The Parliamentary Budget Office (PBO) has just released a report on trends in Commonwealth taxation receipts. While supporting the expectations of a budget in balance by 2019-20, it exposes worrying trends in the balance of the burden of taxes in Australia. In particular, its analysis of trends in the composition of tax revenue identifies an increasing reliance on personal income tax.
The PBO shows that tax revenue from labour (mostly income tax) was 8.6% of GDP in 1971-72. By 2015/16, this had risen to 12.6% of GDP. Over the same period, tax collections from capital (mostly company tax) as a percentage of GDP was virtually unchanged, from 3.3% to 3.2% – although this increased noticeably during the “economic boom”, which ended when the Global Financial Crisis (GFC) hit in 2007.
Taxes on consumption (such a GST and excise duties) were 5.3% of GDP in 1971-72 and 5.7% of GDP in 2015-16. While the introduction of the GST in July 2001 raised consumption taxes temporarily, revenue from both GST and particularly excise taxes has been in decline as a percent of GDP since.
Figure 2 from the report shows these trends over the decades.
The main emphasis of the PBO report is on the period since 2001-02. The chart below shows the increased reliance on income tax and declining importance of taxes on consumption and capital.
What is driving these shifts?
The main reason for the rise in income tax revenue is “bracket creep” as incomes increase and taxpayers move into higher marginal tax brackets. This is due to successive governments not fully indexing tax brackets to increases in CPI or average earnings.
Meanwhile, consumers have been changing their tastes and responding to prices by altering their consumption patterns. The so-called “sin taxes”, or rates of excise duties on alcohol and tobacco, have increased significantly over time.
This has been particularly true for tobacco where the volume of consumption has fallen as fewer people smoke and those who do smoke less. However, the percentage fall in consumption has been less than the percentage rise in tax, so tobacco tax revenue has risen.
For alcohol, consumers have been switching from more highly taxed beer to wine, which is more lightly taxed. For instance, a full-strength beer from your bottle shop carries a tax of $37.10 per litre of alcohol. A moderately priced bottle of wine bears a tax less than half that ($17.60 per litre).
What might be considered a distortion in the taxing of alcohol means that changes in tastes towards drinking wine reduce tax revenue. The system of taxing alcohol is distorting in that encourages changing consumption habits away from beer drinking to wine.
Fuel excise is levied on a number of fuels but revenue comes mainly from petrol sales. The indexing of fuel excise rates was abolished in 2001 before being reintroduced in 2014. This reduction in the real excise rates was accompanied by significant reduction in the volume of fuel per household, from 11.4 L/km in 2001 to 10.6 L/km in 2016, as vehicles became more fuel-efficient.
The combination of reduced real excise rates and reduced consumption have reduced fuel excise revenue as a percentage of GDP.
The GST, one of the principal aims of which was to provide a broadly based growth tax, is declining in relative importance. This is mainly due to the exemptions from the GST base. For instance, spending on education and health, which are exempt from GST, is growing faster than spending on other goods and services. There is also some loss in revenue due to online purchases from overseas, which the government is trying to address.
As the share of consumers’ spending continues to switch from GST-liable to GST-exempt items the share of GST revenue will continue to fall.
Company taxes have diminished in importance in Australia and elsewhere because of the way multinational companies can arrange their tax liabilities across national borders to minimise tax. However, there is also worldwide recognition of the need to reduce company tax rates because of the detrimental effects these have on investment and growth.
The need to cut ‘deadweight loss’
When discussing taxes economist often refer to “deadweight loss”, which is the loss to the economy over and above the amount recouped in tax revenue. When revenue is taken from individuals or companies this results in less of a service or good being produced.
It is argued that governments should put more reliance on taxes that cause less distortion – less deadweight loss. That is, they should have as little effect on individuals’ and firms’ behaviour as possible.
A broad-based GST is efficient because all goods and services bear the same tax rate and therefore will not change relative consumption. It is exemptions that bring about inefficiency by encouraging consumption of untaxed items and discouraging consumption of taxed items. Taxing wine more lightly than beer encourages wine consumption at the expense of beer.
The Australian Treasury has named company tax and income tax as having the “biggest deadweight loss” of all the Commonwealth taxes. International research backs this up. The deadweight loss falls on consumers and shareholders but mostly on workers and wages through lower investment.
The Treasury estimates the deadweight loss of company tax could be more than half the revenue raised from taxation. For income taxes, the deadweight loss is estimated to be 21 cents for every dollar of revenue. This comes about from reduced incentives to work, save or invest.
The PBO report suggests that with continuing trends in taxation revenue the budget’s reliance on personal income tax will increase if current levels of Commonwealth taxation are maintained as a percentage of GDP. While proposals to reduce company tax rates will reduce inefficiency of taxes somewhat, a heavy and increasing reliance on personal income tax points to the need for substantial tax reform. But that’s something neither major party seems prepared to do.
The government is reportedly considering a new tax on the digital economy. While no details of the tax are available yet, the digital services tax recently proposed by the European Commission may give us an idea what the tax might look like.
In essence, the proposal will impose a 3% tax on the turnover of large digital economy companies in the European Union. Similar ideas have been suggested in the UK and France.
The current international tax system was designed before internet was invented, so this new tax is a response to this problem. Under the current system, a foreign company will not be subject to income tax in Australia unless it has a significant physical presence in the country. The key word here is “physical”.
It is well known that modern multinationals such as Google can derive substantial revenue and profits from Australia without significant physical presence here. It is no surprise that this 20th-century tax principle struggles to deal with the 21st-century economy.
This problem is well known but the solution is far more elusive.
Attempts to tax digital companies
The best solution in response to the rise of the digital economy is to reword the laws to take more into account than the “physical” presence of a company in the international tax regime. However, this reform would require international consensus on a new set of rules to allocate the taxing rights on the profits of multinationals among different countries.
In particular, it would mean more taxing rights for source countries where the revenue is generated. The formidable political resistance is not difficult to imagine.
While the EU also recognises that the long-term solution should be a major reform of the international tax regime, the slow progress of the OECD’s effort is seriously testing the patience of many countries. Therefore, the EU has proposed the digital services tax as an “interim” measure.
Google as an example
The Senate enquiry into corporate tax avoidance revealed that Google is deriving billions of dollars of revenue every year from Australia but has been paying very little tax. In particular, the revenue reported to the Australian Securities and Investments Commission in Australia in 2015 was less than A$500 million, with net profits of A$47 million.
The government responded by introducing the Multinational Anti-Avoidance Law in 2016, targeting the particular tax structures used by multinational enterprises such as Google.
Google Australia’s 2016 annual report states that the company has restructured its business. Though not stated explicitly, the restructure was most likely undertaken in response to the introduction of this law.
As a result of the restructure, both revenue and net profits of Google Australia increased by 2.2 times.
However, here is the bad news. Though Google has reported significantly more profits in Australia, the profit margins of the local company remain very low compared to its worldwide group. For example, the net profit margin of Google Australia was 9% while that of the group was 22%.
Of course, a business may have different profit margins in different countries for genuine commercial reasons. However, based on our understanding of the tax structures of these multinationals, it’s likely that significant amounts of profits are booked in low-tax or even zero-tax jurisdictions.
This example suggests that while the Multinational Anti-Avoidance Law is achieving its objectives, it alone is unlikely to be enough.
A digital services tax in Australia
The digital services tax is a turnover tax, not an income tax. This circumvents the restrictions imposed by the current international income tax regime.
The targets of this tax include income of large multinationals from providing advertising space (for example, Google), trading platforms (for example, eBay) and the transmission of data collected about users (for example, Facebook).
If Australia follows the model of the digital services tax, the new tax may generate substantial amount of revenue. For example, Google Australia’s revenue reported in its 2016 annual report was A$1.1 billion. A 3% tax on that amount would be A$33 million.
Along with the digital services tax proposal, the EU proposed the concept of “significant digital presence” as the long-term solution for the international tax system. The exact details are subject to further consultation. However, the relevant factors may include a company’s annual revenue from digital services, the number of users of such services, and the number of online contracts concluded on the platform.
The destiny of this proposal is unclear, but it’s likely to be subject to fierce debate among countries. In any case, the proposals of the digital services tax and the digital presence concept suggest there may be a paradigm shift in the thinking of tax policymakers in response to the challenges imposed by the digital economy that would be difficult, if not impossible, to resist.
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.
“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”.
In the federal budget, Treasurer Scott Morrison promised tax cuts to all working Australians in the form of an offset and changes to tax income thresholds. But our analysis of Treasury data shows that while the government advertised these as payments to low and middle income Australians, most of the benefits would flow through to high income earners in future years.
If all of the stages of the tax plan passed parliament, there would be a sharp increase in benefits for people earning above A$180,000, due to the reduction of their marginal tax rate from 45% to 32.5%.
Taxes in most countries are progressive. This means that the more you earn, the higher your marginal rate (the additional amount you pay for each dollar earned).
There are good reasons for this – progressive tax systems mean those on a lower income pay a lower average tax rate, while those on higher incomes pay a higher average tax rate. This reduces income inequality – as you earn more, for each dollar you earn, you will pay more in tax than someone on a lower income.
With the 2018-19 budget, the proposal is for a “simpler” tax system from 2024-25. This means a reduced number of tax brackets, and a lower rate of 32.5% to those earning between A$87,001 and A$200,000.
Treasurer Scott Morrison said following the budget:
Well, you’ve still got a progressive tax system. That hasn’t changed. In fact, the percentage of people at the end of this plan, who are on the top marginal tax rate is actually slightly higher than what it is today.
However this new tax system from 2024-25 is less progressive than the current system. It means higher income inequality – the rich get more of the tax cuts than the poor.
As part of the new proposal, low and middle income earners get a tax offset in 2018-19, with high income earners getting very little. This part of the plan is progressive – more money goes to lower income earners.
However, by 2024-25, the tax cuts means high income earners gain A$7,225 per year, while those earning A$50,000 to A$90,000 gain A$540 per year, and those earning A$30,000 gain A$200 per year.
Of course, another factor of tax cuts is that they only benefit those who are employed. Tax cuts don’t benefit people like the unemployed, pensioners, students (usually young people) and those on disability support pensions.
The conversation Australians need to have is how we should be spending the revenue boost we are seeing over the next few years. We can either spend this windfall gain on benefits to high income earners, in the hope that this will flow through spending to everyone else; or maybe we should encourage young people into housing through an increase to the first home owners grant, or increased funding for our schools, universities and health system.
We’ve developed a budget calculator so you can see how your family is affected by the 2018 budget.
Opposition leader Bill Shorten has launched a tax bidding war, promising to top the government’s tax relief for lower and middle income earners, as he prepares to fight a string of byelections in Labor seats.
The Labor alternative almost doubles the budget’s relief for these taxpayers, incorporating the early part of the government’s plan and then building on it.
Delivering his budget reply in Parliament on Thursday night, Shorten pledged to give bigger income tax cuts for 10 million taxpayers. Some four million would get A$398 a year more than the $530 under the government’s plan.
Labor’s “Working Australians Tax Refund”, would cost $5.8 billion more than the government’s plan over the forward estimates.
Labor’s alternative comes as debate intensifies about the latter stage of the government’s plan, when a flattening of the tax scale would give substantial benefit to high income earners.
The ALP hardened its position against that change as modelling cast doubt on its fairness. The opposition launched a Senate inquiry which will report mid June on the tax legislation, introduced into parliament on Wednesday.
The government says it will not split the bill, which it wants through before parliament rises for its winter break, but will be under pressure to do so including from the crossbench.
Under Shorten’s proposal, the ALP would support the government’s budget tax cut in 2018-19. Once in power, it would then deliver bigger tax cuts from July 1 2019, when it began the refund.
In Labor’s first budget “we will deliver a bigger better and fairer tax cut for 10 million working Australians. Almost double what the government offered on Tuesday”, Shorten told parliament.
The Labor plan would give all taxpayers earning under $125,000 a year a larger tax cut than they would get under the budget plan.
In a speech heavy on the theme of fairness, Shorten said: “At the next election there will be a very clear choice on tax. Ten million Australians will pay less tax under Labor”.
He also pitched his budget reply directly at the campaign for the byelections.
“This is my challenge to the Prime Minister. If you think that your budget is fair, if you think that your sneaky cuts can survive scrutiny, put it to the test. Put it to the test in Burnie, put it to the test in Fremantle and in Perth.
“I will put my better, fairer, bigger income tax cut against yours. I’ll put my plans to rescue hospitals and fund Medicare against your cuts. I’ll put my plans to properly fund schools against your cuts and I’ll put my plan to boost wages against your plan to cut penalty rates and I’ll put my plans for 100,000 TAFE places against your cuts to apprenticeships and training and I’ll fight for the ABC against your cuts.”
In the Labor model, a teacher earning $65,000 would get tax relief of $928 a year, $398 more than the $530 offered by the government.
A married couple, with one partner earning $90,000 and the other $50,000 would receive a tax cut of $1855, making them $796 a year better off under Labor than under the government.
Shorten said Labor could afford the tax cuts it proposed because it wasn’t giving $80 billion to big business and the big four banks. Also, it had earlier made hard choices on revenue measures.
An ALP government could deliver “the winning trifecta” – “a genuine tax cut for middle and working class Australians; proper funding for schools, hospitals and the safety net; and paying back more of Australia’s national debt faster”.
Shorten said that the Liberals were proposing to radically rewrite the tax rules in their seven year plan. Research had revealed that $6 in every $10 would go to the wealthiest 20% of Australians, he said .
“Very quickly, this is starting to look like a Mates Rates tax plan”.
“And at a time of flat wages, rising inequality and a growing sense of unfairness in the community”.
Other initiatives he announced include:
· A plan for skills, TAFE and apprentices costing $473 million over the forward estimates.
· Abolition of the cap on university places, re-instating Labor’s demand driven system, at a cost of $140 million over the forward estimates.
· Reversing cuts to hospitals and establishing a Better Hospitals Fund, seeing an extra $2.8 billion flow to public hospitals. This would cost $764 million over the budget period.
· Invest $80 million to boost the number of eligible MRI machines and approve 20 new licences – which would mean 500,000 more scans funded by Medicare over the course of a first Labor budget.
· Provide $25m to the Commonwealth Public Prosecutor to establish a Corporate Crime Taskforce. The Taskforce would deal with recommendations for criminal prosecution from the banking royal commission.
The $41 million over four years is about the minimum viable amount to start towards these goals. Sensibly spent, it is enough to achieve the core aims of an Australian agency.
International credibility for Australian space: Australian space businesses bidding for international work dread the question “why doesn’t Australia have an agency?” as it’s often the prelude to “without an agency it’s just too risky for us to work together”. A funded agency takes this objection off the table and levels the playing field.
Support for Australian business: Early-stage grants to help businesses prove concepts – for example, to build a launch-ready small satellite – are within the means of this budget. This will help Australian startups cross the “valley of death” from concept to export-ready, space-tested hardware.
Federal and international coordination: A mix of state and federal agencies have a hand in civilian space activities; a funded agency will help impose order domestically and serve as a focal point for international engagement with other space agencies.
Long term strategic planning for the sector: Space is a long lead-time business. The agency will be responsible for strategic planning for the sector. The money will give its plans clout and an ability to nudge startups and universities into growth areas through funding allocations.
This is not the sort of funding for an agency that will be hiring engineers and building its own spacecraft. Most of the money will be spent in partnerships with commercial companies and universities to help get new ideas and good companies off the ground.
Some will be spent with international agencies to give Australia a “seat at the table” and a chance to bid for international contracts. These partnerships are the likely role of the $15 million earmarked for space investment.
The budget is light on detail and there are many unanswered questions, including:
what areas will Australia focus on?
where will key parts of the agency be located?
what will the future of the agency look like after the four years?
I look forward to seeing these details in the near future.
Anika Gauja, Associate Professor, Department of Government and International Relations, University of Sydney
With income tax cuts and a return to surplus earlier than expected, Treasurer Scott Morrison has certainly delivered a budget full of pre-election sweeteners. New South Wales itself isn’t a big winner, however, with only A$1.5 billion of the A$24 billion earmarked for infrastructure projects heading its way.
The projects that have been announced are strategically targeted: A$400 million will be spent on upgrading the Port Botany rail link, and A$50 million will go towards investigating the business case for the proposed Badgery’s Creek airport rail. The Pacific Highway will be upgraded with a new A$1 billion bypass at Coffs Harbour, bringing a windfall to the Nationals-held seat of Cowper. Scott Morrison’s own electorate will get A$25 million for a new monument commemorating the 250th anniversary of Captain Cook’s landing.
The “election budget” takes on even more significance in NSW, where voters will most likely go to the polls twice in the coming 12 months, with the next state election due in March 2019. By allocating only a modest proportion of infrastructure funding to NSW, the federal Coalition has made it hard for its NSW counterpart to capitalise on spending announcements during the state campaign.
If the state election is held before the next federal election, this might indicate confidence that Gladys Berejiklian’s government will be returned. Yet it might also signal a strategic focus away from NSW, where the state election could act as a buffer to absorb some of the disaffection that might otherwise be directed at the federal government.
David Hayward, Professor of Public Policy and Director, VCOSS-RMIT Future Social Service Institute, RMIT University
Victoria is one of the big winners from the budget, through a mixture of luck and good political management.
First the luck. Mainly due to higher-than-expected population growth, Victoria will receive a bigger share of the national Goods and Services Tax pool, with revenue growing by a whopping A$1.4 billion, or almost 10% to A$17.3 billion. For the first time, Victoria’s share of GST revenues will be almost the same as its share of Australia’s population.
Also growing rapidly is the state’s share of federal infrastructure spending, which is tipped to rise from barely 8% to 15%. This is where the good political management part comes in. Over the last three years, Premier Daniel Andrews and Treasurer Tim Pallas have hit the airwaves to great effect, complaining bitterly about the state’s low levels of infrastructure investment under the Turnbull government.
With an election only six months away, the federal government has finally responded with a cool A$7.6 billion in total. Most of that investment will flow into a Melbourne Airport rail link (A$5 billion), a North East toll road that is yet to gain the support of the opposition (A$1.75 billion), and a rail link to Monash University’s Clayton Campus (A$500 million).
Much of this money won’t be seen for many years, with the spend next year being just A$900 million. The airport rail link is unlikely to start being built until 2026. There will also be some wrangling well before then, with the federal government determined to “equity” fund and the Victorian government looking for good old-fashioned capital grants.
Overall, though, this is a good-news budget for Victorians and the Victorian government. Just don’t expect opposition leader Matthew Guy to be smiling.
Ian Cook, Senior Lecturer in Australian Politics, Murdoch University
Today the budget confirmed that the West Australian government would get another A$2.8 billion to spend on transport infrastructure, and A$189 million to spend on hospitals. Low- to middle-income earners in WA, like everyone else in the country, can now expect around A$500 back by way of an increased tax rebate. West Australians were told last week that they would get around A$1 billion more through a revised GST carve-up.
The crucial question now is whether Western Australians will see the federal government’s budget and the GST boost as a visit from Santa or Scrooge.
They had been wondering where the money would come from to pay for infrastructure projects, especially Perth’s Metronet, promised by State Labor during the last election campaign. Now they know. Well, most of it. A couple of billion dollars more will be needed to fund the projects.
Western Australians were expecting 45 cents back for every dollar in GST raised in the state (up from 34c) and they were told they would in fact get 47c. But Victorians will get A$1.8 billion more in funding, and 98c in the dollar back from their GST.
Many people in the West will be wondering whether another A$10 a week in their pocket is all that much, especially given Perth’s notorious coffee prices.
In a pre-election budget, and in a state in which the Liberal vote is falling, the Santa or Scrooge question is important – and the answer is still not really clear.
Chris Salisbury, Research Associate, University of Queensland
As expected, Scott Morrison’s third federal budget is big on pleasure and light on pain for Queenslanders. With a federal election due within a year, and given Queensland’s status as a battleground state, the temptation to splash the cash in the Sunshine State is strong.
Committing almost A$536 million (A$478 million of it new) over five years to improve the health of the Great Barrier Reef has been welcomed widely, although criticised in some conservation circles for supporting programs that don’t directly address the impacts of climate change.
The biggest smiles are reserved for proponents of infrastructure spending, especially to relieve commuter congestion, with A$5.2 billion newly earmarked for projects in Queensland.
This includes a A$1 billion boost for expanding the M1 motorway between Brisbane and the Gold Coast, A$170 million for the Amberley interchange section of the Cunningham Highway near Ipswich, and A$3.3 billion for much-needed upgrades to the Bruce Highway. There is also A$390 millon for the Sunshine Coast rail line duplication, a project that has long been advocated by local Liberal National Party MPs.
Significantly, but not surprisingly, there is no federal funding for the Cross River Rail project in Brisbane, a longstanding bone of contention between the Labor state government and the federal Coalition. Instead, Morrison has pledged A$300 million for the LNP-controlled Brisbane City Council’s Metro transport project.
Regional Queensland hasn’t been ignored, with A$176 million promised for the long-
proposed construction of Rockhampton’s Rookwood Weir, dependent on equivalent
state funding. Federal Nationals MPs hope this will boost Coalition support in marginal central Queensland seats, where the popularity of One Nation looms large.
Rolf Gerritsen, Professorial Research Fellow, Northern Institute, Charles Darwin University
The federal budget’s impact in the Northern Territory was determined before the territory’s own budget was released last week.
Two days before the NT budget came out, Treasurer Scott Morrison gave the territory a A$259 million top-up to compensate for its reduced GST revenue share. (A sweetener, perhaps, for approving fracking?).
Morrison also promised a A$550 million contribution to the territory’s indigenous housing budget. The Country Liberal Party candidate for the Labor seat of Lingiari also announced A$250 million to extend the indigenous Ranger program. And the NT received $280 million in roads funding, as well.
The NT has three problems in coming years. Its public service expenditure is overly large and top-heavy, meaning its cost is rising faster than inflation. Secondly, its population is growing relatively slowly compared with the rest of Australia. Finally, the territory’s Aboriginal population is decreasing as a proportion of the national Indigenous population, as more people in cities on the east coast have begun identifying as Indigenous in recent censuses.
These factors affect the territory’s relativities as calculated by the Commonwealth Grants Commission. The NT’s relativities have declined from 5.4% to 4.6% in the coming year. This means the NT received A$540 million less in its general purpose grant than if the 2010 relativities settings were still in place.
That will likely only get worse as the territory’s debt burden is expected to become intolerable within two decades.
Rob Manwaring, Senior Lecturer, Politics and Public Policy, Flinders University
The twin focus of the 2018 budget was tax relief and a strong focus on support for older people.
This will have a mixed impact on South Australia. SA has a disproportionately older population compared with the rest of the country. In theory, the state should then benefit from a range of Scott Morrison’s measures to increase aged care places and support for in-home care.
The tax relief measures might also well offer some respite to residents, given concerns about cost-of-living prices.
Yet, the budget does little to directly tackle economic inequality in the state. SA has the highest youth unemployment in the nation. The lack of an increase to the state’s Newstart allowance will not help young people out of work. The treasurer also didn’t flag any specific measures to tackle other youth issues, including pathways into the housing market. Nor are there specific stimulus job measures, meaning any positive job growth effects might well take some time to kick in.
For Steven Marshall’s freshly minted Liberal government, however, there are opportunities in the budget, especially the 21st Century medical plan, which aligns well with his rejuvenation agenda to create medical precincts.
The government will also receive money to fund specific infrastructure measures, such as the North-South roads corridor. Whether this spending is proportionate to SA’s size and needs, however, remains unclear. The Marshall government will still likely need to be proactive to bring additional funding to the state for other infrastructure projects, such as solving traffic hot spots in Adelaide.
Maria Yanotti, Lecturer of Economics and Finance Tasmanian School of Business & Economics, University of Tasmania
Cuts to GST revenue and personal income tax will have the biggest impact for Tasmanians. Changes to the GST carve-up could deliver a A$29 million drop in state government revenue, which will restrict state expenditure as GST payments account for 40% of the state’s budget.
Conversely, the cut to personal income tax will mean more disposable income for many in Tasmania, where annual average earnings are A$53,357, but the median annual income is just A$29,796.
The measures to improve longer life choices for older Australians, as well as the fully funded roll-out of the National Disability Insurance Scheme, will also be welcomed in Tasmania. People aged 65 years and over represent almost 20% of the state’s population, the aged care residential services industry employs 2.8% of Tasmanians (relative to 2% of all Australians), and the health care and social assistance sector is the state’s biggest employer.
Investment in infrastructure, defence equipment, space industry, and research and development are arguably the way to go into the future. Most Tasmanians will support the Great Barrier Reef package and some will indirectly benefit from the Melbourne airport train link. However, the federal budget is again offering little that’s truly new for Tasmania, with most of the funding going to pre-existing commitments.
Investment in agricultural competitiveness and access to export markets, accompanied by cuts in business taxes and business support, will stimulate growth of businesses in an economy that receives a large share of Commonwealth income. Meanwhile, levelling the playing field for small business will benefit many emerging boutique businesses in the state.
Tasmania’s population, tourism industry, private businesses and economy have all been growing, which is always good for the incumbent government. Launceston and Hobart are progressing with “City Deals”, and the University of Tasmania is “transforming”. However, this progress has been accompanied by strong house price growth and housing pressure, while educational levels are still low.
In our budget policy checks we look at the government’s justifications for policies in the budget and measure them against the evidence.
In this piece we look at Treasurer Scott Morrison’s speech.
Treasurer Scott Morrison has laid out his budget plan to further strengthen Australia’s economy, with a focus on constraining both spending and taxing.
As a Government we have put constraints on how much we spend and how much we tax, to grow our economy and responsibly repair the budget.
Real expenditure growth remains below 2%, the most restrained of any government in more than 50 years… We are also keeping taxes under our policy speed limit of 23.9% of GDP set out in our fiscal strategy.
Higher taxes to chase higher spending never ends well. Australians always end up paying for it one way or another.
Economist and tax expert John Freebairn says capping tax revenue is an arbitrary measure that overlooks the many potential reforms to the tax system that are revenue-neutral.
And, says Freebairn, the wide range in tax-to-GDP ratios around the world – from the United States at 25.9% to Denmark at 49.6% – shows that there is no one answer.
Identifying the right level to tax is obviously contentious, but an evidence-based approach would ensure that tax is at a point where the benefit to society of additional government spending no longer exceeds the distortion cost of raising the extra tax.
Tax relief is the biggest budget expense, costing the government A$13.4 billion over the forward estimates. This includes an immediate (albeit small) tax offset for all taxpayers, and for low- to middle-income earners, an increase in the upper threshold for three tax brackets.
Everyone pays the price of higher taxes. It weakens the economy and costs jobs.
And, he says, targeted personal income tax cuts, not funded by bigger deficits, could reduce the squeeze on households and make up for persistent low wages. The move will likely provide much more of a boost to the Australian economy than cutting company income tax.
Meanwhile, households are being promised good news about their electricity bills.
The National Energy Security Board estimates annual power bills will fall by A$400 on average for every Australian household from 2020, following the introduction of our national energy guarantee.
The government continues to argue the case for a conservative emissions reduction and renewable energy targets to prevent against higher electricity prices.
We will maintain our responsible and achievable emissions reduction target at 26-28%, and not the 45% demanded by the Opposition. That would only push electricity prices up.
And we will not adopt the 50% renewable energy target demanded by the Opposition that will also only put electricity prices up.
All energy sources and technologies should support themselves without taxpayer subsidies. The current subsidy scheme will be phased out from 2020.
Energy experts say increasing levels of renewable energy generation are just one of the many factors affecting retail electricity prices. Other factors include network costs, gas prices, changes in supply and demand dynamics and market competition issues.
Energy researcher Dylan McConnell says the assertion that high electricity prices are the consequence of renewable energy policies is incorrect.
The fifth pillar of Morrison’s budget plan is “ensuring that the government lives within its means”.
This is code for a continued crackdown on welfare cheats, but also includes ratcheting back research and development tax incentives, squeezing more tax out of multinationals, and finding a way to get revenue from the black economy.
A stronger economy keeps spending under control by getting Australians off welfare and into work. After record jobs growth, the proportion of working age Australians now dependent on welfare has fallen to 15.1% – the lowest level in over 25 years.
It wasn’t a big budget for education this year, with schools funding already set in the last Budget, and the funding freeze for universities announced in the Federal Government’s mid-year budget update in December.
But the National Schools Chaplaincy program will become permanent, with A$247 million set aside over four years from 2018-19.
And there is some good news for students in regional, rural and remote areas, with:
A$96.1 million over four years for young people in regional, rural and remote communities to transition to further education, training and employment
A$14 million over four years for 185 Commonwealth Supported Places annually for students commencing a bachelor degree at university through a Regional Study Hub
A$53.9 million over four years to improve regional students’ access to youth allowance, and
A$123.6 million over five years to regional universities for additional Commonwealth Supported Places from 2017-18.
Schools and early education funding
Glenn Savage, Senior Lecturer in Education Policy and Sociology of Education at University of Western Australia
Despite ongoing political debates about school funding, most of the big news happened in last year’s budget, when the federal government formalised details associated with its Quality Schools reform package.
The package centres on a commitment to align school funding with the Schooling Resource Standard (SRS) recommended in the 2011 Gonski report into school funding.
To achieve this, the government plans to progressively raise funding levels for government schools from 17% to 20% of the SRS and for private schools from 76.8% to 80% of the SRS by 2027.
The government argues that this delivers an additional $24.5 billion for Australian schools over the decade, and says it will be up to states as to whether they wish to fund the remaining amounts so that all schools reach the full SRS.
The government also claims its reform package provides more consistent needs-based funding when compared to the so-called “special deals” established under the Labor Gillard government.
Labor doesn’t agree, suggesting the Coalition is shortchanging the nation to the tune of A$17 billion (the initial claim was $22 billion) when compared to promises made by the former Gillard Labor government.
Labor has promised, if re-elected, to return to the Gillard model.
This ensures funding will be a defining issue at the next federal election, especially given last week’s Gonski 2.0 report has made a suite of recommendations that the federal government supports and could very well require an additional injection of federal funds to implement.
But any potential changes hinge on whether the Coalition is actually in power when next year’s budget is delivered. And, if so, whether it has any luck pursuing the new Gonski agenda with states and territories.
Aside from these ongoing Gonski wars, this year’s budget contains a few additional highlights.
• A$11.8 million over three years to expand the Early Learning Languages Australia program to more preschools and trial the program in 2019 and 2020 from the first year of school through to year two in primary schools.
• A$6 million over two years (from 2017-18) to continue and update the communications campaign to increase public awareness of changes to the Quality Schools package (aka public relations to sell the government’s reform package).
• A$1.3 million per year until 2020-21 to continued funding the MoneySmart Teaching program, designed to improve financial literacy education in schools.
Finally, the government has signalled its intention to continue exploring ways to deliver new and diverse pathways into the teaching profession, with the view to increasing the supply of quality teachers. This measure builds on previous work associated with the Teach for Australia program.
To pursue this aim, the government has suggested it will invite proposals in 2018 from providers to deliver alternative pathways into teaching.
Higher education and VET funding
Andrew Norton, Program Director of Higher Education at Grattan Institute
The long aftermath of the VET FEE-HELP loan fiasco is still being felt in the 2018-19 Budget. The government is planning to spend A$36.2M over fours years for a new IT system to ensure compliance in the replacement VET Student Loans program.
The VET Student Loans Ombudsman, given the task of receiving student complaints about vocational education lending, is to receive another A$1 million to help deal with the large numbers of people making complaints.
Higher education’s big Budget news came early, in the December 2017 Mid-Year Economic and Fiscal Outlook (MYEFO). It announced a two-year pause in tuition subsidy growth, and a range of reforms to the Higher Education Loan Program (HELP). There is no major change to these decisions in the 2018-19 Budget.
The pause in tuition subsidy growth has been implemented. It was done without going back to parliament using university funding agreements. For domestic bachelor degree places, universities will receive the same total amount that they received for 2017 for each of 2018 and 2019. Previously, there were “demand driven”, meaning that the Government would fund every student the universities enrolled.
The government has also used the funding agreements to reduce the number of Commonwealth-funded diploma, associate degree, and postgraduate coursework places. About 4,000 allocated places were abolished, but some of these weren’t being used anyway, so the practical effect may be limited.
Soon after these policies were announced, partial exceptions began with the University of Tasmania, the University of the Sunshine Coast and Southern Cross University all receiving additional places. These are confirmed in the Budget at a cost of A$124 million over five years.
Including the new places, funding on Commonwealth contributions through the Commonwealth Grant Scheme will be just over A$7 billion for 2018-2019.
From 2020, the government says it will resume funding increases based on population growth for universities that meet yet-to-be determined performance criteria. The Budget paper shows predicted spending of A$7.3 billion in 2020-21.
But numbers this far out are moot. With an election due in the next 12 months, and Labor indicating it will go back to demand driven funding, the funding freeze could be over by then. If the Coalition survives in office, it may also make substantial changes.
The other major MYEFO announcement was to the Higher Education Loan Program (HELP) loan scheme. Unlike changes to total tuition subsidy payments, these need legislating and the relevant bill is still before the Senate.
The most important proposed changes to HELP are the income thresholds determining whether, or how much, a HELP debtor needs to repay each year. If it passes, the bill would lower the initial repayment threshold from A$52,000 a year to A$45,000 a year. HELP debtors earning between A$45,000 and A$52,000 would repay 1% of their income. But some other thresholds are more generous than now, and many HELP debtors would end up paying less per year than they do now.
The government also originally proposed a A$100,000 lifetime cap on borrowing under HELP for all courses except medicine, dentistry and veterinary science, rather than just the full-fee student FEE-HELP scheme. The Budget confirms that the cap would be A$100,000 of HELP debt at any one time, allowing people who have paid off some debt to borrow again.
Whether HELP reforms eventually pass the Senate remains to be seen. In either case, it is fortunate for the higher education sector that they were not rejected prior to the May 2018 Budget. The freezing of the demand driven system showed the government was not bluffing when it said it needed to reduce higher education spending. Like the demand driven system, equity programs and some research programs are vulnerable to cuts the parliament cannot easily stop.
As it turns out, these programs survive in the Budget.
Research funding will receive a modest boost, with nearly A$400 million extra over five years for research infrastructure.
Although the higher education sector gets off lightly in the Budget compared to MYEFO, higher education providers will be hit with extra charges. The Government plans to charge them more for the services of the Tertiary Education Quality and Standards Agency.
The government also plans to charge higher education providers A$10 million a year to recover costs associated with HELP. We can only hope some of this is used to improve on the current very unsatisfactory public reporting of HELP’s finances.
Treasurer Scott Morrison has unveiled an income tax plan that will cost $140 billion over a decade and initially deliver tax relief of $530 a year for 4.4 million people earning between $48,000 and $90,000.
The three part plan is the centrepiece of Tuesday night’s budget, which also brings forward by a year the forecast return to surplus and the peak of Australia’s net debt.
The tax plan will be part of the government’s pitch for the election, due early next year, with Labor putting up a competing proposal.
The government also hopes that its income tax changes will soften Senate resistance to its legislation to cut the company tax rate for large companies. Morrison stressed that people on low to middle incomes would get a tax cut before big business.
Under the plan, the government says that 94% of taxpayers in 2024-25 will face a marginal rate of 32.5% or less. That compares with 63% if the system was unchanged.
Morrison said that in the first step, there would be relief for lower and middle income earners. The second step would protect taxpayers from bracket creep, while the third step would make the income tax system simpler and flatter.
Targeted relief will be given via an additional tax offset, paid when taxpayers receive their assessment, so that it is directed to lower and middle income earners.
In 2024-25 the system will be simplified by abolishing the 37% tax bracket entirely.
“Australians earning more than $41,000 will only pay 32.5 cents in the dollar all the way up to the top marginal tax rate threshold which will be adjusted to $200,000,” Morrison said.
“Under the Turnbull government’s personal tax plan most working Australians earning above $41,000 are likely to never face a higher marginal tax rate throughout their entire working life.” he said.
Morrison said the plan was “affordable”. The revenue impact over the forward estimates is $13.4 billion. The cost over a decade is $140 billion.
The budget forecasts a deficit for the current financial year of $18.2 billion, which Morrison said would be the best budget outcome since the Howard government’s last budget a decade ago.
The deficit is forecast to be $14.5 billion in 2018-19 before returning to balance with a wafer thin $2.2 billion surplus in 2019-20. Previously the budget had been predicted to return to a surplus in 2020-21. Over the medium term the surplus is predicted to rise to more than 1% of GDP.
Net debt will also peak earlier than predicted, at 18.6% of GDP in 2017-18, falling by about $30 billion over the forward estimates. Morrison told a news conference in the budget lock up “we have reached a turning point on debt”.
Morrison said in his budget speech: “The Australian economy is now pulling out of one of the toughest periods we have faced in generations.”
The economy is forecast to grow by 3% in 2018-19, with unemployment at 5.25% compared with 5.5% in this financial year. But the budget forecasts a slowing in what has been the surging growth in employment – from 2.75% in 2017-18 to 1.5% in 2018-19.
Real spending growth in the budget has been kept below 2%, which Morrison said was “the most restrained of any government in more than 50 years”. He emphasised that the government was “keeping taxes under our policy speed limit of 23.9% GDP”.
The main initiative on the spending side is a package for older Australians including an additional 14,000 high level home care places costing $1.6 billion over four years. There will also be extra money for aged care services in regional Australia and increased support for mental health services in aged care facilities.
The government is hoping to boost retirement incomes by making it easier for people to find their lost superannuation, and by abolishing exit fees. It will also crackdown on expensive insurance policies being sold to younger people.
The budget foreshadows raising $5.3 billion over the next four years from a crackdown on the black economy, including combatting “chop chop” tobacco.
The budget was welcomed by business and attacked by Labor and the ACTU.
The opposition said the budget failed both the fairness test and the fiscal test.
Shadow treasurer Chris Bowen and finance spokesman Jim Chalmers said Labor would back the income tax measures that started on July 1 while having more to say later about how else Labor would help working people.
But they said that most of the tax package was “off in the never never – it’s a hoax for Mr Turnbull to tell people they have to vote for him at least two more times before they get tax relief in 2024”.
“Funding just 14,000 new in-home aged care packages over four years is another hoax, with funding being cut from residential aged care to pay for it,” they said in a statement.
Bowen told the ABC Labor would have budget repair as a central element of what it proposed. He also said the ALP would return the budget to surplus in the same year as the government.
The Business Council of Australia said this was “a strong and sensible budget focussed on growth and built overwhelmingly on the contribution of the business community”. The Australian Industry Group said it would “give business and the community confidence for the future”.
But the ACTU said the government “has chosen to do the bidding of big business, offshore investors and the already wealthy, and neglect the needs of working people”. The budget relied “on failed trickle-down economics to trick Australians into giving a failed Government another term in power”.
The Brotherhood of St Laurence said “the long forgotten people of this federal Budget – yet again – are Australians who rely on Newstart to make ends meet”.
The Institute of Public Affairs was scathing, saying the tax cuts were too timid and too slow.
“The so-called ‘tax speed limit’ is a smokescreen to hide the fact that this is the highest taxing, highest spending, and highest debt Budget in Australia’s history,” the IPA said.
The Greens said the budget showed that “large corporations and the super-rich have rigged the rules for themselves”.
“Under the Government’s radical US-style tax plan, a hedge fund manager on $200,000 gets 10 times the tax cut as the person who trims the hedges around his mansion.”