The budget’s tax cuts have their critics, but this year they make fiscal sense



AAP/Lukas Coch

Richard Holden, UNSW

This year’s budget is something of a play in two acts. Act one involves large economic stimulus to help plug the hole in output generated by the coronavirus pandemic. Act two tries to set Australia up for a bounce back in economic growth and employment that involves more than just waiting for the pandemic to end.

The headline figures that will rightly garner much attention are the $213.7 billion deficit for 2020-21—representing 11.0% of GDP – and the increase in net debt to 43.8% of GDP by 2023-24.

Tax receipts are down, but of course spending has rocketed up to $677.4 billion for 2020-21, compared to a projection of $514.5 billion for that period at the last budget.

The massive JobKeeper wage-subsidy program, the coronavirus supplements to various welfare payments, and a number of smaller schemes to encourage building, hiring of apprentices, and boosting manufacturing all add up to an unprecedented boost in government spending.

There is room for debate about the structure of these programs and even whether they are large enough, but they are basically sound as fiscal mitigation.

Tax cuts and their critics

Much was made in the leadup to the budget about the possibility of bringing forward the already-legislated “phase 2” and “phase 3” personal income tax cuts, due to begin on July 1 2022 and July 1 2024, respectively.

Phase 2, which involves raising the income threshold where the 37% marginal rate kicks in from $90,000 to $120,000, has been brought forward to this fiscal year. Phase 3, which abolishes the 37% bracket altogether, letting the top marginal rate of 45% kick in at a new $200,000 threshold will have to wait until 2024, as scheduled.




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Critics of such cuts make two main arguments. The first is that the tax cuts are “unfair” because people on higher incomes get more of them. The second is that the cuts are bad economics, because higher-income households just save the tax cuts, and what we need right now is lots of spending.

Hand-to-mouth consumers

There is, indeed, a compelling case for putting more money in the hands of those who will spend it. Household consumption accounts for nearly 60% of GDP, and during recessions such consumption takes a pounding. 2020 in Australia is no exception.

That said, there is a widespread assumption – more like an article of faith, really – that those at the lower end of the income distribution will spend any temporary income they receive. And this article of faith has a corollary: only those at the bottom of the income distribution will spend such temporary income.

This leads folks to conclude there is downward sloping relationship between income and spending of government stimulus – the lower one’s income the more one spends.

But, as an empirical matter, this just isn’t true.

As economists Greg Kaplan, Giovanni Violante and Justin Weidner have pointed out, Australia has an unusual composition of “hand-to-mouth” consumers – that is consumers who spend all of their available resources every pay period because they have relatively little liquid wealth compared to their monthly expenses.




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First, we have many fewer such people than countries like the United States, United Kingdom, or Canada – a little under 20% of the population. Second, and more strikingly, most of the Australian hand-to-mouth consumers – 90% of them – are wealthy. That is, they have a relatively large amount of total wealth – things like real estate assets and superannuation accounts.

Only 2.7% of Australian consumers are “poor, hand-to-mouth consumers”.

Notice this shatters the idea of a downward sloping income-gradient to spending. People across the income distribution spend stimulus payment.

Now, you might not feel too bad for a household with a good amount of equity in an expensive home and solid superannuation balances, but with large expenses like a big mortgage payment and private school fees. Fair enough. But that doesn’t mean they won’t spend additional income.

The effect of the tax cuts

As it stands, those earning $40,000 a year will pay $1,060 less tax this year than in the 2018 fiscal year. Those earning $60,000 will pay $2,160 less, and those earning $100,000 and above will pay around $2,500 less.

As a stimulus measure that’s far from crazy.

And as a growth-enhancement measure the phase 2 and 3 tax cuts make a lot of sense. Taxing labour income tends to lead to people working less. That’s less economic growth, less personal income, less tax, and less spending.

The exact magnitude of this – what economist call labour-supply elasticities –varies by type of worker and on the exact nature of the tax schedule. But as Michael Keane and Richard Rogerson have noted, these effects are large in the aggregate.

Boosting the economy now and in the future

The economic problem we have been facing since March has been filling a massive drop in economic output. That will remain the central problem unless and until we have a widely-deployed vaccine.

But we cannot wait to tackle the supply side of the economy until after the immediate problems have been addressed. This budget takes a small step in that direction by bringing forward the phase 2 tax cuts. By not bringing the phase 3 cuts forward the government avoids a political fight, but risks waiting too long to begin the task of serious tax reform which is long overdue.The Conversation

Richard Holden, Professor of Economics, UNSW

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

Top economists back boosts to JobSeeker and social housing over tax cuts in pre-budget poll



Wes Mountain/The Conversation, CC BY-ND

Peter Martin, Crawford School of Public Policy, Australian National University

Overwhelmingly, Australia’s leading economists want the budget to boost social housing and the JobSeeker unemployment benefit rather than bring forward personal income tax cuts.

The 49 eminent economists who responded to Conversation-Economic Society of Australia pre-budget survey were asked to rate 13 options in terms of “bang for the buck” – effectiveness in boosting the economy over the next two years.

Among the options offered were boosting JobSeeker (previously called Newstart), wage subsidies beyond the expiry of JobKeeper, one-off cash payments to households, big infrastructure spending, bringing forward the personal income tax cuts, and company tax cuts.

The options were selected by a committee of the central council of the Economics Society and were presented to each surveyed economist in a random (shuffled) order.

The economists surveyed are Australia’s leaders in the fields of microeconomics, macroeconomics, economic modelling and public policy. Among them are former and current government advisers, former heads of statutory authorities, and a former member of the Reserve Bank board.

Each was asked to nominate the four most effective options for boosting the economy.



Economic Society of Australia/The Conversation, CC BY-ND

The most popular option, endorsed by 55% of those surveyed, was boosting spending on social housing.

Monash University econometrician Lisa Cameron said the budget provided an unusual opportunity to fix things for the long term while boosting the economy.

Social housing would leave us with something worthwhile (as did the school hall building program during the global financial crisis) in addition to providing work for the building industry. Alleviating homelessness would be a lasting benefit.

If it goes to the unemployed, it will be spent

The second most popular option, endorsed by 51%, was permanently boosting JobSeeker, previously known Newstart. The temporary boost in the A$282.85 per week payment was wound back last week and will end in December.

Melbourne University economist John Freebairn pointed out that with no real increase in Newstart since 1993 and many on it in demonstrable poverty, every extra cent spent on it will be spent rather than saved.

Supported by fewer than half of those surveyed, but third most popular at 45%, was more funding for education and training.




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Flinders University labour market specialist Sue Richardson said education was
labour-intensive, which would help with employment, and would assist young people severely hit by the pandemic to get the skills they would need to get jobs rather than stay unemployed.

Matthew Butlin, who heads the South Australian Productivity Commission, said the decimation of income from student fees means universities will have less money to subsidise research. There was a case for more direct funding of university research in the form of competitive grants for projects with practical applications.

The fourth most popular option was infrastructure spending, supported by 41%.

Why not a Hoover Dam, a new Opera House?

Many made the point that the projects chosen would have to be worthwhile in their own right, and feared this might not be the case. Others looked to big “nation building” projects along the lines of the Hoover Dam in the United States which was built during the Great Depression and employed 21,000 people.

“Why not building a massive dam in Australia? Why not building a new Sydney Symphony Orchestra building like the Berlin Philharmonie? Why not expand the National Parks? Why not building green libraries all over Australia?,” asked Sydney University’s Stefanie Schurer.




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Done right, like the Sydney Harbour Bridge which was completed during the Great Depression, big imaginative projects could leave us with something valuable.

There was less enthusiasm for continued wage subsidies (35%) and an expanded investment allowance (29%) with University of NSW economist Gigi Foster saying investment allowances could be replaced with income-contingent loans along the lines of the Higher Education Contributions Scheme.

That way businesses could borrow to invest, with an obligation to repay if the investment paid off.

If it goes on tax cuts, it might not be spent

The same approach was taken by some to funding higher quality aged care (supported by 31%) and increasing subsidies for child care (29%).

Economic modeller Warwick McKibbin suggested funding child care through income-contingent loans (repayable on the basis of income) rather than subsidies.

Bringing forward the leglislated personal income tax cuts as proposed by the government and cash payments to households were relatively unpopular, supported by 20% and 16%.

Saul Eslake said that while he agreed with the treasurer that early tax cuts would “put money in people’s pockets”, there was no guarantee the high earners “into whose pockets most of that money would be put”, would take it out and spend it in sufficient quantity.




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Eslake suggested that rather than supporting households with cheques as happened during the financial crisis, households could be handed time-limited tradeable vouchers that could be spent in areas hurt by restrictions, such tourism and the arts, or used for other worthwhile purposes such as childcare or reskilling.

Among those who did support bringing forward the tax cuts was John Freebairn, who said that although presented as cuts, what was proposed would do little more than restore what had been lost to bracket creep, keeping income tax steady.

Company tax cuts an also-ran

Company tax cuts, once touted by former prime minister Malcolm Turnbull as the key to jobs and qrowth garnered minimal support, being backed by just six of the 49 economists surveyed.

The least popular option, backed by only two economists surveyed, was government support for cleaner fossil fuels such as natural gas, as the prime minister is promising. In contrast 13 (26%) backed support for renewable energy.


Individual responses

The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

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

Post-COVID, there’ll be less of a reason to cut company tax than before



Andrey Bayda/Shutterstock

Janine Dixon, Victoria University and Jason Nassios, Victoria University

They’re at it again, pushing lower company tax as a way to resuscitate the economy.

The arguments were well ventilated at the time the government pushed for company tax cuts, failed to get support in the Senate, and then abandoned them in favour of personal income tax cuts in the leadup to the last election, declaring “we’re not coming back to the company tax cuts”.

The new argument is that they’ll help get us out of recession, but in the same sense that Leo Tolstoy observed that while all happy families resemble each other, each unhappy family is unhappy in its own way, each recession is different.

This recession is the result of the forced hibernation of large parts of the economy in order to reduce the spread of COVID-19.

This recession is about households

The first priority will be household spending.

When the time is right, it will be households that hold the key to reversing the effects of hibernation.

Australian households account for 60 cents in every dollar spent in the Australian economy, and they accounted for a disproportionate share of the fall in GDP in the first half of 2020.

With shops and cafes shut, the need for investment in new facilities is low.

The first step to recovery has to be reopening the businesses that exist and are closed or are operating well below capacity.

This means getting households spending, supported by stimulus.

Company tax cuts benefit foreigners

Our modelling in 2018 showed that while a company tax cut would stimulate investment and economic activity, in both the short run and the long run the benefits would accrue to foreign investors rather than to Australians.

In theory, all investors should respond positively to a lower company tax rate, but under Australia’s system of dividend imputation local investors are shielded from company tax, meaning the cuts matter most for those overseas.

Those overseas investors would be likely to invest more in Australia after a company tax cut, boosting Australia’s capital stock (buildings and equipment) making workers more valuable, pushing up wages.




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While sold as a plus, higher wages would make it harder for locally-owned businesses. Our modelling found the biggest losers would be in the retail, health care and education industries.

With foreign investors paying less tax, the local population would bear the consequences of spending cuts or higher taxes, broadly negating the benefit of higher wage growth.

COVID makes the case weaker

As well, much of the company tax cut would be ‘wasted’ providing a windfall gain to foreign investors already in Australia.

The case for a company tax cut is now weaker, not stronger, than it was in 2018.

Budget deficits will reach new highs in 2019-20 and 2020-21. It is the right policy for the circumstances we are in, but it will leave future governments with difficult decisions about budget repair.




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When the economy is strong enough, taxpayers could face deficit repair levies, bracket creep, new taxes, and the broader application of existing ones.

It is for this reason that the International Monetary Fund warned against knee-jerk tax changes during the crisis and said:

a premium should be placed on measures that move the tax system in desirable directions – specifically: refrain from tax holidays; keep environmental taxes; do not cut corporate income tax rates

If the company tax rate was to be cut now, it would be difficult later to restore it to where it was when it was needed.

The smaller tax contribution by foreign investors would mean more of the adjustment would fall on us.

And investors may well find us increasingly attractive

Another fresh reason to be cautious about a cut in company tax is that Australia’s relative attractiveness as an investment destination might well improve.

We have suffered, but most of the world has suffered the same or worse.

Deciding where to invest their next dollars, investors might well form the view that our response to the pandemic has been better than those of other destinations such as the United States, Britain and Brazil.




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One of the benefits of being a peaceful, well-managed resource-rich Western democracy is that when things are bad elsewhere foreign investors look here.

We might continue to find (as we have in the past) that we get all the foreign investment we can handle with our company tax rate as it is.The Conversation

Janine Dixon, Economist at Centre of Policy Studies, Victoria University and Jason Nassios, Senior Research Fellow, Centre of Policy Studies, Victoria University

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

Vital signs: we need those tax cuts now, all of them. The surplus can wait



If you’re going to stimulate the economy, it’s wise not to wait.
Shutterstock

Richard Holden, UNSW

In an enormous week for economic news at the start of the month, parliament passed the government’s three-stage personal income tax plan, and the Reserve Bank cut official interest rates to an unprecedented low of 1%.

It happened against the backdrop of a flagging economy in dire need of stimulus.

As the bank cut rates to a record low, its governor Philip Lowe again warned about the waning power of rates (monetary policy) to lift the economy.

At the Darwin community dinner after the board meeting he said:

Monetary policy does have a significant role to play and our decisions are helping support the Australian economy. But, we should not rely on monetary policy alone. We will achieve better outcomes for society as a whole if the various arms of public policy are all pointing in the same direction.

Lowe and many others – including yours truly – have repeatedly pointed out that spending on physical and social infrastructure can do what lower rates can’t do well – boost the economy while lifting its productivity. So, too would other productivity-enhancing reforms, particularly in the labour market.

And, of course, the government’s tax cuts will also stimulate the economy when they come into effect.

With tax cuts, timing’s the thing…

The obvious problem is that much of stimulus from those tax cuts will happen years from now, rather than today.

What the government should have done was insist on enacting all three stages of their tax plan immediately. Not staggered over several years, not in 2024-25. Now.

That would have, of course, pushed the budget into deficit in the short run, and that would would have run counter to the government’s narrative about being responsible economic managers.

But how responsible is it to prioritise one’s own political brand over the economic health of the nation?




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Let’s not forget where the timing of the government’s tax plan came from. 2024-25 is outside the budget’s so-called “forward estimate” period and thus the impact on the deficit or surplus projections is not apparent.

It was the same rationale that underpinned the glacial, decade-long pace at which the government’s “enterprise tax plan” was to move to a 25% company tax rate. And it is the same set of dodgy accounting tricks that Wayne Swan was a master of for everything from health to education spending commitments.

…and the timing could be immediate

Productive infrastructure spending is hard to enact quickly. Spending on social infrastructure like education and training has a long lead time.

And structural reform of the industrial relations system might is probably the hardest and longest of all to put in place.

They are real constraints.

The Reserve Bank faces another, the so-called “zero lower bound” of conventional monetary policy and the complexities and uncertainties of unconventional policies such as quantitative easing.




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But a government which won a mandate for its tax policies, and who frankly has the Labor opposition in a tailspin, could have insisted on all three stages of the tax cuts immediately.

The only thing standing between the economy and the aggressive fiscal stimulus it needs is the government’s obsession with balancing the budget regardless of the circumstances.

We’re not in the best of times

Don’t get me wrong, I think debt and deficits most certainly do matter. The government deserves credit for chipping away at the structural budget deficit, and we shouldn’t be running deficits in good economic times.

But we’re not in good economic times. We’re standing on the precipice of the first recession in nearly three decades. We’re looking at highly uncertain global conditions, domestic economic growth that has slowed to a trickle, sluggish wages growth, persistently high underemployment, and even the possibility of Japanese-style deflation.

The irony is that if, with the failure to enact sufficiently bold stimulus, we do tip into a recession, the red ink will flow all through the budget. Unemployment benefits and welfare payments will rise, personal and corporate income receipts will fall, GST revenue will drop. And young people who enter the labour market during a recession will suffer for years to come.

The downsides of not enacting sufficient fiscal stimulus far outweigh whatever benefits there are of a glide to path to budget balance while avoiding a recession.

It’s certainly not the time for hand-wringing

Coming back to Lowe’s admonition that we need the “various arms of public policy…pointing in the same direction”, here’s where we currently stand: The bank has acted, but far too late. For years it told us that 5% unemployment was as good as it could get long-term, to be patient and to wait for higher wage growth and inflation.

It’s been a mere five weeks since Lowe stopped impersonating Charles Dickens’ character Wilkins Micawber, who was fond of saying “something will turn up”.




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Now the treasurer Josh Frydenberg is giving us his version of the same routine. On one hand he says personal income tax cuts are crucial to boosting employment and spending. On the other hand, he says we’d better wait.

The Australian economy can’t afford to wait for aggressive stimulus. The government has shown more concern for its political brand than for our economic health.

It isn’t what a responsible steward would do.The Conversation

Richard Holden, Professor of Economics, UNSW

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

Morrison’s $158 billion tax plan set to sail through Senate after deals with crossbenchers


Michelle Grattan, University of Canberra

The Morrison government will finish the first week of the new parliament with its election centrepiece – the $158 billion, three-stage tax package – passed into law.

The first stage of the tax relief – in the form of an offset for low- and middle-income earners when people submit their returns – will be available as soon as the Tax Office makes the necessary arrangements over the next few days. Getting the legislation through this week means there is only minimal slippage from the July 1 start date that was promised in the budget.

The numbers fell into place with Tasmanian crossbench senator Jacqui Lambie declaring she would vote for the package. She had negotiated with the government on her demand that it forgive the $157 million social housing debt her state owes the Commonwealth. This would save Tasmania $15 million a year, which Lambie wants used to deal with issues of homelessness and social housing.

Lambie said: “The good will is there and they know that we’ve got housing problems down there.”




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While Finance Minister Mathias Cormann, who had said there would be no horse-trading over the package, was publicly coy about the deal, Lambie is confident it will be delivered.

She said some details still had to be sorted out.

What I don’t want to be doing is rushing out saying here’s the money and that’s it. We want to make sure that that money is targeted […] we’re still dealing on good faith. And I look very forward to that over the next four to six weeks.

Cormann told Sky News: “Senator Lambie has been a very forceful advocate.

She has raised issues with us. We are very happy to work through these issues with her. When we are in a position to make further announcements down the track we will.




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The other crossbench votes needed for the package come from independent Cory Bernardi and the two Centre Alliance senators.

Centre Alliance extracted a deal over action on gas prices.

It said in a Thursday statement that it had “worked with the government on both short- and long-term reforms to deal with gas market concerns.”

The government would announce the full package in coming weeks, it said.

It would include

changes to the Australian Domestic Gas Security Mechanism (ADGSM) to deal with current pricing, market transparency measures, measures to deal with the monopoly nature of East Coast gas pipelines and longer term measures to ensure future gas projects deliver surplus supply to the Australian market.

The gas agreement, canvassed publicly in recent days, has caused some blow-back from the industry.

Faced with the inevitability of the tax package passing, Labor said it would continue to pursue its attempt to split the package and then consider its options.

It is likely not to oppose in the final vote.




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Michelle Grattan, Professorial Fellow, University of Canberra

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

Grattan on Friday: Those tax cuts test Albanese and provoke Hanson


The proposed 3 stage tax plan will cost $158 billion.
Shutterstock

Michelle Grattan, University of Canberra

As hissy fits go, it was a beauty. Pauline Hanson was very cross indeed. Senate leader Mathias Cormann hadn’t called her, even though he was reportedly negotiating on the government’s $158 billion package of income tax cuts.

Venting on Sky on Wednesday night, Hanson said: “I don’t think he’s got the guts to pick up the phone and actually talk to me. And to turn around and say that he’s negotiating with crossbenchers is not the truth, because he’s not negotiating with me”.

She went on to rail about the Liberals preferencing One Nation below Labor, doing “grubby deals” with Clive Palmer and trying to destroy her.

The three-stage 10-year package, which promises an extra tax offset for low and middle income earners, is the big game in town for the first days of the new parliament, which opens the week after next, and it’s causing some grief.




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Despite the government’s confident words during the election campaign, the Tax Office has declined to pay the offset of up to $540 until the legislation is passed. This means the July 1 deadline from when the offset was supposed to be available will be missed. (Although people will get from July 1 the tax cut in the pipeline from last year’s budget.)

If the tax legislation is passed quickly, a few weeks’ delay for the offset is no big deal, especially as many people won’t be putting in their tax returns for a while. But the pressure on the government to deliver the first stage of its plan ASAP – not least because the economy needs the stimulus – reduces its ability to hold out indefinitely on its insistence it won’t split the package to accommodate objections to the later cuts.

Labor is in even more of a bind. It is happy to tick off the first stage – worth $15 billion – but has yet to decide its position on stages two (costing $48 billion and starting 2022-23) and three (costing $95 billion and commencing 2024-25).

Its objections are particularly to the last stage, which delivers cuts for higher income earners. Both the later stages come after the next election, due early 2022.

Those urging Labor should try to block at least stage three argue, apart from the equity issue, that mounting economic uncertainty makes it irresponsible to lock in such big tax cuts out in the “never never”.

On the other hand, a strong case can be made on grounds of principle and practicality for Labor to wave the whole package through.

The question of when a party or politician has a “mandate” is vexed.

On one view an opposition can claim it possesses a mandate to stay faithful to positions it advanced before an election even after it has lost that election.

But when the Morrison government went to the polls with the tax package as its prime policy, it does seem to have a strong case to say the parliament should pass it.

The same point would have applied if Bill Shorten had won. He would have had a mandate for his proposed changes to franking credits and negative gearing – both opposed by the Coalition.




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It doesn’t help maintain faith in the political system, or in election promises, for parties to try to govern from opposition, despite the Senate’s voting system sometimes facilitating this. Voters should be able to expect that major election policies of the winning side are implemented (perhaps with some alterations at the edges by parliament).

It is another matter when, as happened with the Abbott government’s 2014 budget, big new controversial initiatives are brought in soon after the election campaign, during which they were not flagged.

The practical reason against Labor going to the barricades on the tax package is that as it regroups, there is little to be gained by taking on this particular battle, especially when it is trying to reposition itself as appealing better to “aspirational” voters and leaving behind language attacking the “top end of town”.

Labor might be right that the proposed long term tax cuts could look irresponsible later, but if so, that is a fight to be had at the next election, when the ALP could highlight doubts it had previously registered.

There are divisions in Labor about what to do. Victorian MP Peter Khalil this week said if the government won’t split the package, Labor should vote for it all. Anne Aly, a backbencher from Western Australia, expressed concern about the package’s implications against a darkening economic outlook. The ALP has asked the government for more information. Anthony Albanese is consulting within the party before shadow cabinet decides the position it takes to caucus.

While the government is focusing the rhetorical pressure on Labor, it has an eye to the alternative route – to get the package through via the crossbench.




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For Cormann, the new Senate is easier than the last, partly because the non-Green crossbench has been slashed at the election.

To pass legislation opposed by Labor and the Greens the government needs four of the six non-Green crossbenchers. These include two from Pauline Hanson’s One Nation, two from Centre Alliance, South Australia’s Cory Bernardi, and Tasmania’s Jacqui Lambie.

Bernardi will vote with the Coalition. He has said he wants to help the Morrison government as much as possible, and on Thursday he announced he is winding up his Australian Conservatives party. It’s not clear whether he’ll seek to rejoin the Liberals, from whom he defected in 2017, or even stay in the parliament.

Cormann has been in discussion with Centre Alliance about their push for lower gas prices, and an agreement on some action appears likely. While this deal is formally separate from the tax package, he and they both have that front of mind.

This would leave one vote to be collected.

Lambie refuses to comment on her position. Hanson said earlier this month she was “not sold” on the current package and “therefore not likely to support the measures” – and proposed some of the funds be used for a coal-fired power station and a water security scheme.

After Wednesday’s outburst, Cormann was (of course) on the phone to her at crack of dawn Thursday. On her account, he said: “I’m not negotiating with crossbenchers with this at all. We have our three stages. We’re going to pass that no matter what”.

The government aims to keep the heat on Albanese. By the same token, if the crossbench has to come into play, Cormann won’t want a repeat of last term, when he couldn’t muster the numbers to deliver tax relief to big companies.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.

Frydenberg declares tax package must be passed ‘in its entirety’


Michelle Grattan, University of Canberra

The government’s tax relief package is shaping up as the first test of incoming opposition leader Anthony Albanese, with Treasurer Josh Frydenberg declaring on Friday it must be supported “in its entirety” when put to the new parliament.

But Albanese has only guaranteed support for the first tranche. As for the later cuts for higher income earners, “we will consider that,” he said on Friday.

But let me tell you, it is a triumph of hope over experience and reality that the government knows […] what the economic circumstances are in 2025 or 2023, in the middle of the next decade.

Appearing with Albanese on the Nine Network, Trade Minister Simon Birmingham said:

Albo, it would be remarkable if your first act as leader of the opposition was […] to oppose a long term package of tax relief – that would show a real tin ear for the Australian people”.

In an interview with The Conversation, Frydenberg refused to be drawn on what the government would do if unable to get the whole bill through.

It would, however, be hard for it to avoid splitting the bill – to hold out would deny the immediate relief pledged in the April budget.

All or nothing

Nor could Frydenberg say when parliament will meet to consider the legislation, although the government has effectively conceded it will not be in time for the promised July 1 start of the additional tax offset promised in the budget. (A smaller offset from last year’s budget will be paid from then.)

But Albanese said the tax cuts could be passed in time for July 1, because it would only need a couple of hours of sitting. “We’ll do a deal. I can do that. One speaker a side, and Bob’s your uncle.”

Frydenberg said Reserve Bank Governor Philip Lowe had highlighted the positive impact the tax cuts would have on household incomes.

“Let’s too not forget that $7.5 billion will flow to households in the coming financial year, as a result of these tax cuts,” Frydenberg said.

Tax cuts as good as rate cuts

“This benefit to households and the economy is equivalent to two 25 basis point interest rate cuts and is one reason why growth and household consumption is projected to pick up,” he said.

“The tax reforms we are putting to parliament are not just providing immediate relief, but leading to long term structural change. This will tackle bracket creep and reward aspiration.

“Earning more is nothing to be ashamed of and should be encouraged not punished. Rewarding aspiration is in the Coalition’s DNA and will be a fundamental driver of our policies in government.”

In his assessment of the economic outlook, Frydenberg had two messages.

He said in his discussions with some of Australia’s biggest employers, “I’ve been buoyed by their confidence and their desire to work with the government, to support continued economic growth and job creation”.

Headwinds worsening

But the economy “faces significant headwinds. Trade tensions between the United States and China have increased, with the potential to negatively impact global growth.

“Were there to be another round of US tariff increases, the potential for which has been flagged publicly, the proportion of global trade covered by recent trade actions would double from 2% to 4%.”

Also, flood, drought and fires had taken a toll and the housing market slowdown was hitting dwelling investment and having an impact on consumption.

The challenges made the government’s agenda for growth, including tax relief, so important and time critical.

Asked whether the “headwinds” faced by the Australian economy were stronger than at budget time, when he also spoke of headwinds, Frydenberg said: “I think the tensions between China and the US have increased”.




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Frydenberg spoke with the US Treasury Secretary Steve Mnuchin this week and the two will meet in Japan at the G20 finance ministers meeting in a few weeks. Frydenberg stressed in the conversation the importance of free trade to Australia and its wish to see disputes resolved as amicably as possible.

Asked whether, if the economy deteriorated further, the government would be willing to live with a smaller surplus next financial year than the $7.1 billion projected in the budget, Frydenberg said, “that’s the amount that we’re committed to”.

He would not be drawn on the signal this week from Lowe that an interest rate cut was coming.

The Treasurer said the current unemployment rate of 5.2% reflected “strong labour market performance”.

While there are no plans for an overhaul of federal-state relations by the re-elected government, Frydenberg said he would work closely with the states on infrastructure and managing population.




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Cutting interest rates is just the start. It’s about to become much, much easier to borrow


He said he would respond fully to the Productivity Commission report on superannuation, although he had not set a date for this.

“The issues that were raised through the Productivity Commission report which we need to have a good look at are about the unintended multiple accounts and the under-performing funds,” he said.

“The royal commission [on banking] recommended having a single default [account], which we accepted and Labor accepted, so we’ll go ahead and do that”.




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Grattan on Friday: Shocked Labor moves on – but to what policy destination?


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.

Potentially unaffordable, and it still won’t fix bracket creep. The Coalition’s $300 billion tax plan assessed



File 20190408 2927 lwoiiu.jpg?ixlib=rb 1.1
The budget tax cuts aren’t tax reform, and probably can’t be paid for over the longer term.
Mick Tsikas/AAP/Shutterstock

Danielle Wood, Grattan Institute; Kate Griffiths, Grattan Institute, and Matt Cowgill, Grattan Institute

The big surprise in last week’s budget was the size of new income tax cuts – A$158 billion over a decade, in addition to the A$144 billion already promised in last year’s budget.

A lot of the plan doesn’t take effect until 2024-25, so it’s easy to dismiss as tax cuts on the never-never. But given it’s a central plank of the government’s campaign for re-election, it deserves closer scrutiny.



Grattan Institute

The plan comes in three stages.

The major part of stage 1 is the Low and Middle Income Tax Offset – giving everyone earning less than $126,000 a cheque in the mail come July and then for the following three years. Stage 2 (2022-23) would lift the top threshold of the 19% and the 32.5% brackets. The biggest cuts would come in stage 3 (2024-25) when the government removed the 37% bracket and cut the 32.5% rate to 30%.

Everyone earning between $45,000 and $200,000 would face the same 30% marginal tax rate.


2019 Budget infographic

Unsurprisingly, in absolute terms the biggest beneficiaries would be high-income earners. More than half the benefit would go to the top 20% of earners, those with taxable income over $87,500 a year.

But to better understand what the plan would do to the progressivity of the system, we need to consider what would happen to rates without the plan.

Without change, the average tax rate would increase across the income distribution, as wage growth pushed people into higher tax brackets.

The plan would prevent some of that bracket creep by lowering future tax rates.

Most taxpayers would be better-off than without a change – but high-income earners would benefit the most.




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NATSEM: federal budget will widen gap between rich and poor


It goes part-way to addressing bracket creep for low and middle income earners. Someone in the middle of the income distribution would pay 3.6% more tax in 2029-30 than today, instead of 6.1% more without the plan.

But Australia’s highest earners – the top 15% of taxpayers – would escape bracket creep entirely, paying the same average tax rate or less in 2029-30 than today.



Grattan Institute

This result would be a shift in the proportion of tax paid at different points in the income distribution.

Middle earners, those earning between the third to top and the third to bottom ten percents of the income distribution, would pay a larger share of tax in 2029-30 than they do today: 23% compared to 20%.

But high-income earners, those in the top fifth of the income distribution, would pay a smaller share of tax: 65% in 2029-30 compared to 68% today.

It’s more a tax cut than tax reform

The government has been keen to sell the tax package as a “huge reform” because it removes an entire tax bracket.

It says flattening the tax scale would create a greater incentive for higher-income earners to work. But unlike earlier tax reform packages, there has been little in the way of clear articulation or modelling to demonstrate that this would be the case. And there are reasons to doubt that it would be the case.




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


The people who would benefit most from the tax reform would be in the top 6% of the income distribution in 2024-25. Barring major changes to gender work patterns in the next five years, they would be disproportionately men, working full time. But as the Henry Tax Review pointed out, the people who are the most responsive to changes in effective tax rates are second-earners (mainly women) working part-time.

Proper reform of the income tax system would lower the economic barriers to second-earners working more: the increase in tax, the cuts in family and childcare benefits and higher childcare costs that accompany working more.

And it might not be affordable

The budget numbers point to a decade of surpluses, exceeding 1% of GDP by 2026-27, even with the tax cuts. But the surpluses rely on payments as a share of gross domestic product falling steadily over the decade, from 24.9% of GDP today to 23.6% by 2029-30.

Achieving such a reduction would require significant cuts in spending growth across almost every major spending area, during a period when we know that an ageing population will increase spending pressures, particularly on health and welfare. The Parliamentary Budget Office says ageing will add 0.3% of GDP a year to spending by 2028-29.

The approach marks a change since the 2016-17 budget, when the government forecast that payments would grow as a share of GDP over the decade because of the ageing population. There have not been enough significant savings measures in the past three budgets to explain the turnaround. It appears to be more driven by assumption than by reality.




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


If we were to make the still-conservative assumption that spending remained merely constant as a share of GDP at 24.9%, the third stage of the tax cuts would push the budget back into deficit in 2024-25.

The bottom line

The pre-election tax package finally does something about bracket creep – but solves it only for the highest of earners.

It passes up the opportunity for more comprehensive reform. And most disconcertingly, it punches a sizeable hole in government revenue just at the time an ageing population will start to demand that more money be spent.




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What will the Coalition be remembered for on tax? Tinkering, blunders and lost opportunities


The Conversation


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

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

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


Michelle Grattan, University of Canberra

For the government this “election budget” is an exercise in juggling. On the one hand, it is throwing out voter bait. On the other, it is running hard on the theme of economic responsibility.

For the second budget in a row, there are highly generous tax cuts, amounting to A$158 billion over a decade. This is on top of the earlier $144 billion.

The government wants this election to be all about tax.

The tax cuts you will get, now and later. The “higher taxes” that Bill Shorten would impose – by cracking down on negative gearing and cash refunds for franking credits. And by claiming that Labor’s climate policy is a “carbon tax”.

A theme in Treasurer Josh Frydenberg’s speech was that the government was taking its initiatives “all without increasing taxes”.

Under the budget’s tax cuts, low- and middle-income earners would pocket up to $1,080 within weeks of the election – for families with a dual income, this amounts to $2,160.




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Tax giveaways in Frydenberg’s ‘back in the black’ budget


The government points out that its tax cuts are the most generous since John Howard’s time. But two things might be noted about this comparison. The 2007 tax package has since been much criticised for being irresponsible – and Howard did not win the election of that year.

Despite earlier speculation, the Coalition won’t try to rush any of the tax package – which includes a reduction in the 32.5% rate to 30% from July 2024 – through parliament this week.

The government wants to set up as much of a contrast between itself and Labor on tax as possible. Frydenberg told a news conference the tax bills were “a package” covering the immediate tax relief and the rate change. The government was asking the public “who do you trust?” to deliver lower taxes.

Finance Minister Mathias Cormann said: “We are just not prepared to haggle with the Senate in the next 24 hours.” It was up to the Australian people to back the government in, he said.

But in a game of bluff and counter-bluff on tax, Labor could simply match the immediate relief – which it did instantly.

This neutralises part of the tax argument, although the government can still highlight the contrast between its longer-term tax regime and Labor’s “higher taxing” agenda.

On economic responsibility, the budget’s boast is for a $7.1 billion surplus next financial year – the first surplus in 12 years. “The budget is back in the black and Australia is back on track,” Frydenberg told parliament, as he outlined the growth of surpluses to a total of $45 billion over four years.




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We can be sure that in the election campaign Labor will match or even better the budget’s surplus figures.

Shadow treasurer Chris Bowen has learnt from the experience of the last election, when the Labor program came in with a slightly worse fiscal bottom line over the forward estimates than the government’s. The difference wasn’t huge but it was enough to be a political handicap.

The budget’s economic projections seem credible enough, although there is the perennial question over its forecast for wages growth – 2.75% in 2019-20 and 3.25% in 2020-21.

The fact that early in the imminent election campaign the departments of Treasury and Finance produce a detailed economic outlook imposes a discipline on the pre-election budget. A government that tried to fiddle the forecasts would quickly get caught out.




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Frydenberg’s speech was notably sombre about the outlook for the economy, despite saying the fundamentals were sound.

“There are genuine and clear risks emerging both at home and abroad,” he warned, highlighting the cooling of the residential housing market and global trade tensions.

His words are a reminder of how quickly things can change – including the prospect of strong surpluses projected into the future. Good economic times suddenly turned bleak in the early days of the Rudd government, as a result of the global financial crisis.

The budget provided a nice reality check on the beat-up the government indulged in over the medevac bill. Remember all the hyperbole Scott Morrison sprouted, when he said he was going to have to spend more than $1 billion reopening Christmas Island?

The budget includes just $178.9 million to manage the transfer of people from Nauru and Papua New Guinea for medical treatment, $3.2 million to increase the police presence there and $3 million to reinforce the campaign to discourage people getting on boats.

The government says that if it is re-elected it will repeal the medevac bill and close the Christmas Island facility by July 1 – returning any people who have been transferred back offshore.

Questions to the office of Home Affairs Minister Peter Dutton this week about whether anybody had been transferred under the new legislation received the response that no comment was being made.

Morrison told his party room on Tuesday, before the budget, that three dates were available for the May election – May 11, 18 or 25. The general expectation is that he will announce the poll quickly. The budget might look benign, but the government does not want an extended period of Senate estimates next week which would facilitate picking it apart.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.

Tax giveaways in Frydenberg’s ‘back in the black’ budget


Michelle Grattan, University of Canberra

The Morrison government has delivered an election-launch budget with big personal income tax handouts to attract voters and a A$7.1 billion 2019-20 surplus to display its economic credibility.

The budget – the first brought down by Treasurer Josh Frydenberg – doubles the tax relief that average earners were due to receive within weeks, from $530 in last year’s budget to $1,080.

This outbids the relief that Labor promised last year. But the opposition immediately announced it would support the tax cuts that begin on July 1 “for working and middle-class people”.

“This is essentially a copy of what we proposed last year, and they are simply catching up to us,” Labor’s Shadow treasurer, Chris Bowen, and finance spokesman, Jim Chalmers, said in a statement.

“The Liberals are so out of touch that they’ve given a much smaller tax cut to two million Australians earning less than $40,000. Labor will fix this and give these working people the tax relief they deserve,” Bowen and Chalmers said.

Four things you need to know about the budget, according to The Conversation’s Business and Economics Editor, Peter Martin.



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People with incomes between $48,000 and $90,000 will be eligible for the maximum $1,080. About 4.5 million people will receive the full benefit.

In July 2022 the government will lift the top threshold of the 19% tax rate from $41,000 to $45,000

From July 2024 it will cut the rate of the middle tax bracket from 32.5% to 30% – leaving a rate of 30% between $45,000 and $200,000, beyond which it will be 45%.



The cost of the tax relief is $19.5 billion over the four-year forward estimates period and $158 billion over a decade.

Frydenberg told parliament: “The budget is back in the black and Australia is back on track.

“For the first time in 12 years our nation is again paying its own way.”

Earlier, in the government parties’ meeting, Scott Morrison told his MPs the available election dates were May 11, May 18 and May 25 and he would determine when the election would be in a short while.

The surplus of $7.1 billion is for the coming financial year. In the current year, ending June 30, the budget is expected to come in with a deficit of $4.2 billion.




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Iron ore dollars repurposed to keep the economy afloat in Budget 2019


The surpluses will build over time – projected to total $45 billion over the next four years. “Surpluses will continue to build towards 1% of GDP within a decade,” Frydenberg said. The government’s goal was to eliminate Commonwealth net debt by 2030 or sooner.

He said the government’s economic plan restored the nation’s finances without increasing taxes, strengthened the economy and created more jobs, and guaranteed essential services, while tackling the cost of living.

For the 2019-20 year, economic growth is forecast at 2.75% and wages are forecast to increase by 2.75%. Unemployment is expected to be 5%.

One major saving in a budget that avoids widespread cuts is changing the social security income assessment model, saving more than $2.1 billion over five years.

The change will simplify and automate the reporting of social security recipients through the Single Touch Payroll. From July 2020, recipients who are employed will report income that is received during the fortnight rather than calculating and reporting their earnings. The government says this will greatly reduce overpayments.

The budget anticipates a substantial amount of additional revenue – $3.6 billion through cracking down on tax avoidance by large corporations, multinationals and high-wealth individuals.

As the government flagged ahead of the budget in a series of specific announcements, the budget includes an extensive infrastructure program, which it says it has boosted to $100 billion over the decade.

Frydenberg announced a four-fold increase in the Urban Congestion Fund – from $1 billion to $4 billion.

The fund will include a $500 million Commuter Carpark Fund to “improve access to public transport hubs and take tens of thousands of cars off our roads”.

Budget measures also target small and medium-sized businesses with an increased and expanded instant asset write-off. The write-off will rise from $25,000 to $30,000 per item and be extended to businesses with a turnover of up to $50 million.

There would be a $525 million skills package, including the creation of 80,000 new apprenticeships in industries with skills shortages. Incentive payments to employers will be doubled to $8,000 per placement. New apprentices will also receive a $2,000 payment.

Ten new training hubs will be established connecting schools, local industries and young people in regional areas with high youth unemployment. The government is also promising $62 million to boost students’ literacy, numeracy and digital skills, as well as further funding to increase the participation of women and girls in science, technology, engineering and maths.

There is also $453 million to extend preschool education, enabling 350,000 children to have 15 hours of early learning a week in the year before school.



Responding to Labor’s promise to unfreeze the Medicare rebate, the budget provides $187.2 million over four years to reintroduce indexation to all remaining general practitioner services.

It offers $527.9 million over five years for the recently announced royal commission into violence towards and abuse of people with disabilities.

The budget contains a new $3.9 billion Emergency Response Fund to “ensure additional resourcing is available to support future natural disaster recovery efforts”.

A $100 million Environment Restoration Fund is to deliver “large-scale environmental projects”, including protecting the habitats of threatened species, the coasts and the waterways and cleaning up waste.

Frydenberg warned about the economic outlook, saying: “The fundamentals of the Australian economy are sound but there are genuine and clear risks emerging both at home and abroad.

“The residential housing market has cooled, credit growth has eased and we are yet to see the full impact of flood and drought on the economy. Global trade tensions remain.”

Bowen and Chalmers said: “Scott Morrison has delivered an election con, filled with the same Liberal cuts.

“This is a Budget from a government that has given up governing. There is no plan for wages, no plan to tackle power prices, no plan to address climate change, and no plan for the future”.

Business was basically positive. The Business Council of Australia described it as both “a strong and responsible budget that delivers a surplus, lowers personal income taxes and invests in jobs, health, education and infrastructure. This is the payoff for the community from spending discipline and hard work.”

The Australian Industry Group said the stimulus inherent in the budget “is a timely and welcome boost for a slowing economy at a time of wavering business and household confidence”. But it criticised the cut in migration.

The ACTU slammed the budget as failing the fairness test. “It’s a cynical attempt to buy votes, but Morrison and Frydenberg are giving with one hand and taking away with the other.”

The Brotherhood of St Laurence attacked the budget for failing to do for more for the disadvantaged, including providing no increase to Newstart.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.