered by Medicare, and regional patients often had to drive for hours or pay thousands of dollars. “If we win the election, not only will we provide more MRI machines to communities where they are needed most, but Labor will guarantee that every single MRI machine in Australia that meets a national quality standard is covered by Medicare for cancer scans.”

  • invest $433 million to fund three million free consultations with oncologists and surgeons. Over four years this would mean an extra three million appointments were bulk billed, reducing costs of hundreds of dollars to nothing

  • guarantee that every drug recommended by independent experts would be listed on the Pharmaceutical Benefits Scheme.

On tax, Shorten said people earning between $48,000 and $126,000, no matter who they voted for in May, would get the same tax refund.

But the Liberal plan did not do enough for the 2.9 million people who earned less than $40,000 – about 57% of whom were women.

In Labor’s first budget Labor would provide a bigger tax refund for low earners than the Liberals proposed.

“6.4 million working people will pay the same amount of income tax under Labor as the Liberals – and another 3.6 million will pay less tax under Labor,” he said. “All told, an extra billion dollars, for low income earners”.

Under further details provided by Labor, it said workers earning up to $37,000 a year would receive a tax cut of up to $350. For workers earning between $37,000 and $48,000 the value of the tax offset would increase up to the maximum tax offset of $1,080.

A worker on $35,000 would get a tax cut of $255 a year under the Liberals, compared to $350 under Labor. A worker on $40,000 would receive a cut of $480 under the Liberals compared to $549 under Labor.

On TAFE Shorten promised to double the size of Labor’s rebuilding TAFE program – up to $200 million – to renovate campuses.

Labor is committed to paying the upfront fees for 100,000 TAFE places to get more Australians in high priority courses. “I am proud to announce that 20,000 of these places will be allocated to a new generation of aged care workers and paid carers for the NDIS,” Shorten said.

Finance minister Mathias Cormann said Shorten had put forward an agenda for $200 billion in higher taxes that would weaken the economy and bring higher unemployment. The Conversation

Provided by Labor.

Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The budget super change that helps the wealthy at the expense of the young



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If your’re wealthy you’ll be able to put more money into super without even working.
Shutterstock

Brendan Coates, Grattan Institute

Another federal budget, and yet more tinkering to superannuation tax breaks. But the latest changes will only help older wealthier Australians. The losers are younger workers and taxpayers.

What’s the plan?

From July 1 2020, Australians aged 65 and 66 will be able to make voluntary pre- and post-tax superannuation contributions without having to pass the Work Test, under which they are required to work a minimum of 40 hours over a 30-day period.

About 55,000 Australians aged 65 and 66 will benefit from these changes at a cost of A$75 million over the next four years.

It’s another boost for tax planning

Treasurer Josh Frydenberg says the changes will help Australians save for their retirement.

But most 65- and 66-year-olds still working to top up their superannuation are already eligible to make voluntary super contributions, because they satisfy the Work Test. Working 40 hours over a 30-day period – or little more than one day each week – is hardly onerous.

For every dollar contributed to super that genuinely helps Australians save more for their retirement as a result of these changes, there will be many more dollars funnelled into super to make extra use of superannuation tax concessions.

The biggest winners will be wealthier retired 65- and 66-year-olds with other sources of income, such as from shares or property, which they will now be able to recycle through superannuation.




Read more:
View from The Hill: budget tax-upmanship as we head towards polling day


They will be able to put up to $25,000 into super from their pre-tax income and then – because super withdrawals are tax-free – take the money back out immediately. Their contributions to super are taxed at only 15%, whereas ordinary dividends or bank interest is taxed at their marginal tax rate. The tax savings can be as high as $5,000 a year.

Such strategies aren’t costless: other taxpayers must pay more, or accept fewer services, to make up the difference.

It will mean larger inheritances

The government is also allowing 65- and 66-year-olds to make three years’ worth of post-tax super contributions, or up to $300,000, in a single year.

These changes will mainly boost inheritances.

Most people who make after-tax contributions already have large super balances and typically contribute from existing pools of savings to minimise their tax.

Grattan Institute’s 2016 report, A Better Super System, found that only about 1% of taxpayers have total super account balances of more than $1 million, yet this tiny cohort makes almost one-third of all post-tax contributions.

These changes will turbo-charge so-called “recontribution strategies” that minimise the tax paid on superannuation fund balances passed on as inheritances. When inherited, super fund balances originally funded by pre-tax contributions can be taxed at 17% (including the Medicare levy), depending on the age of the deceased and the beneficiary.

To avoid this tax on their estate, individuals can withdraw superannuation funds tax-free and contribute them back as a post-tax contribution, up to the annual post-tax contributions cap of $100,000 each year.

It fails the government’s own test

In 2016, the government tried – but failed – to define the purpose of superannuation as providing “income in retirement to supplement or substitute the Age Pension”.

The proposed objective rightly implied that super should not aim to provide limitless support for savings that increase retirement incomes.

The benefits of super changes should always be balanced against the costs of achieving them. The government’s latest changes fail that test.




Read more:
Expect a budget that breaks the intergenerational bargain, like the one before it, and before that


The Conversation


Brendan Coates, Fellow, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Budget 2019 boosts aged care and mental health, and modernises Medicare: health experts respond



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The budget provides some short-term boosts for aged care and mental health but little opportunity for much-needed structural reform.
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Stephen Duckett, Grattan Institute; Hal Swerissen, Grattan Institute; Ian Hickie, University of Sydney; Lesley Russell, University of Sydney; Peter Sivey, RMIT University, and Philip Clarke, University of Melbourne

This year’s budget includes $448.5 to modernise Australia’s Medicare system, by encouraging people with diabetes to sign up to a GP clinic for their care. The clinic will receive a lump sum payment to care for the person over time, rather than a fee each time they see their GP.

The indexation freeze on all GP services on the Medicare Benefits Schedule (MBS) will lift from July 1, 2019, at a cost of $187.2 million. The freeze will be lifted on various X-ray and ultrasound MBS rebates from July 1, 2020.




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The budget announces $461 million for youth mental health, including 30 new headspace centres, some of which will be in regional areas. But it does little to address the underlying structural reforms that make it difficult for Australians to access quality and timely mental health care.

In aged care, the government will fund 10,000 home care packages, which have been previously announced, at a cost of $282 million over five years, and will allocate $84 million for carer respite. But long wait times for home care packages remain.

Other announcements include:

  • $62.2 million over five years to train new rural GPs
  • $309 million for diagnostic imaging services, including 23 new MRI licences
  • $331 million over five years for new pharmaceuticals, including high-cost cancer treatments
  • $107.8 million over seven years for hospitals and facilities including Redland Hospital, Bowen Hospital, Bass Coast Health and Ronald McDonald House
  • $70.8 million over seven years for regional cancer diagnosis, treatment and therapy centres
  • $114.5 million from 2020-21 to trial eight mental health facilities for adults
  • $43.9 million for mental health services for expectant and new parents
  • $35.7 million over five years for increased dementia and veterans’ home care supplements
  • $320 million this year as a one-off increase to the basic subsidy for residential aged-care recipients.

Here’s what our health policy experts thought of tonight’s budget announcements.


A hesitant step forward for Medicare

Stephen Duckett, Director, Health Program, Grattan Institute

Medicare funding is slowly creeping into the 21st century. The 19th-century model of individual fees for individual services – suitable for an era when medicine was essentially dealing with episodic conditions – is being supplemented with a new fee to better manage the care of people with diabetes.

The budget announcement, as part of the Strengthening primary care package, is for a new annual payment for each person with diabetes who signs up with a specific GP. Funding is provided for about 100,000 people to sign up – about 10% of all people with diabetes in Australia.

The new item number is consistent with the recent MBS review Report on General Practice, which recommended a move toward voluntary enrolment.

The precise details of the new fee – including the annual amount and any descriptors – have not yet been released. But it should encourage practices to move towards a more prevention-oriented approach to chronic disease management, including using practice nurses to call patients to check up on their condition, and using remote monitoring technology.

The budget announcement contained no evaluation strategy for the initiative. The government should produce such a strategy soon.


Support for aged and disability care

Hal Swerissen, Emeritus Professor, La Trobe University, and Fellow, Health Program, Grattan Institute

The budget has short-term measures to address major issues in aged care and disability while we wait for the royal commissions to fix the long-term problems.

The National Disability Insurance Agency (NDIA) is struggling with the huge task of putting the National Disability Insurance Scheme (NDIS) in place.

There has been a major under-spend on the on the scheme. Price caps for services such as therapy and personal care are too low and nearly one-third of services are operating at a loss. The under-spend would have been more if there hadn’t been a last-minute budget decision to significantly increase service caps, at a cost of $850 million.

$528 million dollars has also been announced for a royal commission to look at violence, neglect and abuse of people with disabilities – the most expensive royal commission to date.




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There is more funding for aged care. Currently, 130,000 older people are waiting for home care packages – often for a year or more. Nearly half of residential care services are losing money and there are major concerns about quality of care.

The short-term fix is to give residential care $320 million to try to prevent services going under. The budget includes 10,000 previously announced home care packages, at a cost of $282 million, but that still leaves more than 100,000 people waiting.

There’s still a massive shortfall in home care places.
eggeegg/Shutterstock

Little for prevention, Indigenous health and to address disparities

Lesley Russell, Adjunct Associate Professor, Menzies Centre for Health Policy, University of Sydney

Prevention

Preventable diseases and conditions are a key factor in health inequalities and rising health-care costs. The two issues looming large are obesity and its consequences, and the health impacts of climate change.

There is $5.5 million for 2018-19 and 2019-20 for mental health services in areas affected by natural disasters, and $1.1 million over two years for the Health Star rating system – otherwise nothing for primary prevention.

Indigenous health

The Treasurer did not mention Closing the Gap in his budget speech, and there is little in the budget for Indigenous health.

Just $5 million over four years is provided in the budget for suicide-prevention initiatives. And the Lowitja Institute receives $10 million for health and medical research.




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Some announcements in March contribute a little more:

Inequalities and disparities

Disadvantaged rural and remote communities will (ultimately) benefit from efforts to boost National Rural Generalist Training Pathway, with $62.2 million provided over four years. This was a 2016 election commitment.

The announcement of $200 million over three years to index Medicare payments for ultrasound and diagnostic radiology services (beginning from July 1, 2020) came with claims this will help reduce out-of-pocket costs. But given that these payments have not been indexed in 20 years, will the money go to providers or patients?

Hospitals and private health insurance

Peter Sivey, Associate Professor, School of Economics, Finance and Marketing, RMIT University

There are no major changes to public hospital funding arrangements in this year’s budget.

It’s business as usual for hospital funding, aside from funding injections for a handful of hospital sites.
By VILevi

Funding for public hospitals is predicted to increase at between 3.7% and 5.6% over the forward estimates. However, these figures are contingent on the new COAG agreement on health funding between the Commonwealth and states, which is due to be finalised before the end of 2019.

The states will be hoping to wring some more dollars from the federal government given their soaring public hospital admissions and pressure on waiting times.

There is no change to the government’s private health insurance policy which has just come into force.




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Government spending on the private health insurance rebate is projected to increase more slowly than premiums at between 1.8% and 3.2% because of indexation arrangements which are gradually reducing the rebate over time.


Smaller targets for mental health

Ian Hickie, Co-Director, Brain and Mind Institute, University of Sydney

Numerous reports and accounts from within the community have noted the flaws in Australia’s mental health system: poor access to quality services, the uneven roll-out of the NDIS, and the lack of accountability for reforming the system.

The next federal government faces major structural challenges in mental health and suicide prevention.

Not surprisingly, this pre-election budget does not directly address these issues. Instead, it focuses on less challenging but worthy targets such as:

  • continued support for expansion of headspace services for young people ($263m over the next seven years) and additional support for early psychosis services ($110m over four years)
  • support for workplace-based mental health programs ($15m)
  • support for new residential care centres for eating disorders ($63m).

A more challenging experiment is the $114.5 committed to eight new walk-in community mental health centres, recognising that access to coordinated, high-quality care that delivers better outcomes remains a national challenge.

Despite the commitment of health minister Greg Hunt to enhanced mental health investments, the total increased spend on these initiatives ($736.6m) is dwarfed by the big new expenditures in Medicare ($6b), improved access to medicines ($40b), public hospitals ($5b) and aged care ($7b).

It will be interesting to see whether mental health reform now receives greater attention during the election campaign. At this stage, neither of the major parties has made it clear that it is ready to deal directly with the complex challenges in mental health and suicide prevention that are unresolved.


New funding for research, but who decides the priorities?

Philip Clarke, Professor of Health Economics, University of Melbourne

The budget contains several funding announcements for research.

The government will establish a Health and Medical Research Office, to help allocate money from the Medical Research Future Fund (MRFF). This will be needed, as the budget papers commit to a further $931 million from the MRFF for:

  • Clinical trials for rare cancers and rare diseases
  • Emerging priorities and consumer-driven research
  • Global health research to tackle antimicrobial resistance and drug-resistant tuberculosis.
The budget includes funding for consumer-driven research and drug-resistant tuberculosis.
i viewfinder/Shutterstock

In addition, the budget includes:

  • $70 million for research into type 1 diabetes
  • a large investment for genomics (although that is a re-announcement of $500 million promised in last year’s budget)
  • a series of infrastructure grants to individual universities and institutions, such as $10 million to establish the Curtin University Dementia Centre of Excellence.



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The government appears to be moving away from allocating medical research funding through existing funding bodies, such as the National Health and Medical Research Council (NHMRC), towards allocating research funds to specific disease areas, and even to individual institutions.

This is a much more direct approach to research funding, but it raises a few important questions. On what basis are these funding decisions being made? And why are some diseases considered priorities to receive funding? There is very little detail to answer these questions.

Australia’s allocation of research funding through the MRFF is diverging from long-held traditions in other countries, such as the United Kingdom, which apply the “Haldane principle”. This involves researchers deciding where research funding is spent, rather than politicians.

* This article has been updated since publication to clarify the 10,000 home care packages have been previously announced.The Conversation

Stephen Duckett, Director, Health Program, Grattan Institute; Hal Swerissen, Emeritus Professor, La Trobe University, and Fellow, Health Program, Grattan Institute; Ian Hickie, Professor of Psychiatry, University of Sydney; Lesley Russell, Adjunct Associate Professor, Menzies Centre for Health Policy, University of Sydney; Peter Sivey, Associate Professor, School of Economics, Finance and Marketing, RMIT University, and Philip Clarke, Professor of Health Economics, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Government gives Newstart recipients energy payment to smooth passage of legislation


Michelle Grattan, University of Canberra

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.




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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.




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“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.




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The Conversation


Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

NATSEM: federal budget will widen gap between rich and poor



File 20190403 177184 3n3zsz.jpg?ixlib=rb 1.1
The National Centre for Social and Economic Modelling has calculated the impact of the 2019 federal budget’s tax and welfare transfer changes.
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Robert Tanton, University of Canberra; Hai Anh La, University of Canberra, and Jinjing Li, University of Canberra

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.




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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.



National Centre for Social and Economic Modelling

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.

Demographic benefits

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.


Figure 2: Impact of 2019-20 budget tax and welfare system changes by age group and year of impact.


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.

Family benefits

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.

Geographic gains

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.




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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.The Conversation

Robert Tanton, Professor, Institute for Governance & Policy Analysis, University of Canberra; Hai Anh La, Senior Research Fellow, University of Canberra, and Jinjing Li, Associate Professor, NATSEM, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

View from The Hill: Malcolm Turnbull’s home truths on the NEG help Labor in the climate wars


Michelle Grattan, University of Canberra

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.”

And then:

“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.




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The Conversation


Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.