In most countries, the question of whether to produce guns or butter is a metaphor for whether a country should put its efforts into defence or well-being. In New Zealand, this debate is much more literal and has been won easily by butter.
Big ticket items such as warships and military aircraft last for decades and purchases are often years in the planning. Platforms purchased for the New Zealand military, including some acquired during the Vietnam War, are now reaching the end of their life.
New Zealand is facing significant bills as major aircraft, ships and army vehicles will need to be purchased in the next few years. The timing is particularly awkward for the government as it is shifting its spending towards well-being.
The first purchase to come consists of new C-130J-30 Super Hercules transport planes. They will replace the Royal New Zealand Air Force’s existing C-130s which are now more than 50 years old. At the time of writing, all five of these planes have been grounded due to maintenance problems. A major justification for the upgrades is greater need for a variety of relief, monitoring and peacekeeping missions caused by the effects of climate change.
A recent New Zealand Defence Force report warned that extreme weather patterns will threaten water, food and energy security in the region and shortages could spark violence. New Zealand’s military provides humanitarian aid and disaster relief in the Pacific and the climate crisis is shifting the rationale for defence spending and the politics of defence in general.
This shows the complexity of defence politics in New Zealand, as different political parties represent distinct strands of public opinion on the role of the military.
Balancing pacifist and martial traditions
The last 50 years have seen significant disagreement over how the country should engage with the rest of the world and what it should do with its military in particular. Decisions over big purchases and overseas deployments can open up major divisions over New Zealand’s strategic identity.
New Zealand’s strong martial and pacifist traditions are both represented in the current government and major defence decisions have to be made with care.
Jacinda Ardern’s coalition is managing this complex balancing act. The coalition is made up of the centre-left Labour Party and the moderately populist New Zealand First Party, with the Green Party providing confidence and supply.
NZ First is the strongest supporter of the country’s martial traditions. It has always had a hawkish attitude towards China, which has become more relevant in recent years.
Labour has generally differentiated itself by being slightly more willing to criticise allies and placing more faith in collective security, the United Nations and disarmament.
To limit criticism that it is spending on “tanks not teachers”, Ardern’s coalition has skilfully outsourced the job of replacing ageing defence equipment to NZ First’s minister of defence Ron Mark. It was probably no coincidence that last year’s announcement that NZ$2.3 billion would be spent on new maritime patrol aircraft was made by NZ First leader Winston Peters while Ardern was on maternity leave.
Ardern has let NZ First claim the political credit and take the political risk with expensive defence replacements, lest they take the shine off Labour’s focus on social policies. That balancing was on show again last week when Ardern announced that New Zealand was ending its military training deployment to Iraq.
Pacifism in the age of climate change
By sitting outside cabinet, the Greens are able to represent the pacifist end of the political spectrum. The party has its roots in the Values Party of the 1970s, which helped make anti-nuclear attitudes mainstream in New Zealand and, by 1984, Labour Party policy.
The party’s defence spokesperson Golriz Ghahraman described the transport plane purchase as “war making capability” when New Zealand is good at humanitarian aid delivery, monitoring and supporting Antarctic research. She reconfirmed the Green Party’s commitment to peacekeeping through the UN.
This attitude is problematic as it forgets that the tools for war fighting are the same as those for peacekeeping and disaster relief. As the focus of Green movements worldwide has shifted to climate change, the commitment to disarmament is becoming more at odds with the realities of climate change. Rising sea levels, crop failures and mass migration will be massively destabilising to the international system.
It is not tenable to criticise the purchase of aircraft that will be largely used to send relief missions to the Pacific, scientists to Antarctica and peacekeepers to UN missions, simply because they could be used to send soldiers into combat. The challenge for the Greens will be to find a coherent message on the military that tackles the climate crisis and represents the views of its pacifist base.
The challenge for New Zealand’s allies will be to understand and respect how these contradictory threads of New Zealand’s strategic culture direct and constrain its defence spending.
The first week of the federal election campaign has been dominated by heated disputes about the numbers behind both government and opposition policies.
Both sides are under pressure. Notably, the cost of Labor’s 45% emissions-reduction target has been rightly questioned.
Opposition leader Bill Shorten’s answer to reporters that “our 45% reduction, including international offsets, has the same economic impact as the Liberals’ 26%” didn’t exactly engender confidence.
But the folly of Labor’s environmental plans is another tale for another column.
Our focus here is on how the Coalition is going to cut personal income tax by A$158 billion and balance the budget.
Earlier this week the Grattan Institute pointed out the Coalition’s budget assumption that expenditure will fall from 24.9% of GDP in 2018-19 to 23.6% during the next decade amounts to cutting spending by more than A$40 billion a year in 2029-30.
This raised the natural question of exactly where those cuts will come from. According to the government, it’s from things such as lower welfare payments and lower interest payments on government debt.
The Grattan Institute’s Danielle Wood described these assumptions as “heroic”. Yup.
Now, you might wonder why the Coalition’s plan to cut personal income tax doesn’t fully kick in until 2025. Or, for that matter, why its “enterprise tax plan” on corporate tax is scheduled to be phased in over a decade.
Playing outside the rules
The short answer is that for the four years following a budget – the so-called “forward-estimates period” – there are rules about banking spending cuts.
During those four years, cuts need to be specified, or economic parameters need to be varied. And with good reason. That way the actual assumptions the government is making, however fanciful they may be, are plain for all to see.
But beyond the four-year period no such discipline applies. This allows governments of all stripes to make very specific claims about, for example, tax cuts they plan to deliver without having to be at all specific about how they are going to pay for them.
This is all just a conjuring trick. Politicians try to get us to focus on the tangible, specific thing we want – tax cuts, more money for hospital or schools, free cancer treatment – while obfuscating how they are going to pay for it.
It’s dirty pool. It’s not cricket. It’s the kind of thing a mob accountant does. Pick your favourite metaphor.
Of course, treasurer Josh Frydenberg and finance minister Mathias Cormann didn’t invent this unscrupulous practice. Wayne Swan and Penny Wong, as treasurer and finance minister respectively, were guilty of these kind of shenanigans too.
The specifics of the current round can’t even be debated properly, because ten-year “guesses” don’t lay out specific assumptions that can be checked for internal consistency and plausibility.
Sadly, it seems futile to hope for cultural change among politicians and a shift to integrity.
To some extent, we need to be the change we want.
The fact both sides of politics so brazenly play us for suckers is as much our fault as it is theirs. If politicians thought there were real consequences at the ballot box for this sort of behaviour, they would think twice.
But there aren’t. When both sides are guilty it’s understandable that voters become so cynical that they just factor it in and look to other issues.
If more voters were willing to make “cooking the books” a decisive issue, that might change.
Need for incentives
Politicians respond to incentives. My favourite illustration of that is how United Nations officials used to be exempt from parking tickets in New York City. As economists Ray Fisman and Ted Miguel showed, when norms alone governed behaviour, officials from corrupt countries basically parked wherever they wanted. Once city authorities got the ability to confiscate diplomatic licence plates of violators, things improved radically.
So as long as the mainstream media refuses to issue our politicians with the moral equivalent of parking tickets for cooking the books of public debate, politicians are going to keep doing it.
Now, many commentators do exactly that – and some of them are brilliant and fearless. But other folks, on the right and on the left, seem to have the attitude that both sides play fast and loose with the facts so it’s fine for them to call out whichever side they personally like the least.
Actually, scratch “seem to have the attitude”. They’ll tell you that to your face.
When Australian cricket captain Steve Smith and vice-captain David Warner got caught in a ball-tampering racket, there were consequences.
When our elected representative do something similar, but with our nation’s finances –with consequences for growth, employment, welfare benefits, retirement incomes, and climate change – they get a pass.
That’s got to stop; and we’ve all got our part to play.
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:
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:
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.
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.
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?
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.
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.
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.
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.
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.
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.
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 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.
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.
Little for prevention, Indigenous health and to address disparities
Lesley Russell, Adjunct Associate Professor, Menzies Centre for Health Policy, University of Sydney
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.
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.
$6.3 million to continue the development of the Health Data Portal for services funded under the Indigenous Australians Health Program.
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.
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.
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.
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.
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.
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 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.
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.