MYEFO reveals billions more in revenue, $9 billion in fresh election tax cuts


Peter Martin, The Conversation

Higher-than-expected company tax revenue and lower-than-expected spending have boosted the budget’s bottom line by A$15 billion over next four years, allowing it to forecast cumulative surpluses of A$30.4 billion, double what the budget predicted in May.

Modestly improved surpluses

The midyear budget update cuts the projected deficit for 2018-19 from a May estimate of A$14.5 billion to A$5.2 billion.

The surplus forecast for 2019-20 climbs from A$2.2 billion to A$4.1 billion. By 2021-22 the surplus is forecast to be A$19 billion, up from A$16.6 billion.



The surplus won’t reach the government’s long-term target of 1% of gross domestic product until 2025-26. And in projections out to 2028-29 it is not forecast to climb much above this target as the budget hits the Coalition’s self-imposed tax “speed limit” of 23.9% of GDP.



$9 billion in unannounced tax cuts

The budget boost would have been much bigger were it not for more than A$9 billion in “decisions taken but not announced”. Almost all of these are revenue decisions, presumably extra election tax cuts, worth A$2.5 billion to A$3.7 billion per year.

The budget papers say these are decisions taken since the May budget, and are either not for publication or haven’t yet been made public.




Read more:
More mirage than good management, MYEFO fails to hit its own targets


Treasurer Josh Frydenberg confirmed the government had taken decisions to do with tax, but said it would announce them at a time of its choosing rather than in the budget update.

It reserved the right to take other tax and spending decisions in the lead-up to the election. Some would be revealed in the 2019-20 budget, to be delivered in April rather than in May to allow an election in May.

Downgraded wage growth

Although the Treasury has revised up its estimates for revenue and revised down its estimates of unemployment, expecting the rate to fall to 5% by June 2019 and stay there, it has shaved 0.25 percentage points off its estimates for wage growth.

It now expects wages to grow by 2.5% in the year to June 2019 (down from 2.75%) and 3% in 2019-20 (down from 3.25%). In future years, it expects wage growth of 3.5%.



Addressing the downgrade, Mr Frydenberg said weaker-than-expected wage growth appeared to be part of a worldwide phenomenon, “not unique to us”.

Wage growth for the year to September was 2.3%, the highest since 2015. The statement said anecdotal evidence from Treasury’s business liaison program pointed to “skills shortages and wage pressures in some sectors of the economy, consistent with a tightening labour market”.

Weaker consumer spending, economic growth

Growth in consumer spending has also been revised down, from 2.75% in 2018-19 to 2.5%. It is expected to climb back to 3% in 2019-20.

The statement revises down the government’s forecast of economic growth in 2018-19 from 3% to 2.75%, in part because of the Queensland drought, but predicts growth of 3% in 2019-20, 2020-21 and 2021-22, a touch higher than the Treasury’s estimate of long-term sustainable growth.

The Treasury is expecting economic growth to weaken in China and the United States, slipping from 6.5% in China to 6% in 2019 and 2020, and from 2.75% in the US to 2.25 and then 2%.

But debt has peaked and is headed down

The update shows that net debt has already peaked as a proportion of GDP and will fall faster than previously expected, in line with higher surpluses, sliding from 18.2% of GDP to 1.5% over the decade to 2028-29.



Government receipts are expected to climb from 24.9% of GDP to 25.5% by 2021-22. Payments are expected to fall from 24.9% of GDP to 24.6%.

Mr Frydenberg said the Coalition had kept average real spending growth at 1.9% per year, well below Labor’s 4% over six years which included the global financial crisis.



Finance Minister Mathias Cormann said recurrent spending had fallen below recurrent revenue for the first time in more than a decade.

Recurrent spending excludes spending on long-term investments in things such as road and rail infrastructure.

He said all new spending since the May budget had been offset by spending cuts elsewhere.

No firm commitment on fiscal discipline

Asked whether he felt bound by a commitment in the budget papers to bank rather than spend improvements to the budget’s bottom line due to changes in the economy, Cormann said it was “a matter of balancing priorities”.

The imperative to cut tax to keep it below the government’s self-imposed speed limit might conflict with the commitment to devote extra tax takings to improving the bottom line.




Read more:
Monday’s MYEFO will look good, but it will set the budget up for awful trouble down the track


The Conversation


Peter Martin, Editor, Business and Economy, The Conversation

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

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More mirage than good management, MYEFO fails to hit its own targets


Danielle Wood, Grattan Institute and Kate Griffiths, Grattan Institute

The Morrison government wants next year’s election to be about economic management.

So understandably, it’s using the improved bottom line in the Mid Year Economic and Fiscal Outlook (MYEFO) to talk up its economic credentials.

But the numbers in MYEFO show it has failed to hit many of its own targets.

Target 1: Surpluses on average over the cycle

The government’s overarching fiscal objective is to deliver budget surpluses: not just in one year but on average over the economic cycle.

MYEFO indicates the government is expecting a $5.2 billion deficit in 2018-19 (0.3% of GDP).

It will be the 11th consecutive deficit for the Commonwealth budget.

Deficits have averaged $33.2 billion (2.1% of GDP) over those 11 years.

Yes, a $4.1 billion surplus is forecast for next year, with surpluses projected to reach $19 billion (0.9% of GDP) by 2021-22.

But so big have the recent deficits been, that even if everything goes well and the fiscal position continues to improve, the budget would need to be in surplus for decades to produce a surplus on average over each year, far longer than what most economists consider a typical economic cycle.




Read more:
MYEFO reveals billions more in revenue, $9 billion in fresh election tax cuts


A related fiscal target is that budget surpluses will build to at least 1% of GDP as soon as possible.

Despite revenue windfalls from income and company taxes (discussed below), the government is still forecasting it won’t reach that 1% of GDP surplus target until 2025-26.

Policy decisions in this year’s budget and MYEFO – including income and company tax cuts, additional funding for independent and Catholic schools, and changes to the GST formula to placate Western Australia – have weakened the bottom line in 2021-22 by $10.5 billion.

Hardly the actions of a government in a hurry to deliver a sizeable surplus.

Verdict: Fail.



Target 2: Reduce the payments-to-GDP ratio

The government’s policy is also to maintain strong fiscal discipline by controlling expenditure, with a falling payments-to-GDP ratio its measure of success.

Whether it has met the target depends on the starting year. Governments payments are forecast to reach 24.9% of GDP in 2018-19, up from 23.9% in 2012-13 before the Coalition took office.

The government prefers the starting point of its first year in office 2013-14 where payments were 25.5% of GDP.

Either way, payments in 2018-19 remain above the 30-year historical average of 24.7% of GDP.




Read more:
Morrison’s return to surplus built on the back of higher tax – Parliamentary Budget Office


While the government projects that spending will fall slightly further to 24.6% of GDP by 2021-22, this relies on spending growth across the government’s major programs falling substantially compared to the previous four years – without major policy changes to help facilitate the fall.

Verdict: Debateable pass.



Target 3: Tax-to-GDP ratio below 23.9% of GDP

In last year’s budget, the government introduced a new target of capping tax collections at 23.9% of GDP.

Why 23.9%? That was the average level of tax during the final two terms of the Howard/Costello government.

While the Coalition is understandably keen to follow the lead of one of its most electorally successful governments, that was also a period where tax collections were historically high.

Tax collections are projected to reach 23.8% of GDP in 2022, on the back of stronger than forecast personal income tax and company tax receipts.

Verdict: Pass.


MYEFO Chart.


Target 4: New spending measures more than offset by reductions in spending elsewhere

Since becoming prime minister, Scott Morrison has sent mixed signals about whether his government will adhere to the longstanding budget rule that all new spending proposals be matched with budget savings.

At the MYEFO press conference, Finance Minister Matthias Cormann said it was a “matter of balancing competition priorities”.

Here’s the straight answer – the net effect of policy changes announced in MYEFO are an additional $12.2 billion in spending over four years.

In other words, the government has not offset new spending with cuts to other spending programs. The Turnbull government similarly failed to offset its new spending in 2017-18 (although it succeeded in prior years).




Read more:
Monday’s MYEFO will look good, but it will set the budget up for awful trouble down the track


There have been some reductions in spending because of improvements in the economy. The government claims these reductions offset its recent spending announcements. But genuine offsets come from policy changes, not economic good luck.

Verdict: Fail.

Target 5: Shifts due to changes in the economy banked as an improvement in budget bottom line

This objective is key to the government’s fiscal conservative credentials.

If it has some economic good luck, it commits to use the proceeds for budget repair rather than new spending or tax cuts.

This rule has been irrelevant for most of the past decade, because almost every budget had revenue collections falling short of forecast.

But the Morrison government is in the middle of a mini revenue boom – revenue collections were higher than forecast in both the 2018-19 budget and MYEFO.

Company tax collections are higher largely due to strong commodity prices. Income tax collections are up and government spending is down because of improvements in the economy.




Read more:
Labor would deliver bigger surpluses than the Coalition: Bowen


So has the government used this chance to show off its fiscal prudence?

Not exactly. It will spend around $11.8 billion of this windfall, give away another $19.3 billion in tax cuts and bank just over half of it ($35.2 billion) to the bottom line.

And in the shadow of an election, we can almost certainly expect further spending. The $9 billion in decisions taken but not announced – potentially a pre-election warchest – suggests that more tax cuts could also be on the way.

Verdict: Fail.

Our final verdict

The challenge in assessing budget management is separating good luck from good management. Governments will always seek to take credit for economic upswings that boost the bottom line.

Fiscal targets are there to keep them on the straight and narrow.

An objective assessment of the government’s performance against its own key targets suggests its good news budget is more mirage than magnificent management.The Conversation

Danielle Wood, Program Director, Budget Policy and Institutional Reform, Grattan Institute and Kate Griffiths, Senior Associate, Grattan Institute

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

MYEFO rips A$130 million per year from research funding despite budget surplus



File 20181217 185264 1kkui2j.jpg?ixlib=rb 1.1
The shockwaves of this cut will be felt for years to come at Australian universities.
http://www.shutterstock.com

Margaret Gardner, Monash University

Yesterday morning, the mid-year budget update unveiled research funding cuts of A$328.5 million over the next four years. This budget raid on research was more than double the size expected by the university research community.

This new freeze on growth in research funding and PhD scholarships follows last year’s freeze on funding for student places.




Read more:
Universities get an unsustainable policy for Christmas


The effect will be felt immediately by the nation’s researchers and their research projects in positions lost and projects slowed, limited or not started. But the damage done will be felt for much longer – in inventions, ideas and opportunities missed.

Why has it been done?

As yet, there has been no adequate public explanation from government, save for two paragraphs in Education Minister Dan Tehan’s media release yesterday:

The decision to pause indexation of research block grant programs for 12 months, along with adjusting growth for RSP (the Research Support Program), will allow the government to prioritise education spending, including on regional higher education.

And this further par:

We have invested over A$350 million since the 2018-19 Budget to support students in regional and remote Australia.

In truth, most of Australia’s regional universities will lose millions of dollars more under the 2017 funding freeze than will be redistributed to them via this latest research cut. And under this new research freeze, they, too, will lose scholarships for PhD students – our next generation of brilliant research talent.

Research funding also goes towards keeping the lights on in libraries and labs so researchers can complete their work.
from http://www.shutterstock.com

Nationwide, the government will fund up to 500 fewer of these scholarships for PhD candidates next year due to the research funding freeze. That’s 500 fewer people who will dedicate their talent to the creation of new knowledge in the national interest.

The education minister has tried to repair the damage inflicted by the 2017 decision of his predecessor – Simon Birmingham – only to compound the damage with this second freeze. That’s throwing bad policy after bad.

Regional universities were among those hardest hit by the 2017 MYEFO decision to cut funding for student places. And that decision continues to cut deeper each year – it will be felt more in 2019 than 2018, and more in 2020 than 2019.

How this will affect Australian research

The harm this will inflict is manifold.

First, it will cut the research funding program. This scheme enables universities to pay the salaries of researchers and technicians whose work enables ground-breaking discoveries. It also funds keeping the lights on in labs and libraries.




Read more:
Educational researchers, show us your evidence but don’t expect us to fund it


These overheads of research are not funded by competitive grants. For every A$100,000 an Australian university secures in competitive research grants, it must find an extra A$85,000 to be able to deliver that research. Where will universities find these funds?

Second, it will cut the research training program. This funds scholarships for PhD students to enable them to complete their higher degrees – a necessary first step on the way to a career in research. This is a cut into their brilliant careers, and Australia’s future research capacity.

Third, it damages Australia’s standing as a global research leader. Why would a great researcher come to or stay in Australia, when the government has sent a message that, in a time of budget surplus, it’s prepared to cut into research?

Research funding is critical to Australia’s status as a global research leader.
from http://www.shutterstock.com

Fourth, it will further undermine Australia’s position in research and development investment relative to our economic competitors. China now invests 2.1% of its GDP in research and development – while Australia’s total investment from all sectors in research and development (government, business and research institutions) is now just 1.88% of GDP. China’s economy is ten times bigger than Australia’s, but they’re investing 30 times more than we are.

Our government only spends A$10 billion on research and development each year. Only last Friday, it was revealed Australia’s government spending on research and development was already forecast to fall this year to its lowest level in four decades as a percentage of GDP – to 0.5%. This new research funding cut only worsens this situation.

With the budget in surplus, it makes no sense

University leaders knew research funding was at risk, and so jobs for researchers, technicians and researchers were at risk. But beyond these jobs are the projects they support and the Australians from all walks of life whose lives have or will be transformed by Australian research.




Read more:
Margaret Gardner: freezing university funding is out of step with the views of most Australians


Universities Australia has stories of survivors of stroke, cervical cancer and family violence speaking about how crucial university research has been in the lives of people like them at #UniResearchChangesLives.

With a government budget surplus in sight, it makes no sense to cut the research capacity that will create jobs, income and new industries for Australia.The Conversation

Margaret Gardner, President and Vice Chancellor, Monash University

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

Liberal Julia Banks defects to crossbench as Scott Morrison confirms election in May


Michelle Grattan, University of Canberra

The government has been delivered a fresh major blow with the defection of Victorian backbencher Julia Banks to the crossbench, delivering a swingeing attack on the right of the Liberal party.

In an emotional speech, Banks told parliament she had had time to reflect on “the brutal blow against the leadership, led by members of the reactionary right wing.”

While she pledged to give the government confidence and supply, her defection has highlighted again the deep divisions within the government, and reopened wounds over the August leadership coup that ousted Malcolm Turnbull and saw then-deputy leader and foreign minister Julie Bishop go to the backbench.

It will give even more muscle to the newly-empowered crossbench. It has also increased the chances of Labor mustering the numbers to refer Home Affairs Minister Peter Dutton to the High Court to determine whether he is sitting in parliament in breach of section 44 of the Constitution.

Banks, who spoke at midday, did not inform the party room beforehand, government sources said.

As she was delivering her speech to the House of Representatives, Scott Morrison was holding a news conference at which he announced the budget will be on April 2, and confirmed the election will be in May, the latest the government can run.

In a further sign of disunity, Bishop has undermined the government on the crucial area of energy policy, saying it should do a deal with Labor on a National Energy Guarantee.

The defection of Banks, who at the time of the leadership coup called out bullying within the Liberal party, comes a day after the Coalition formally went into minority government in the House, with the swearing in of independent Kerryn Phelps.




Read more:
View from The Hill: Day One of minority government sees battle over national integrity commission


With the loss of Banks the government has 73 on the floor of the House. This excludes the Speaker, Tony Smith, who has a casting vote. A simple majority is 75, but 76 votes are needed to suspend standing orders. Labor has 69. There will now be seven crossbenchers.

Ever since the coup, it has been thought Banks might jump ship to the crossbench.

Banks, who won the marginal Melbourne seat of Chisholm for the Liberals from Labor in 2016, did not rule out running as an independent at the election, saying she would look at her options in the new year.

Praising Turnbull and Bishop as “visionary inspiring leaders of sensible centrist liberal values with integrity and intellect”, she told the House: “The gift of time in reflection has provided some clarity regarding the brutal blow against the leadership. Led by members of the reactionary right wing, the coup was aided by many MPs trading their vote for a leadership change in exchange for the individual promotion, preselection endorsements or silence.

“Their actions were undeniably for themselves, for their position in the party, their power, their personal ambition, not for the Australian people who we represent, not for what people voted for in the 2016 election, not for stability, and disregarding that teamwork and unity delivers success,” she said.

“The aftermath of those dark days in August then acutely laid bare the major parties’ obstructionist and competitive actions and internal games, or political point-scoring, rather than for timely, practical, sensible decisions on matters which Australians care about.”

Banks said equal representation of men and women in parliament was “an urgent imperative, which will create a culture change.” She called the Liberals’ rejection of quotas “blinkered”.

She said an independent whistleblower system to enable the reporting of misconduct was clearly needed. “Often, when good women call out or are subjected to bad behaviour, the reprisals, backlash and commentary portrays them as the bad ones.”

Banks said her “sensible centrist values, belief in economic responsibility and focus on always putting the people first and acting in the nation’s interest have not changed.

“The Liberal Party has changed. Largely due to the actions of the reactionary and regressive right wing who talk about and to themselves rather than listening to the people.”

Banks said the three female independents, Phelps, Cathy McGowan and Rebekha Sharkie, “are at the core of what I stand for”.

Her attack comes a day after Senate president Scott Ryan also lashed out at the right, saying Liberal voters who had deserted the party in the Victorian election had sent the party a message. “They don’t want views rammed down their throat, and they don’t want to ram their views down other people’s throat.”




Read more:
Senate president Scott Ryan launches grenade against the right


Bishop has told the Australian Financial Review: “The government needs to consider energy policy through the prism of securing bipartisan agreement with Labor, to establish a long-term, stable regulatory framework that will support private-sector investment in generating capacity.”

Only the NEG could achieve “elusive” bipartisanship, she said.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.

Battle won. Our budget woes are behind us


Warren Hogan, University of Technology Sydney

The government’s final budget outcome for 2017-18 is a deficit of A$10.1 billion. That’s an extraordinary A$8.1 lower than the May estimate just months ago, and more than A$19 billion lower than when the 2017-18 budget was originally put together the previous May.

The deficit, a mere 0.6% of gross domestic product, is the smallest in the run of ten that began in the global financial crisis of 2008-09.

The result tells us something important about the Australian economy ten years on from the crisis.




Read more:
Budget deficit comes in at $10.1 billion, in boost for early
return to surplus



First, it’s performing better than expected.

Not only is it growing faster than most forecasters expected, it has been producing more jobs and less inflation than such growth would have produced in the past.

This has allowed much low interest rates than would have once been the case and supported investment across the economy.

Back to normal

So good is the government’s financial position that the heavy lifting has been all but been done.

A return to budget balance is entirely possible this financial year.

Indeed, for most purposes the budget is already balanced.

Federal government revenues and expenses are each about 25% of GDP. Given the complexity and natural variability of the budget and the economy, an outcome within 0.5% of GDP from balance is basically in balance.

The fact that two-thirds of the originally projected 2017-18 budget deficit has vanished due to “forecast error” makes the point.

Fiscal policy is effectively back to normal, with plenty of spending power in reserve should the economy deteriorate.

Better confidence, for now

Solid government finances will support confidence, not least among households that are used to worrying about large deficits boosting future tax burdens or eating away at government services.

That isn’t to say that everything is baked in.

The economy and government finances can go the other way. But the task of budget repair, which started years ago under Treasurer Wayne Swan, is virtually complete. Any further substantive budget tightening will produce growing surpluses rather than shrinking deficits.

More profits, less welfare

Over the past 15 months the big improvement in the government’s financial position has come in two phases.

The first surprise was a revenue windfall received last summer. This was mostly because of higher commodity prices and the boost this gave to corporate profits.

Corporate income tax receipts are 8.7% higher than originally projected, resulting in an almost A$7 billion windfall for the budget. This represents about a third of the A$19 billion budget improvement.




Read more:
Morrison’s return to surplus built on the back of higher tax – Parliamentary Budget Office


This was well known by the time of the May budget and was responsible for most of the improvement in the budget bottom line between May 2017 and May 2018.

The next phase was a substantial drop in government payments near the end of the financial year just concluded.

This was not factored into the May 2018 budget. Most of it is made up of lower welfare and social security payments, partly in response to the stronger economy, and partly due to much lower than anticipated spending on disability assistance.

Disability-related payments, both in terms of payments to states and National
Disability Insurance Scheme spending, are about A$3 billion lower than expected in May last year.

And improvement all around

The rest of the good news is spread across the board. Income tax receipts are higher due to stronger employment growth. The government has collected more duties and excise than it expected. Pension payments have been a little lower than expected, as have infrastructure-related payments to the states.

Because the presentation of the final budget outcomes does not come with any formal update of budget forecasts, the treasurer and his finance minister had very little to say about the government’s fiscal strategy other than to reinforce that its jobs, growth and budget repair strategy is on track.

They’ll say more in the midyear economic and fiscal update (also called MYEFO) in December.

Question time

Ministers Frydenberg and Cormann were asked a number of questions at their Tuesday press conference that they chose not to answer properly.

I thought I would take the liberty of doing it for them.

REPORTER: So does this outcome increase the likelihood that you will return to surplus sooner than predicted?

MY ANSWER: It most certainly it does. The better result is mainly due to a stronger-than-expected economy. At the time of the budget in May 2017 the government had forecast economic growth of 2.75% for the 2017-18 financial year. As it turned out, growth came in at 2.9% and we are taking strong momentum into 2018-19.

It won’t take much to nudge the budget into surplus this year, that is, a year earlier than forecast. Simply factoring in the better baseline performance of the budget from last year should produce a deficit for 2018-19 of around A$5-8 billion. If the recent trends of higher commodity prices, a lower Australian dollar and stronger domestic economic activity persist, as they appear to be doing, then we will easily get a surplus this year.

Complicating the picture is the political cycle. With a government well behind in the polls and an election due in the next six months or so, it will be hard to resist the temptation to spend some of this recent budget improvement.

It will become a political judgment for the new prime minister and his cabinet. Is the political benefit of presenting a budget surplus greater than the electoral impact of new spending measures?

REPORTER: And do you continue to adhere to the budget discipline that all new spending must be accompanied by savings in equal amount?

MY ANSWER: The government should be commended for keeping real spending growth to just 1.9%, the lowest in a generation. It is projecting it to fall even further, to around 1.6% over the next few years. With a tough election contest ahead, my guess is that we may see some slippage on government spending.

REPORTER: You are out by 40% to 45% on the deficit you published in May this year. That’s a wild variation in just 6 weeks. Should Treasury be doing better than that, basically?

MY ANSWER: Revenues total just under A$450 billion and expenses total just over $450 billion. The deficit figure is the result of the calculation of the small difference between those two big numbers.

Rather than thinking about an A$8 billion miss on a A$18 billion deficit we should be thinking about A$8 billion on the $450 billion revenue and expense base.

Instead of a 40% variation, the real variation is less than 2%.

Given that the Treasury only had the March quarter national accounts at its disposal when pulling together the May Budget forecasts and considering the propensity of the Bureau of Statistics to revise the national accounts, the fact that the misses are less than 2% is actually pretty amazing.

The economy is complex and ever changing.

Economic forecasting is hard. Understanding the relationship between government revenues and an economy experiencing significant industrial structural change is far from a perfect science.The Conversation

Warren Hogan, Industry Professor, University of Technology Sydney

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

Budget deficit comes in at $10.1 billion, in boost for early return to surplus


File 20180925 85755 up06mj.jpg?ixlib=rb 1.1
Estimates out, but happy. Mathias Cormann and Josh Frydenberg announce the smallest deficit in a decade.
Mick Tsikas/AAP

Michelle Grattan, University of Canberra

The budget outcome for 2017-18 shows a deficit of A$10.1 billion –
dramatically less than expected in May, and just 0.6% of GDP.

In this year’s May budget, a mere four months ago, the outcome for the last financial year was forecast to be just over A$18 billion, already revised well down on the more than A$29 billion estimate in the 2017 budget.

The drivers of the better-than-anticipated result were stronger
revenue and lower spending than earlier expected.

Treasurer Josh Frydenberg and Finance Minister Mathias Corman said in
a statement: “At A$10.1 billion, just 0.6 per cent of gross domestic
product (GDP), the underlying cash deficit is the smallest in ten
years.

“Stronger economic growth and much stronger employment growth than
anticipated at the time of the 2017-18 budget have driven increases in
personal income tax and company tax receipts, with total receipts
$13.4 billion higher than expected at the time of the budget.

“Total payments were A$6.9 billion lower than forecast at budget time,
including as a result of lower welfare payments with more Australians
in paid work. Welfare dependency for working age Australians is now at
its lowest level in 25 years and in 2017-18, there were 90,000 fewer
working age Australians on welfare,” they said.

“Real GDP in 2017-18 was stronger than anticipated in the 2017-18 budget.”

Last week Standard & Poor’s ratings agency reaffirmed Australia’s
triple A credit
rating. Frydenberg said Australia was one of only 10 countries with a AAA
credit rating from the three major agencies.

He told a news conference that the budget outcome confirmed the budget
was on the path back to balance in 2019-20.

The mid-year budget update will come in December, with the revisions
at that time setting the scene for the run into the election a few
months later, with the government making economic and fiscal
management a key plank in its campaign.

Shadow treasurer Chris Bowen said the final budget outcome “shows the
deficit came in almost four times worse than forecast in the Liberal
Party’s first budget. This is after the Liberal Party’s massive cuts
to schools, hospitals and the pension.”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.

Morrison’s return to surplus built on the back of higher tax – Parliamentary Budget Office


Saul Eslake, University of Tasmania

First, the good news. The Parliamentary Budget Office’s latest medium-term budget projections provide
independent reassurance that the government’s personal income tax cuts, announced in the May budget and passed through parliament in June, can be funded without pushing the budget back into deficit.

But they also sound warnings about the downside risks from weaker-than-assumed economic or wages growth, and from any relaxation of the spending restraint
that successive governments have maintained since 2012.

More income tax

The PBO projects the federal government’s “underlying” cash balance to improve from 0.8% of GDP in 2021-22, the last year of the latest budget’s forward estimates period, to 1.3% of GDP in 2028-29.




Read more:
Budget policy check: does Australia need personal income tax cuts?


That’s after allowing for the revenue forgone by the tax cuts. Without these, and in the absence of any other spending or revenue measures, the surplus would have reached 3.7% of GDP (my calculation, not the PBO’s), largely on the back of the “bracket creep” that would have occurred without some form of personal income tax cuts between now and then.

Even so, there’s an awful lot of bracket creep.

Projected change in average income tax rates by quintile.
Parliamentary Budget Office, 2018-19 Budget: Medium-Term Projections (September 2018), CC BY

The average tax rate across all taxpayers is projected to increase from 22.9% to 25.2% – that is, by 2.3 percentage points. For taxpayers in the second and middle quintiles (the middle fifth and the second-to-bottom fifth) it’s even worse. They will see their average rates rise by more than 4 percentage points. The average tax rate for those in the top and bottom quintiles will climb by less than 1 percentage point.

The PBO’s projections allow for only slight additional relief; small reductions in 2027-28 and 2028-29, worth about 0.4% of GDP, to ensure tax receipts remain within the government’s “cap” of 23.9% of GDP in the final two years of the 10-year projection period.

A helpful backdown on company tax

The PBO’s forecasts don’t allow for the government’s recent decision to abandon
the previously proposed cut in the corporate tax rate for companies with annual turnover exceeding $50 million, which it had been unable to pass through the Senate. That would add the equivalent of almost 0.5 of a percentage point of GDP to the surplus by 2028-29, unless offset by other measures (which it probably will be).




Read more:
The full story on company tax cuts and your hip pocket


By law, the PBO is required to use the same economic assumptions in framing its medium-term projections as those used in the most recent federal budget.

Wishful economic thinking

These requirements mean the projections are conditioned on, among other things, “above-trend economic growth for much of the period” and “a return to close to trend wages growth” by 2021-22.

This week’s national accounts data lend some near-term support to the first of these assumptions, but they (and other data) cast further doubt on the likelihood of wages growth returning to trend in line with the budget assumptions.




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The PBO notes that, as a direct result of the government’s personal income tax plan, any weakness in future tax receipts flowing from “weaker economic circumstances” will “flow through directly to the budget bottom line”.

A decade of tight spending

The report highlights the importance of policy decisions in stemming the flow of new spending decisions and tightening eligibility for benefit payments since 2012.

Much of the impact of these will show up more clearly over the next decade. Apart from three areas – the National Disability Insurance Scheme (NDIS), aged care and defence, on which spending is projected to rise by a little over 1 percentage point of GDP over the next decade – other government spending is projected to
fall by around 2 percentage points of GDP between 2017-18 and 2028-29.




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The PBO notes that “the spending restraint seen over the past few years … may be
increasingly difficult to maintain with an improving budget outlook”.

(Unintentionally) highlighting that risk, the PBO explicitly notes that the proposed further increase in the pension eligibility age to 70 between 2023 and 2035 – which the government abandoned this week – was “projected to have a significant impact on Age Pension spending … over the next decade”.The Conversation

Saul Eslake, Vice-Chancellor’s Fellow, University of Tasmania

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

Shorten promises to reverse budget cut to the ABC


Michelle Grattan, University of Canberra

Bill Shorten has moved to make the ABC an election issue, promising to reverse the Turnbull government’s $83.7 million budget cut and to guarantee funding certainty over the broadcaster’s next budget cycle.

Ahead of appearing on the ABC’s Q&A program, Shorten and frontbench colleagues declared the Coalition had “launched the biggest attack on the ABC in a generation”.

In recent months Communications Minister Mitch Fifield has sent a stream of complaints to the ABC about stories, both online and on air, contesting facts and interpretations. The Prime Minister’s Office has also complained. Government frontbenchers and backbenchers frequently make cracks at or about the ABC, echoing a theme of many conservative commentators.

The ABC is also under constant attack from News Corp, driven by both ideology and commercial interests. The government has an inquiry underway into the ABC’s competitive neutrality, which was part of a deal with Pauline Hanson but also important in the context of News Corp’s argument about the government-funded ABC encroaching on financially strapped commercial media.

When the government made the $84 million budget cut – which took the form of a freeze to indexation – Treasurer Scott Morrison said “everyone has to live within their means”. Managing director Michelle Guthrie said that “the decision will make it very difficult for the ABC to meet its charter requirements and audience expectations.”

In a statement Shorten, communications spokeswoman Michelle Rowland and regional communications spokesman Stephen Jones said Labor’s commitment would ensure the ABC could meet its charter requirements, safeguard jobs, adapt to the digital environment “and maintain content and services that Australians trust and rely on”.

They said the Coalition since 2014 had “overseen $282 million in cuts to the ABC that has seen 800 jobs lost and a drop in Australian content and services”.

“Labor will stand up for the ABC and fight against the conservatives’ ideological war against our public broadcaster,” the statement said.

The promised investment “demonstrates Labor’s commitment to the ABC’s independence and to maintain the ABC as our comprehensive national broadcaster.

“Now, more than ever, Australians need the ABC – our strong, trusted and independent public broadcaster.

The Conversation“At a time when too many Australians feel disengaged from their democracy and distrustful of their representatives, Labor wants to restore trust and faith in our institutions. Part of restoring trust is is supporting a healthy public interest media sector, and protecting that trusted institution – the ABC”.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

View from The Hill: With apologies to Mathias, Hanson blows away government hopes on company tax


Michelle Grattan, University of Canberra

Not so long ago, new South Australian independent senator Tim Storer and Victorian crossbencher Derryn Hinch were set to be the pivotal players determining the fate of the government’s tax cut for big companies.

But after the evidence from the banking inquiry Hinch’s doubts about the measure hardened further, while Storer continued to agonise.

The government then looked towards the Centre Alliance senators, Stirling Griff and Rex Patrick, for the two crucial numbers it needed. The rest of the votes were in the bag.

Only it turned out they weren’t. Pauline Hanson, who commands three Senate votes and thus a veto, has suddenly withdrawn the support she earlier pledged. Hanson has flipped-flopped before but she insists this is for real – that she won’t change her mind again.

Hanson says she’s “so disappointed in this government” after the budget it produced. She has a litany of complaints: inaction on debt; intransigence on immigration; the absence of changes to the petroleum resource rent tax; no appearance of promised apprenticeships, and many more.

Hanson denies her reneging is driven by her political needs in the Queensland seat of Longman, though that claim lacks credibility. Tax cuts for the wealthiest companies, including the banks, would hardly appeal to potential One Nation voters, and this byelection will be a test for Hanson’s party, just as it will be for Labor and the Coalition. Bill Shorten had already been exploiting her closeness to the government.




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As much as the Senate is unpredictable, this does look like the end of the government’s chances of getting its company tax package through parliament before the election.

Senate leader Mathias Cormann, the government’s chief negotiator, said he hoped “that this is not the last word” but admitted “it might well be that we won’t ever get there”.

Once again, Shorten has had a lucky break. The tax cut for big companies, which Labor has strenuously opposed, is still on the political agenda. If the Senate had passed it, Labor would have a diminished target.

It also remains on the books. Admittedly the cost is way into the future, but in these times when parties like to talk in terms of a decade, those notional future dollars are useful to Labor.

Also, if the package isn’t passed, Labor doesn’t have to cope with the question: how can you be sure a Shorten government could persuade a post-election Senate to repeal the cuts?

Most immediately, the opposition on Tuesday was making merry with questions about what “secret deal” the government had with Hanson to try to get the company tax cut through.

A Senate estimates hearing saw an angry clash between Labor’s Senate leader Penny Wong and Cormann, when Wong pursued whether the government was willing to meet Hanson’s various demands. As she went through these, Cormann retorted “I know that you always like channelling Senator Hanson”.

Wong, of Asian heritage, responded ferociously: “Don’t tell me I channel Pauline Hanson. I find that personally offensive. I can tell you what happened to me and my family and people like us, when she stood up in the parliament, possibly before you were here, saying Australia was in danger of being swamped by Asians. I will never do anything other than fight her.”

Cormann accused Wong of “confected outrage”; Wong countered “How dare you!”.

But a few hours later the two had made up.

Wong tweeted: “I will never do anything other than stand up to Pauline Hanson and her views, but I know Mathias is one of the decent people in this Government and accept his assurance he did not mean to cause offence.”

Cormann replied: “While we are fierce political competitors, I value the fact that we always aim to engage in the political contest professionally and with courtesy and mutual respect.”

It’s notable how much genuine respect Cormann commands in a parliament characterised by the lack of it.

Hanson went out of her way to stress she wasn’t blaming Cormann for anything – “his colleagues and the government” had let him down, she said. She told her news conference, “I know he’s devastated”, and she’s said to be genuinely upset that she’s left him in the lurch.

The government says that if there’s not a new turn of Senate fortunes, it will take the company tax policy to the election.

Although some argue the measure should be ditched, which is the superficially attractive course, that would potentially bring fresh difficulties. Not only would it open a brawl with business, but it would undermine the economic argument the government has been making for two years. Killing an albatross can be a dangerous business.




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It would, however, be popular with the public. Tuesday’s Essential poll reported that when people were asked which in a list of measures they would support to cut government spending, the top item nominated (on 60%) was “not providing company tax cuts for large business”.

The Essential poll brought mixed news on the tax front for the government.

Asked to choose between the budget’s income tax plan and the alternative outlined by Shorten in his budget reply, Labor’s plan was preferred by 45% to 33%. On the other hand, Labor and the Coalition were equal (on 32% each) when people were asked which party they trusted most to manage a fair tax system.

The ConversationParticularly interesting was the poll’s voting figure. The two-party Labor lead has now narrowed to 51-49% (compared with 52-48% in the last poll). This is the closest result since late 2016, and in line with the most recent Newspoll. It reinforces the point that the contest is tightening.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Don’t give anyone a tax cut: Greens


Michelle Grattan, University of Canberra

The Greens are standing out against the bipartisan consensus that tax cuts are needed for middle and lower income earners.

They are ruling out supporting all the budget’s tax relief, and say they are also opposed to the package of larger cuts the opposition has proposed, which would be confined to people in the lower and middle income ranges.

Instead, the funds should be spent on services, the Greens say.

The Coalition tax package will be a focus of this parliamentary fortnight, which sees the House of Representatives sitting and the Senate holding estimates hearings.

The legislation will be passed in the House, while estimates will be used by the opposition to seek the annual cost in the latter years of the seven-year plan, which the government has so far declined to provide. Treasury is before the estimates hearings next week; the Prime Minister’s department is up this week.

The opposition has submitted ahead of time a list of detailed questions about the tax package to try to prevent the delay of answers by officials asking for questions to be put on notice.

Labor supports the first stage of the three-part plan, is vague about the second stage, but has expressed opposition to the third stage, which flattens the tax scale and favours high income earners.

The government says it will not split the bill. It is not clear whether the opposition would vote against the legislation if the government holds firm, or whether the government would be flexible if pushed.

The shadow cabinet meets on Monday night, when the legislation is set to be discussed.

Labor’s alternative tax cuts, announced in Bill Shorten’s budget reply, would be confined to those on incomes up to about $125,000.

While the immediate concentration is on the future of the government’s legislation, the uncertainty of a post-election Senate also raises the issue for Labor of whether an ALP government could get its legislation through.

The Greens said in a statement that the government’s proposed income tax cuts were just a bribe to get the massive company tax cuts passed. People on the minimum wage wouldn’t even see $4 a week, while the wealthiest would benefit the most.

“Both parties’ plans will worsen inequality, and see us lose vital revenue for the essential services people rely upon,” the Greens said.

Greens leader Richard Di Natale said with inequality rising, reinvestment in public services should be the priority.

“For years, politicians have been telling Australians that the budget doesn’t have money to properly fund our public schools, build a world-class NBN, or take action on climate change,” Di Natale said.

“Yet when an election is rolling around both old parties are giving away cheques like a breakfast TV show trying to increase their ratings.”

“This reckless tax auction is nothing more than a distraction from the millions of dollars stripped from our schools, hospitals and social safety net over the past decade.

The Conversation“While Turnbull is busy squabbling with Labor over how much they want to rip out of Australia’s institutions, the Greens are proud to stand up for Medicare, our public schools and hospitals and the environment”.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.