“Growth in the bottom line” for whom?3 May 2016
Jeremy Nadel weighs in on the 2016 federal budget’s finance and economics.
The Turnbull government’s 2016 budget includes changes to superannuation tax concessions and tertiary education fees, along with measures aimed at reducing tax avoidance and cuts to income tax. This year’s budget is the least ambitious of the three released during the Coalition’s time in government.
The Abbott government won the 2014 election with the promise that it would reduce expenditure and manage the deficit created by the Labor Party’s “reckless spending”. The Coalition argued the economy could no longer afford deficits as it transitioned out of the mining boom.
Abbott’s first budget was loaded with austerity measures. It put pensioners, the welfare system, HECS and Medicare in the firing line. The 2014 budget became notorious, seeing support for the Coalition plummet to levels that put Labor on a path to victory. The government’s failure to convince the public of its ‘tough love’ measures led to ministerial shuffles and a watering down of savings measures.
In 2015, Treasurer Joe Hockey’s ‘have a go’ budget lacked the previous year’s optimism that a surplus would be within reach in a few years. Nonetheless, it was less harsh on welfare recipients, students, pensioners and low-income earners. The shift helped bring support for the Coalition back above Labor.
More recently, opinion polls have brought Labor and the Coalition neck and neck. Contributing to the decline in the Coalition’s approval ratings are the government’s indecision on tax reform, the perception that it is not harsh enough on the top-end of town and their refusal to condemn financial corruption with the same vigour as the opposition.
As a result, with a double dissolution election on the horizon and no two-year redemption period, the Turnbull government has introduced a budget with expenditure at the same level as Wayne Swan’s 2010 election-year budget. The government expects the deficit to reduce by only 2.2 per cent and there is no promise for when it will achieve a surplus. The emphasis is less on managing the deficit and more on vague commitments to “jobs and growth”.
Changes to superannuation concessions
The Turnbull Government has made a range of changes to the superannuation concessions system. The changes will only affect two per cent of Australians.
Currently, high-income earners pay 45 per cent tax for every dollar earned above $180,000 per year. But money directed to individuals’ super funds is taxed at only 15 per cent, unless they have an income above $300,000, in which case it’s 30 per cent. This 30 per cent tax will now apply to individuals with an income of $250,000 or above. The government has also introduced a $1.6 million cap on the amount of money people can transfer from their regular superannuation funds into special, tax-free retirement accounts.
Reserve Bank of Australia shares the spotlight
At midday the Reserve Bank of Australia announced that it would lower interest rates. Cash rates will reduce by 25 basis points to 1.75 per cent.
A media statement explained that the move was motivated by inflationary pressures being lower than expected. Analysis suggests the drop in inflation is due to the global economy growing at a slower pace than expected. China’s growth rate has also moderated, which is partly responsible for the decline in commodity prices over the past couple of years. The Reserve Bank believes lower interest rates will support demand and decrease exchange rates. As a result, the bank expects Australia’s prospects for sustainable economic growth to improve.
Attempts to crack down on tax avoidance and financial corruption
The Panama Papers confirmed that tax evasion is pervasive in Australia and globally. In response, Treasurer Scott Morrison has unveiled a plan to fight tax avoidance. The government claims it will strengthen regulators’ ability to crackdown on multinationals and wealthy people avoiding paying their fair share through several new measures. These include setting up a new $679 million tax avoidance taskforce over four years and introducing a diverted-profits tax that imposes a 40 per cent penalty tax on multinationals that try to shift their Australian profits offshore to avoid taxation.
Tax evasion is only one drop in the ocean of reasons Australia’s confidence in the financial sector is at an all-time low. There has been a litany of scandals in Australia’s major banks. The CommInsure scandal involved an insurance scheme riddled with fraudulent assessments of cases. Last month, the Coalition committed to a bank levy that will fund an extra $121 million for the Australian Securities Investment Commission. “In the 21st century economy you need a tech cop on the beat,” said Morrison.
But this solution is tame compared to the plan supported by Labor and the Greens to reinvigorate confidence in banks and taxation. Both parties argue for a Royal Commission into the financial sector. Polls suggest six out of 10 voters support the idea.
Changes to tertiary education fees
The government has committed to a few changes that it argues will make the tertiary education sector more “financially sustainable”. Currently, the government subsidies 60 per cent of all Australians’ undergraduate degrees. The coalition will continue to try to reduce this figure to 40 per cent. The government has considered introducing an extra fee of 5 to 20 per cent on all HELP loans. Fee deregulation will not go ahead in its previous form but some undergraduate courses could be deregulated.
Cuts to personal income tax
Morrison claims taxes affecting “middle income Australians” are “punishing hard work and hampering innovation.” Changes to personal income tax will see an increase in the middle tax bracket threshold from $80,000 to $87,000. This means 500,000 taxpayers currently in the marginal tax bracket will no longer pay a 37 per cent tax on every dollar earned over $80,000. The change will reduce revenue by $3.95 billion. In addition, the government will keep its promise to abandon the two per cent deficit levy on incomes over $180,000 in 2017.
During the 5 p.m. press release, Morrison presented this cut to personal income tax as one of the features in the budget he was most proud of. “This modest tax relief demonstrates that wherever possible we prefer to leave a dollar in Australians’ pockets than take it for the government’s pocket,” he said. It was also a feature that faced heavy criticism. Journalists were quick to point out that there were no generous income tax cuts for Australians who earn lower than $80,000. Critics described these low-income earners as “the losers of the budgets”.
Morrison defended the decision to provide income-tax cuts only to the middle class on the grounds that workers on low incomes would still enjoy cuts on taxes affecting small business. “Australians have moved beyond ‘who are the winners, who are the losers’. They are interested in jobs and growth.”
The Labor Party is likely to capitalise on the fact that the Coalition’s cuts to personal income taxes exclusively benefit middle-income earners. The opposition will likely argue that its budget proposals offer higher revenues with measures that benefit the disadvantaged.
Labor’s policies include limiting negative gearing and reducing capital gains tax breaks for properties from 50 per cent to 25 per cent. Both of these policies, they argue, are likely to make housing prices more affordable.
Chart created from data supplied by the ABC.