Tag Archives: Budget 2014

To GST or not to GST

Tony Abbott and Joe Hockey have been seen as herding the states and territories towards increasing the GST, rightly or wrongly. I suspect rightly.

Richard Denniss in the AFR says Forget GST, hit the rorts on super.

The Commonwealth government will collect $363 billion in taxes this year, with state and local governments collecting a further $83 billion in taxation. The GST accounts for around $51 billion, or 11 per cent, of total revenue. Increasing the GST to 12 per cent would collect an additional $10 billion or so. In an economy with a nominal GDP of $1521 billion and a population of more than 22 million it is, quite simply, small change.

If raising the GST is “the solution” then ‘the problem can’t be very big, which, of course, is exactly what the World Bank, the IMF, the OECD and the rest of the world have been trying to tell us. Australia is a low tax, low-debt country.

The pension is costing about $40 billion each year and is growing at 6% pa, only 1% faster than nominal GDP. Superannuation concessions, by contrast, cost about $35 billion, of which $13 billion flows to the richest 5%, and are growing at 12% pa.

Economists tend to favour taxing consumption, because it is efficient and less distorting than many other taxes. They tend to downplay the fact that it is regressive, once again selectively hitting those who can afford it least. They wave that argument away, saying that the needy can be compensated by increased transfer payments. Whether such payments would hit the mark is highly questionable. Moreover the better off in the community tend to see such payments as undeserving.

Denniss identifies other “rorts” such as the 50% capital gains concession, and the exemption of the family home, which can store massive value for the rich.

An alternative to increasing the rate is to increase the coverage. The list of exempt goods and services is actually quite large. I’ve copied it here for convenience:

  • medical and other health services, hospital services, residential or community care and medical aids;
  • education courses, course materials, student accommodation;
  • child care services registered under the Childcare Rebate, eligible child care centres or other child care services
  • exports of goods and services from Australia if exported within 60 days after the earlier of the day payment is received or the invoice is issued;
  • religious services;
  • non-commercial activities of charitable institutions;
  • water and sewerage goods and services;
  • sales of businesses as going concerns;
  • sales of precious metals after refinement by the supplier and delivery to a precious metal dealer
  • inwards duty free goods sales to a relevant traveller;
  • sales of freehold interest in land or long-term lease made by a Commonwealth, State or Territory Government;
  • subdivided farm land
  • cars for use by disabled people.

I’m not sure about sales of precious metals and subdivided farmland, but I think Australia has its exemptions about right. It’s late but I can’t find food on the list. Most but not all food is exempt as explained here.

I’ve been explaining that Bowen and Rudd did not leave the budget in a mess (see ABC FactCheck). By adding $68 billion to the deficit, however, Hockey has created quite a mess of his own. Treasury boss Martin Parkinson explained that brave assumptions were required to fix it:

Prior to this budget, we were banking the house on 33 years of uninterrupted economic growth and there’s no precedent for that. We’re banking on another 10 years of fiscal drag and that being pocketed, and that has quite significant regressive impacts, and even then, we still don’t get back to surplus.

“Fiscal drag” means bracket creep.

Thanks Joe!

Tax the rich, I say. At least 80% for incomes of over half a million and a wealth tax for those who organise to have no income. Peter Martin points out that the wealthiest 75 have an average taxable income of $82.

Meanwhile NATSEM modelling has found that low earners do most of the heavy lifting:

The budget hits 1.25 million low and middle income families with children on average by about $3000 a year in 2017-18 while it actually benefits upper middle and upper income families through removing the carbon price, according to modelling done by NATSEM at University of Canberra.

That’s apart from the young unemployed, where a 26 year-old loses $6944.

10262004_10154113572330198_5995357860786883638_n_500

Clearly there is a need for a thorough review of the total tax system, which Labor undertook and then largely ignored. That was a major blot on the legacy of Swan’s treasurership and the Rudd/Gillard years, having commissioned the Henry review and then largely ignored it.

Poll anger or a shift in the tectonic plates?

The polls are disastrous for the LNP. Nielsen is 56-44 to Labor, Newspoll is 55-45 and Morgan is a staggering 56.5 to 43.5. Historically Morgan tends to favour Labor, Nielsen was the most accurate at the last election.

The question is now whether these results represent short term anger at the budget or whether the tectonic plates have shifted. Laura Tingle comes out in favour of the latter:

Just every so often in politics there is a moment when you can almost hear the tectonic plates shift, and they don’t necessarily come with elections.

We saw one of these in 2010 when it emerged that Kevin Rudd was dumping his commitment to an emissions trading scheme.

The Fairfax-Nielsen poll suggests the 2014 budget is proving another such moment when politics can be turned on its head.

It is not just the dramatic slump in the government’s primary and two-party preferred vote, or the fact that Labor is, for the first time, the major beneficiary of this slump. It is not just that voters – in spectacular, angry numbers – think the budget is both unfair and not good for the country.

It is not even that Tony Abbott’s barefaced refusal to confront the fact he is breaking promises has enraged voters in a way that makes his position with them unrecoverable.

It is the fact that this poll suggests Tony Abbott and Joe Hockey will have little choice but to go back and rethink the entire political and economic strategy on which this budget is built.

Unfairness, not good for the country, broken promises, lies.

We are often told that Labor needs a 4 in front of its first preference vote in order to win. Suddenly it has one, for the first time since 2010, and the LNP doesn’t. There has been a cross-over:

Labor LNP vote_cropped

Perhaps notably, the Greens have lost three points and the indies have picked up three.

This graph shows the Nielsen two-party preferred vote, ending with May 19:

2PP vote_cropped

Labor lost its way when Gillard announced the carbon ‘tax’ early in 2011. It looks as though there has been a shake-out since Rudd’s second coming, with the latest poll marking a decisive shift. Time will tell, but Tingle thinks the LNP will need to rethink it’s entire economic and political strategy.

In other aspects of the poll:

    The only demographic where the LNP tops Labor is in the 55+, were it is now 43-39 to the LNP compared to 49-33 in April.
    Shorten is now ahead of Abbott as preferred PM 51-40.

    Abbott’s approval rating has gone from a net -7 to -28. Only 34% approve whereas 62% disapprove.

    Shorten’s approval rating has gone from +2 to +12.

    A staggering 63% say the budget is unfair, the first time ever there was a majority, compared with 33% who say it was fair. Gillard/Swan in 2013 scored 43-46.

    53% thought the budget was good for Australia, again the first majority ever, compared with 42% who say it was good. Gillard/Swan scored 42-44.

Abbott said that the LNP was in a similar position after Howard’s first budget in 1996. He lied.

Abbott said there would be no cuts to health and education for several years. Again he lied. There will be $1.8 billion in hospital cuts from July.

Finally I want to emphasise again that Abbott, Hockey, Cormann and company are lying about Labor leaving a budget mess. This ABC FactCheck shows that Bowen and Rudd left the budget in good shape:

PEFO_cropped_600

Elsewhere Mark’s excellent post stresses the unfairness of the 2014 budget and its attack on a foundational Australian value. It’s not too much to say, I think, that it has breached the social compact on which the Australian polity is based.

Shredding the fig leaf

Direct Action was always a fig leaf for a government pretending to have a climate policy. Now the climate change denialists in Abbott’s cabinet have taken the opportunity to shred the fig leaf to the complete embarrassment of Greg Hunt.

Giles Parkinson thinks the 2014 budget is Abbott settling old scores, and dumping clean energy in favour of the asphalt economy.

With proposals to repeal the carbon price, dismantle the Climate Change Authority and the Clean Energy Finance Corporation, and the dilution of the Renewable Energy Target already in train, these budget measures – which include the closure of ARENA, the dumping of the million solar roofs program (both contrary to election promises) and the research funding cuts at the CSIRO, Bureau of Meteorology and elsewhere – mean that the obliteration of the Clean Energy Future package will be complete, if it can get past the Senate.

Dumping ARENA is particularly stupid, as the fund was leveraging private investment at the rate of $2.50 to one and doing much to support the off-grid activities of the mining industry.

ARENA will maintain funds of $1 billion for around 190 projects – mostly R&D – that have already been contracted since its creation in 2012, but it will have a measly budget of just $15 million over each of the next two years for new projects.

Some 150 of its 180 projects already allocated are in support of research and development, a core competency not valued by the Government.

The Emissions Reduction Fund ($2.55 billion) has been spread over 10 years, rather than four. Tristan Edis explains that $2.55 billion will be allocated over the next four years, but the scheme only pays on completion. However, this does call into question the efficacy of the scheme.

Clive Palmer wants to divert the funds to pensions and is prepared to vote it down.

The million solar roofs scheme was a featured election promise.

The million solar roofs program, once a $1 billion centrepiece of Direct Action to bring solar to lower-income earners and renters, has sunk without trace — replaced by a derisory $2.1 million program to install solar on RSLs and bowling clubs in seven electorates, many of them marginal (yes, really).

But not to worry we still have “$525 million to pay up to 15,000 under-25s to pick up litter at below-award wages under the guise of the Green Army”.

Parkinson further reports

the abrupt closure of the Energy Efficiency Opportunities, as well as rejecting calls for the revival of Low Carbon Australia, which also supported investments in energy efficiency. It has also brought an end to support for ethanol and algae fuel programs.

The Energy Efficiency Opportunities program, which was to cost $20 million to run over the next five years, had helped deliver more than $1 billion a year in savings since 2006.

Alan Pears at The Conversation has more. He says the Clean Energy Finance Corporation which has already mobilised $2.5 billion of mostly private funding for low-emission energy and agriculture projects would make a profit for the government if allowed to continue. Like ARENA the CEFC will continue trading until stopped by legislation.

Pears says that leaves the Renewable Energy Target (RET) scheme as “the last major remaining piece of federal government policy that supports ongoing investment.” It has already led to $20 billion worth of investment, but is under review with climate sceptic Dick Warburton at the helm.

There’s more at The Guardian and at Planet Oz. There Graham Readfearn tells of the axing of a small $1.3 million program, which has been supporting more than a 150 local and state-based conservation groups across the country since 1973. Such is the depth and thoroughness of the attack on the environment.

Meanwhile global renewable energy jobs surged to almost 6.5 million in 2013. In Germany, where the government strategy was to take first mover advantage, renewable energy production reached 74% the other day.

We are striving to be last.

A crisis in trust

Politics is broken, is the shorter message of Mark’s post at The new social democrat. Mark, writing before Hockey’s budget speech predicted that the budget would be “horrible”.

He was right. There may have been a feeling that the bad news had been leaked early. In fact the true horror is being revealed in the detail coming out after the speech.The speech sounded like severe belt tightening with a raft of cuts (summary here). In the interview after the speech Sarah Ferguson nailed Hockey on at least two major points. The first is that ordinary folk will carry a bigger burden than the rich, not just proportionately, but in actual dollars. On one count $1400 for the rich and $3000 to $5000 for lower to middle income families.

In fact middle Australia, the poor, the young and the marginalised will be hammered in Hockey’s vision of an age of opportunity, rather than entitlement.

Take the young unemployed:

The Abbott government’s first budget revealed job seekers applying for Newstart or Youth Allowance, who have not been previously employed, will face a six-month waiting period of no income support before they are eligible for payments by undertaking 25 hours a week in the Work for the Dole program.

Once they have spent six months on the program, they will lose income support for another six months unless they undertake training or study.

People under 25 will not be eligible for the dole and instead will have to apply for Youth Allowance which is about $100 less a fortnight. Newstart and Youth Allowance will also be frozen for the next three years.

The hourly rate on Work for the Dole will be $10.20 for Newstart and $8.29 for Youth Allowance.

In the six months applicants for Newstart and Youth Allowance do not receive income support, they will be required to undertake government-funded job seeking programs.

For those thrown out of work Newstart will be limited. With some exceptions:

Newstart applicants will receive one month of income support for every year they worked before applying for the dole and exceptions to the six months…

I don’t think we can talk in terms of a general safety net any longer. We have instead active harassment in the name of stimulating greater personal responsibility. We are leaving a system where all are looked after in favour of a system where only the deserving are supportis severely conditional and incomplete.

Family payments will save a whopping $7 billion, but hardest hit will be:

Sole parents, single parents and parents of disabled children will be hardest hit under changes to family tax benefits, designed to save money and get primary carers back to work.

More harassment.

The second point coming out of the Ferguson/Hockey interview was that the Abbott government is intent on forcing the states to increase the GST by cutting the funding for schools and hospitals by $80 billion over the next 10 years. Hockey’s response was “States runs schools and states run the hospitals” and “All the GST goes to the states so it is up to them.”

That’s clear enough, but not what voters expected or were told to expect.

Mark quotes EMC research:

this week’s Essential Report suggests voters are expecting to take the fall for a budget emergency that is really just a false alarm.

Without believing the central premise of the budget, voters are left with a sick feeling they’ll pay for a budget that doesn’t fix the economy but rather punishes ordinary people in favour of the wealthy.

Mark says (read the whole post!):

The most important thing about this Budget is that it symbolises the brokenness of Australian politics. It’s a tipping point, a crisis moment for the political class.

Everything they [the Government] think they learnt in politics school is wrong, and the focus groups must be feeding this back. We can see this reflected through the inconsistent and panicked messaging from the government.

Confected austerity economics will not work in a crisis of trust. Nor will “let’s all pull together” work in an age of upper middle class entitlement, generously fostered by John Howard’s electoral/fiscal calculus.

I still have some faith in Chris Bowen, who seems to me principled, articulate and genuine. I’d rather he gave the budget reply speech, but there is some hope for Shorten. He sounds less like a politician than many and that may eventually play in his favour.

Abbott has calibrated his message to mask his detailed promises about no cuts “full stop”. For example, he promised no cuts the the ABC and SBS, Instead $43.5 million is being taken out of their budget over the forward estimates. That’s 1% of general funding, plus cancellation of the Australia Network contract one year in, halving its budget. The ABC used the Australia Network funding to enhance its threadbare foreign coverage for the network generally.

Abbott is a silver tongued politician, master of slogans, but is sounding more and more like a salesman, inherently untrustworthy.

You don’t build a stronger Australia by shredding safety nets and increasing inequality.

Update: I thought I’d add here from this post the ABC FactCheck verdict showing how Hockey has added $68 billion to the deficit and essentially confected a budget ‘crisis’, as shown in this table:

PEFO_cropped_600

See also Hockey’s morality play.

Also see Mark on Hockey’s social dystopia and John Quiggin on the mess of contradictions, meanness, trickiness and tribalism that is the Abbott-Hockey Government’s first budget.

Budget explainer

ABC Online has put together a neat budget explainer, telling us what is already on the record, what to watch out for and what might happen tonight.

Yesterday we heard that a further 36 government bodies will go in addition to the 40 already axed, at least on paper. Amongst them Ivor Frischknecht (literally ‘fresh servant’) had a lot to say about the expected demise of ARENA, the Australian Renewable Energy Agency. The audit commission recommended that ARENA be dissolved and its activities rolled into the Department of Industry.

Frischknecht seems to be taking the view that ARENA is legally obliged to keep operating until its governing legislation is changed. That will depend on the Senate.

The Government seems to be taking the view that decision-making and service delivery will be cleaner, more streamlined and more accountable if the Government does less. In my humble opinion burying the activities of separate, identifiable, dedicated agencies in the bowels of government departments will have the reverse effect.

Meanwhile Abbott gave backbenchers and newbies ‘love and reassurance’, but they still have to go out and sell the crock Hockey and co have cobbled together. They should sound about as convincing as sales people and be held in similar regard.

On a mission to upset everyone

Having upset the rich with their ‘debt levy’, and with 72% of people thinking it a broken promise, Abbott and Hockey are on a mission to upset the rest of us by re-indexing the fuel excise.

Richard Denniss told the 7.30 Report that the tax was good policy.

Sinclair Davidson told Waleed Aly that if you must tax, then taxing consumption is better than taxing production. The fuel excise taxes consumption. He forgets that sole traders (like me) driving a ute or a van would pay the tax. Nevertheless the LNP backbencher Ken O’Dowd in the linked article appears to be wrong:

A Federal Government MP has spoken out against plans to raise the fuel excise, warning it will force up the cost of everyday groceries.

Farmers and miners don’t pay fuel excise. That tax concession is worth some $13 billion, which the Greens would like to abolish.

Davidson also pointed out that fuel excise was a regressive tax, it disadvantages the poor. Those with time to ring up are letting Mr O’Dowd know:

“The phones haven’t stopped, especially with our older folk. We got off on the wrong leg, talking about increasing the pension age, I don’t think it was explained too good. It really concerned a lot of old people that they were going to lose their rights.”

It hardly matters now what the budget detail turns out to be – the damage has been done.

Meanwhile company directors are losing faith. Only 30% of company directors expected the new administration to have a positive impact on their business decision making, down from 70% when the LNP took over. Furthermore:

This loss of confidence has also translated into a fall in the proportion of directors who believe the Federal Government understands business – from 55 per cent last year to 48 per cent now.

Fully 80% say that achieving a budget surplus in the next three years is not a priority.

Wayne Swan says he left the budget in good shape. Chris Bowen has been saying that Joe Hockey has doubled the deficit by changes to Government spending and changes to Government assumptions. The ABC FactCheck verdict:

Since the election, the official forecast deficit has doubled. The economic assumptions are different from those used before the election, and spending decisions have been made that were not in the previous forecasts. Mr Bowen’s claim checks out.

Here’s the table that tells the story:

PEFO_cropped_600

The PEFO of August 2013, prepared independently by Treasury and Finance, shows a surplus for 2016-17. Leaving aside Hockey’s moral austerity crusade, it does appear that he has confected the crisis.

Hockey’s morality play

Joe Hockey has mightily offended Bernard Keane by making his austerity a moral issue, evoking a trenchant critique. The shorter Keane is that if you turn budgeting into a moral issue you are held to a higher standard. On this basis Hockey comes out as a prize hypocrite.

More of Keane later, first let’s wrangle some numbers.

I’ve made a table of the 15 major expenditure items identified by the National Commission of Audit as causing concern over the long term, omitting the eight years of 2015-16 to 2013-24 for convenience. The intervening data does tell some stories. For example, after growth spurts both Schools and the NDIS settle to much flatter growth in the out-years. The table was reprinted in the AFR.

Audit Report_cropped_600

To me the most important numbers are the two in the bottom right. When all is said and done total Commonwealth payments would grow by 0.2% of GDP over 10 years. In today’s dollars that’s about $3 billion dollars. Sounds a lot, but in a $400 billion budget it’s a rounding error.

Hockey is trying to achieve two main goals. (Here I’m drawing mainly from Phillip Coorey, but also Laura Tingle in the AFR.)

First, he is aiming at a small surplus in 2019-20 and a surplus of one per cent of GDP by 2023-24. Economists and others can argue about timing and quantum but this aim seems to me fair enough.

Secondly, Hockey wants to shrink expenditure as a proportion of GDP. This is ideological, not moral.

Hockey claims that if he takes his hands off the wheel expenditure will grow by 3.75% per annum, reaching 26.5% of GDP by 2023-4. From memory, I think that’s roughly where it was under Howard and Costello.

The CIA’s world Factbook has a country comparison of tax and other revenues as a proportion of GDP. Obviously they use a particular definition (probably includes GST) since Australia comes in at 33.2%. By contrast we have Canada at 37.7%, New Zealand at 38.5%, the UK at 40.4%, then follow the Europeans up to the Scandinavians at above 50%. If Australia’s share was lifted to Canada’s the government would have an extra $55 billion available.

All I’m saying here is that lifting the share by a few percentage points is not self-evidently a crime against the people, immoral or even economically foolish.

The audit commission has assumed that tax receipts must remain limited to 24% of GDP, for reasons unknown.

Before the election Hockey was saying that he would take 1% off tax receipts as a proportion of GDP. He hasn’t nominated a percentage now that I know of, but he has deemed that growth in expenditure will be limited to 1.75% per annum. That’s harsh. Tingle says Labor’s aim, not always achieved, was for a 2% limit, also austere.

Again we are told this 1.75% limit is right, responsible and moral, without any supporting argument.

Labor’s plans

Wayne Swan, I understand, reduced outlays by a couple of percentage points of GDP. His problem was that revenues were a couple of percentage points shy of outlays. Still, Labor had a long-term plan back to the black. The following graph is from the Pre-Election Fiscal Outlook (PEFO) published under the charter of budget honesty before the last election. I displayed it in my ‘liars and clunkheads’ post back then.

fcccad64-03b4-11e3-9d44-7643a0300d9c_chart1_580

I understand it involved allowing bracket creep. One has to ask why Hockey’s self-imposed austerity path is supposed to be superior.


Hewson on tax concessions

One way of fixing the budget would be to allow bracket creep, ruled out by the audit commission and Hockey.

Another way, suggested by John Hewson, would be to take a look at tax concessions, especially in superannuation.

A startling fact is that the percentage of retired folk receiving at least a part pension is projected to remain at 80%. Hewson says that superannuation policy robs the poor in favour of the rich, and in amounts that matter. He calculates super tax concessions at around $44 billion, roughly the same as the aged pension but growing faster.

Tax concessions overall are around $120 billion rising to $150 billion by 2016/17. Today’s AFR identifies some of the budget sacred cows, leading with $15 billion in protecting the family home from capital gains, $13 billion in not broadening the GST. Tightening the age pension means test to include the family home would save $7 billion.

By contrast the mooted ‘deficit levy’ would only yield hundreds of millions even if implemented widely. It’s small change. Such a move must be regarded a political rather than economic.

Keane’s critique

Keane asked Hockey what he was going to tell his granchildren about what he did to prevent global warming. They will pay.

Why were Labor’s efforts to reign in middle class welfare either not commented on or termed “class warfare” or “the politics of envy”?

Why did the LNP fight tooth an nail cutting back the private healthcare rebate to high-income earners?

In November, Hockey abandoned Labor’s plan to reduce the extravagant tax concessions enjoyed by superannuants earning over $100,000 a year, costing billions. He also restored a fringe benefits tax rort, an actual rort, for novated leases, again worth billions.

Hockey wants to cut carbon pricing and the mining tax.

Hockey is talking to us about the “moral imperative” of fiscal discipline while handing billions to large companies, wealthy retirees and tax rorters.

One minute Hockey is complaining about

a “massive increase” in defence spending beyond forward estimates and that it was a budget boobytrap, a fiscal “tsunami coming across the water” created by Labor.

The next minute he’s committing billions to F-35s which “wouldn’t cost anything” because it’s already in the budget.

Then of course there is the rolled gold parental leave scheme.

Keane reckons Hockey has cut revenue by about $15 billion. He would have increased spending by a similar amount. Then he complains about a budget mess and dresses up his austerity program as a moral crusade.

By the way here’s Labor’s Budget debt in context:

Debt_35d9ec68-d401-11e2-a269-28d841715c70_14p22bassRESIZED_cropped

I think we’ve been short of revenue since Rudd matched Howard’s tax cuts in the 2007 election campaign. There’s nothing broken about the budget that a steady hand, a mature review of priorities and a gradual return to revenue levels prevailing under the Howard government would not fix, together with a modernisation of the whole tax regime. Time to look seriously at Ken Henry’s review.

Elsewhere, Peter Martin has some tips.

Update:

In the Weekend AFR Phillip Coorey in an article The budget crunch is John Howard’s baby too reckons the budget problems date back that far. Apart from generous handouts to middle Australia in the previous years, Howard/Costello promised a $31.5 billion tax cuts in the May 2007 budget. One day into the election campaign he added a promise of $34 billions worth of further tax cuts (we’re talking four-year budget cycles). Rudd matched him, in addition to his own spending plans. The half-year budget update did find an extra $59 billion worth of revenue.

No-one foresaw the GFC and the end of the salad days.

Also Chris Bowen has an article pointing out that scrapping the low income superannuation contribution (LISC) and deferring the increase in the superannuation guarantee will take $55 billion out of our national savings pool over the next 7 years. These policies, he says, were designed to reduce the numbers of middle and low income earners requiring pension support in the future. Do this rather than lift the retirement age, he says.

Bowen’s comment received specific support from Tony Shepherd, chair of the audit commission.

See also John Davidson’s post, plus Richard Holden on why Australia does not have a debt crisis.

Update – posts on Budget 2014:

On a mission to upset everyone

Budget explainer

A crisis in trust

Shredding the fig leaf

Poll anger or a shift in the tectonic plates?

To GST or not to GST
Cap super, says Richard Denniss

Resolving the budget ‘crisis’

Hockey’s debt and deficit mess