tag:theconversation.com,2011:/uk/topics/federal-budget-2016-24802/articlesFederal Budget 2016 – The Conversation2021-05-04T04:37:41Ztag:theconversation.com,2011:article/1600862021-05-04T04:37:41Z2021-05-04T04:37:41ZThe budget is a window into the treasurer’s soul. Here’s what to look for<p>What in America they call the <a href="https://en.wikipedia.org/wiki/State_of_the_Union">State of the Union</a>, in Australia we call the federal budget.</p>
<p>As surprising as it may seem, Australian budgets aren’t really about money — they’re about values.</p>
<p>As a case in point, a key part of next week’s budget will be an announcement about <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/making-child-care-more-affordable-and-boosting">childcare</a>, but the childcare measures won’t start until <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/making-child-care-more-affordable-and-boosting">2022-23</a>.</p>
<p>It’s not clear that they’ll need to be in the 2021-22 budget in order to get approved.</p>
<p>Indeed, the budget’s formal title is <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/speeches/budget-speech-2020-21">Appropriation bill (No. 1) 2021-22</a>. The budget bill will deal only with appropriations for 2021-22.</p>
<p>But the theatre that has built up around the presentation of that bill — the budget speech — has given it the space to deal with so much more.</p>
<h2>Legally, the budget needn’t deal with much</h2>
<p>Last year’s speech mentioned <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/speeches/budget-speech-2020-21">values</a>, twice. It spoke of our “cherished way of life”, of the courage, commitment, and compassion of healthcare workers and volunteer firefighters, of our “invisible strength”.</p>
<p>And it extended the low and middle income tax offset for another year.</p>
<p>Legally, the budget bill can’t include tax measures. That’s <a href="https://www.aph.gov.au/About_Parliament/Senate/Powers_practice_n_procedures/%7E/link.aspx?_id=AFF6CA564BC3465AA325E73053DED4AA&_z=z#chapter-01_part-05_54">outlawed</a> by the Constitution.</p>
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<span class="caption">UK Chancellor of the Exchequer Rishi Sunak. In Britain, tax collections need to be re-authorised every year.</span>
<span class="attribution"><span class="source">WILL OLIVER/EPA</span></span>
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<p>Tax measures have to be introduced in separate legislation, measure by measure — or not be introduced at all. Our government can continue to collect tax at the existing rates for as long as it likes, unlike in Britain where tax collections form the core of the budget bill and need to be <a href="https://www.legislation.gov.uk/ukpga/2020/14/contents/enacted">re-authorised every year</a>.</p>
<p>In Australia, government spending does need to be re-authorised every year, but only spending which is for the “ordinary annual services” of government.</p>
<p>Everything else — the vast bulk of government spending, everything from Medicare to pensions to grants to the states to family support to support for private schools and private health insurance — is ongoing, approved on a never-ending basis under so-called “standing appropriations” or “special appropriations”.</p>
<p>At the last count there were <a href="https://www.finance.gov.au/sites/default/files/2021-03/chart-of-special-approps-1-march-2021.pdf">240</a> such special appropriations, covering everything from the funding of universities to paid parental leave. </p>
<p>The Department of Finance says 167 of them are unlimited, meaning there is “no defined ceiling on total expenditure”.</p>
<p>What’s left, what actually needs to be re-approved in the budget each year, is little more than the payment of rent and public service wages, suggesting that if the Senate had rejected “supply” (the budget appropriation bill) during the 1975 constitutional crisis as it had threatened to do, the Whitlam government could have taxed and spent much as before, although it would have had to get private banks to advance public servants’ wages, something it was <a href="https://www.naa.gov.au/sites/default/files/2020-05/fs-240-the-dismissal-1975.pdf">investigating doing</a>.</p>
<h2>Practically, it deals with most things</h2>
<p>It might be because it needs to do <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp2021/Quick_Guides/CommonwealthBudget2021-22">so little</a> that the budget has come to do so much.</p>
<p>These days we look to it as a source of official economic forecasts, but that’s a recent development. Up until the late 1980s the forecasts weren’t really forecasts — they covered only the <a href="https://archive.budget.gov.au/1984-85/downloads/Budget_1984-85.pdf">financial year ahead</a>, which, because the budget was delivered in August after the financial year had started, covered not much at all.</p>
<p>Now the “forward estimates” for spending and revenue and the state of the economy go out for four years, and some of them for ten.</p>
<p>The budget has become a statement of the government’s values in part because it puts numbers on those values — how much it is prepared to spend on health compared to defence, how much it plans to spend on superannuation tax concessions for high earners compared to pensions for low earners.</p>
<h2>Which makes it a statement of values</h2>
<p>As with the US President’s State of the Union speech, it’s the only night of the year in which the government sets out clearly what it stands for and what it plans to do.</p>
<p>An accident of history means it’s the treasurer rather than the prime minister who delivers the statement of values, although the treasurer speaks for the prime minister, as Joe Hockey spoke for Tony Abbott in 2014 when he infamously declared his budget to be for “<a href="https://archive.budget.gov.au/2014-15/speech/Budget_speech.pdf">lifters, not leaners</a>”.</p>
<p>Josh Frydenberg’s values will be apparent in how he responds to a surging iron ore price (last year’s budget assumed US$55 a tonne and on a <a href="https://www.linkedin.com/pulse/iron-ore-you-care-fob-cif-benjamin-cox/">slightly different</a> measure it’s currently north of US$180) and much stronger than expected recoveries in jobs and the share market.</p>
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<p>It would be tempting to wind back spending and push up taxes in order to close the budget deficit without seeing how far the recovery can run.</p>
<p>That Frydenberg says he won’t, not until he gets the unemployment rate <a href="https://theconversation.com/exclusive-top-economists-back-budget-push-for-an-unemployment-rate-beginning-with-4-159989">below 5%</a> and hundreds of thousands more Australians are in jobs, is a statement of values.</p>
<p>That he is reportedly planning to spend an extra $10 billion (over the four-year “forward estimates”, not per year) on responding to the findings of the aged-care royal commission when the commission identified much greater needs might also be a statement of values.</p>
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Read more:
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<p>As might the forecasts he makes for immigration, for the spending on mental health promised in response to the Productivity Commission inquiry, for the rollout of vaccines for Australians and vaccines for countries that need them more than Australia.</p>
<p>They’ll all be part of a program that makes clear what the government stands for and against which it can be judged. <a href="https://budget.gov.au/index.htm">Tuesday night</a> will matter.</p><img src="https://counter.theconversation.com/content/160086/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The budget is Australia’s State of the Union. It’s the only night of the year the government sets out a program against which it can be held accountable.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/726662017-02-15T19:09:19Z2017-02-15T19:09:19ZAfter all the talk, what is the Turnbull government actually doing for small business?<figure><img src="https://images.theconversation.com/files/156498/original/image-20170213-23342-17ss52x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Scott Morrison is continuing to make the case for the government's company tax cut plan to be passed.</span> <span class="attribution"><span class="source">AAP/Mick Tsikas</span></span></figcaption></figure><p>Treasurer Scott Morrison <a href="http://www.theaustralian.com.au/national-affairs/listen-to-the-rba-on-tax-morrison-urges-crossbench/news-story/5f9a0e52d4f18c2bde4c82a66ff86ae7">continues to warn</a> about the decline of Australia’s global competitiveness if the centrepiece of the 2016–17 federal budget – a company tax rate cut – is not passed.</p>
<p>However, such tax cuts are not necessarily the best approach for the government to support small business. They need other – more immediate – forms of support, <a href="https://www.qld.gov.au/dsiti/assets/documents/qld-business-innovation-report-2014.pdf">our research shows</a>.</p>
<h2>What’s being proposed?</h2>
<p>The <a href="http://www.budget.gov.au/2016-17/content/glossies/jobs-growth/downloads/FS/Small_Business.pdf">2016-17 budget</a> reflected the Turnbull government’s catchphrase of “jobs and growth”. From a small-business perspective, the budget wanted to: </p>
<blockquote>
<p>… boost new investment, create and support jobs and increase real wages, starting with tax cuts for small and medium-sized enterprises, that will permanently increase the size of the economy by just over 1% in the long term.</p>
</blockquote>
<p>In 2014, Australia had the <a href="https://theconversation.com/factcheck-is-australias-corporate-tax-rate-not-competitive-with-the-rest-of-the-region-37226">fifth-highest company tax rate</a> among OECD countries, albeit average in the Asia-Pacific region. Local investors benefit from lower taxes on dividends through Australia’s dividend imputation system, which passes credits onto them for corporate taxes already paid.</p>
<p>The Abbott government later succeeded in <a href="http://www.abc.net.au/news/2015-05-13/budget-2015-small-business-tax-break-explained/6466066">lowering the tax rate</a> for small businesses with a turnover of less than A$2 million from 30% to 28.5%. The Turnbull government’s plan would eventually reduce the rate for all companies to 25% by 2026-27. It’s a phased implementation over the next ten years, starting with an immediate cut for small companies to 27.5%.</p>
<p>However, 70% of small businesses are <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fems%2Fr5684_ems_42c172ff-6eb3-49d0-b310-7c6016682033%22">unincorporated</a>. This means their owners add profits to their personal income for tax purposes. While the government has promised an increase in their tax offset percentage, it plans to retain the cap of A$1,000.</p>
<p>All small businesses will benefit from the simplification of tax rules for stock, GST and depreciation. But the government’s plan introduces three levels of concessions for small businesses. This complicates the definition of what these small businesses are.</p>
<h2>Definition disputes</h2>
<p>Defining small business goes beyond an academic debate.</p>
<p>With little consensus on typical turnover numbers – these <a href="http://asic.gov.au/for-business/your-business/small-business/small-business-overview/small-business-what-is-small-business/">range</a> from A$2 million to A$25 million – a better indicator could be the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/8165.0Main%20Features1Jun%202011%20to%20Jun%202015?opendocument&tabname=Summary&prodno=8165.0&issue=Jun%202011%20to%20Jun%202015&num=&view">Australian Bureau of Statistics</a> definition of small businesses as those with fewer than 20 employees. And 97% of the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/8165.0Main%20Features1Jun%202011%20to%20Jun%202015?opendocument&tabname=Summary&prodno=8165.0&issue=Jun%202011%20to%20Jun%202015&num=&view">2.1 million businesses trading in Australia</a> fit this definition.</p>
<p>It is risky, though, to simplify the definition into one blunt instrument that ignores differences in industry, life cycle and high-volume versus high-worth sales. A more nuanced approach is needed to ensure relief for the businesses that need it most.</p>
<p>However, the major political parties seemingly remain focused on turnover as a measure of what is and isn’t a small business. The government’s <a href="http://www.budget.gov.au/2016-17/content/glossies/jobs-growth/downloads/FS/Small_Business.pdf">plan</a> extends the upper limit for the turnover of small businesses to A$10 million by 2016–17, which covers some of the 3% of Australia’s non-small businesses.</p>
<p>Meanwhile, Labor <a href="http://www.alp.org.au/bill_shorten_budget_reply_2016">has argued for</a> immediate support for tax cuts to small businesses with a turnover of less than A$2 million.</p>
<p>Lifting the turnover threshold for all small businesses from A$2 million to A$10 million in the short term will increase the number of businesses that can access some tax concessions by 90,000. And it may improve economic growth as larger firms <a href="https://theconversation.com/is-small-business-really-the-engine-room-of-australias-economy-60447">receive some relief</a>.</p>
<h2>What small businesses actually need</h2>
<p>Small businesses need immediate and certain tax relief in the short term. They struggle with an uncertain business environment. </p>
<p>But, in the longer term, <a href="https://www.qld.gov.au/dsiti/assets/documents/qld-business-innovation-report-2014.pdf">our research</a> shows increased competition, a lack of market demand and red tape are but a few of the issues small businesses deal with. They highlighted statutory and regulatory compliance, as well as tax planning and compliance, as major issues for them. </p>
<p>More than tax rates, complex tax requirements and regulations are issues causing small businesses substantial distress. The <a href="https://www.ato.gov.au/uploadedFiles/Content/CR/downloads/SMEPS%2013108_Main%20Report%2021_10_13_FINAL.pdf">Australian Tax Office’s research</a> supports this: more than 70% of surveyed clients viewed their tax affairs as complex. And the World Bank’s <a href="http://www.doingbusiness.org/rankings">ease of doing business</a> index ranks Australia 25th in terms of ease of paying taxes.</p>
<p>The immediate tax relief for small businesses is tied up in proposed legislation surrounding the government’s ten-year tax plan, which is unlikely to find enough support to pass the parliament in its current form. The uncertainty and complexity that have ensued from the political conflict over tax have negative effects on the small business landscape.</p>
<p>Innovation is likely to suffer under such uncertain conditions. The government’s <a href="http://www.budget.gov.au/2016-17/content/glossies/jobs-growth/downloads/FS/Small_Business.pdf">plan</a> recognises that: </p>
<blockquote>
<p>Small businesses are the home of Australian enterprise and opportunity and they are where many big ideas begin.</p>
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<p>In addition to ideas and passion, small businesses need resource availability, appropriate capabilities and market access to innovate. The plan proposes measures that satisfy some of these criteria, but more focus on finding ways to minimise bureaucracy to provide time to focus on innovation is needed. </p>
<p>The role of government is undeniable in such initiatives. Even if one argues that tax relief is a temporary reprieve, this cash injection can jump-start small business innovation and growth. </p>
<p>Should the two major parties fail to find common ground on the government’s company tax cut, the stalemate will continue – and leave small businesses in the lurch.</p><img src="https://counter.theconversation.com/content/72666/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Martie-Louise Verreynne receives funding from the ARC.</span></em></p><p class="fine-print"><em><span>Thea Voogt does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The volatile political debate between the two major parties about the long-term vision for tax has left small businesses in the lurch.Martie-Louise Verreynne, Associate Professor in Innovation, The University of QueenslandThea Voogt, Lecturer in Tax Law, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/648222016-09-07T20:12:28Z2016-09-07T20:12:28ZRedressing, not exacerbating, inequality is the real moral challenge for this government<figure><img src="https://images.theconversation.com/files/136526/original/image-20160905-31623-gvdncp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The government is keen to push its omnibus savings bill through parliament.</span> <span class="attribution"><span class="source">AAP/Mick Tsikas</span></span></figcaption></figure><p>A purported priority for this 45th parliament is to tackle the deficit, last encountered in the budget items just before the federal election campaign. </p>
<p>Would it be affected by the close result and odd voting patterns? No, the government claims – its win was the mandate it sought.</p>
<p>Prime Minister Malcolm Turnbull claimed that the passing of the budget repair bills was more than just political gain. He doubled down on his economic message ahead of parliament’s return, describing budget repair as a <a href="http://www.abc.net.au/news/2016-08-29/malcolm-turnbull-pushes-labor-to-support-budget-savings/7796390%5D(http://www.abc.net.au/news/2016-08-29/malcolm-turnbull-pushes-labor-to-support-budget-savings/7796390">“fundamental moral challenge”</a>. He demanded the opposition support the <a href="http://sjm.ministers.treasury.gov.au/media-release/074-2016/">omnibus bill</a> in its entirety, as Labor “assumed passage of it in its election costings document”.</p>
<p>This sets an odd tone for a “moral” claim, as the target of most of the bill’s proposed 24 cuts are the poor and vulnerable. This is in stark contrast to another bill for <a href="http://www.news.com.au/finance/economy/federal-budget/the-big-problem-with-the-80k-tax-cut/news-story/107528e698dc528a6fb29e464c84cb73">tax cuts for those earning A$80,000 plus</a>.</p>
<p>These claimed priority items make it clear the government’s budget “repairs” will increase overall income inequities, and if supported by Labor, could further exacerbate the distrust of the “elites”. </p>
<p>The priorities in Turnbull’s speech seemed to focus on punishing the least powerful by cutting their payments. While picking on welfare recipients has been around for a long time, its current use is dicey, given that <a href="http://vtr.aec.gov.au/HouseStateFirstPrefsByParty-20499-NAT.htm">24% of formal voters indicate</a> increasing distrust of major parties.</p>
<p>Both here and overseas, there are disturbing signs of the damage of inequalities. The rising proportion of outlier candidates in the recent election match worldwide evidence that populism is rising in response to the increased inequities in the developed world – for example, the rise of Donald Trump. </p>
<p>The Brexit polls and data produced by the IMF suggest that the focus on market models may damage both <a href="http://www.independent.co.uk/news/uk/politics/neoliberalism-is-increasing-inequality-and-stunting-economic-growth-the-imf-says-a7052416.html">economic growth and democratic legitimacy</a>. And the current ABC Boyer Lectures, delivered by Michael Marmot, question whether inequalities undermine <a href="http://www.abc.net.au/radionational/programs/breakfast/boyer-lectures-michael-marmot-social-determinants-ill-health/7636982">health and national well-being outcomes</a>. </p>
<p>These all suggest that any government that fails to tackle emerging political and economic inequities may create more problems.</p>
<h2>Who will be affected?</h2>
<p>Buried in the governor-general’s <a href="http://australianpolitics.com/2016/08/30/cosgrove-speech-opening-45th-parliament.html">speech opening this parliament</a> is a brief mention of the cashless welfare card. </p>
<p>This is a further sign again of increased contempt for those who are not in paid work – and that is not just the unemployed. <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/6224.0.55.001">New data from the ABS</a> family work status survey show there were around 329,200 “jobless” families with dependants in June 2015. In those families, there were 662,100 dependants aged less than 25 years, 85% of whom were children under 15. </p>
<p>In recent years, the proportion of jobless families with dependants has remained stable at around 11%. These cover carers, people with disabilities, the sick, students and parents with young or multiple children.</p>
<p>The omnibus bill – to which the government attached its hyperbolic demand for not leaving debts to our grandchildren – includes 24 items. Most of these, in <a href="http://www.smh.com.au/comment/24-shades-of-nasty-the-devil-in-the-detail-of-treasurer-scott-morrisons-6-billion-omnibus-savings-bill-20160901-gr6ddm.html">a neat summary article</a>, are described by Jessica Irvine as “24 shades of nasty”. Some are particularly toxic.</p>
<p>I have further summarised 13 of the meaner items below, with their proposed savings, which would add only just over half of the $6 billion or so expected to be saved over the four-year forward estimates. This is hardly serious deficit-cutting, but will cause real pain to those who rely on them.</p>
<ul>
<li><p>cuts in support for students and earlier FEE-HELP repayment ($3.3 million);</p></li>
<li><p>abolish bonus for those getting off Newstart and holding a job for 12 months ($242.1 million);</p></li>
<li><p>no overlap period for those moving from Newstart to paid work ($61.5 million);</p></li>
<li><p>cuts to dental services ($52.4 million);</p></li>
<li><p>two-year wait for immigrants to claim welfare payments ($312.5 million);</p></li>
<li><p>cuts to paid parental leave ($133.7 million);</p></li>
<li><p>cuts to fringe benefits valuing for other payments ($132.1 million);</p></li>
<li><p>no backdating of Carers Allowance ($108.6 million);</p></li>
<li><p>cuts to family payments and other parental leave ($330.9 million);</p></li>
<li><p>cuts to income support for mentally ill people confined by serious criminal offence ($37.8 million);</p></li>
<li><p>cuts to energy supplement for recipients of disability support pension, carer and Newstart payments ($1.29 billion);</p></li>
<li><p>tighter subsidies for high-need aged-care residents ($80.5 million); and</p></li>
<li><p>tougher repayments of debts of welfare recipients ($157.8 million).</p></li>
</ul>
<p>Apart from the Newstart savings, the forward estimates are not impressive. And the situation of those on Newstart is already grim, without further cuts. </p>
<p><a href="http://www.smh.com.au/business/workplace-relations/caught-in-an-unemployment-netherworld-too-young-to-retire-too-old-to-get-a-job-20160823-gqyv2w.html">An article in the SMH</a> on research from the Brotherhood of St Laurence has found that 40% of recipients of employment services last year were mature-age Australians who spent more than a year on income support. </p>
<p>It pointed out that more than one-third of Newstart payments go to people who are not even expected to look for work as they are sick, caring for others, in training, or cannot look for work.</p>
<p><a href="http://www.smh.com.au/federal-politics/political-news/malcolm-turnbulls-dole-cuts-will-hit-older-australians-the-hardest-20160903-gr817b.html">Another article</a> shows increasing numbers of older people on Newstart (10,000 extra since 2012, with more than half staying on the payment for at least two years). All these data suggest that what was once seen as a short-term payment has now become long term for those who meet prejudice and lack opportunities in finding paid work.</p>
<h2>Ignoring the fairness question at their peril</h2>
<p>So why is the government making these cuts their “moral” demand for support? And why has Labor not offered clear opposition? </p>
<p>Despite the clear public and political responses to the basic unfairness of these and similar cuts in the 2014 budget, the government is pressing ahead with these measures by way of its wafer-thin majority. Have neither of the major parties has learned anything from the election? </p>
<p>Both major parties would be wise to listen to the messages coming from a grumpy electorate that has indicated it wants serious leadership, not just political game-playing and increased unfairness.</p>
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<p><em>Eva Cox will be online for an Author Q&A between 11am and noon AEST on Friday, 9 September, 2016. Post any questions you have in the comments below.</em></p><img src="https://counter.theconversation.com/content/64822/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Eva Cox does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We need to ask on what basis the government is making its budget savings a ‘moral’ issue, and how the opposition can possibly support it.Eva Cox, Professorial Fellow, Jumbunna IHL, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/644202016-08-25T06:31:02Z2016-08-25T06:31:02ZScott Morrison has correctly diagnosed the problem, but needs to be flexible about solutions<p>Federal treasurer Scott Morrison’s diagnosis of the risks and challenges confronting the Australian economy, as set out in his <a href="http://sjm.ministers.treasury.gov.au/speech/015-2016/">Bloomberg Address</a> in Sydney, is hard to fault. </p>
<p>Australia has become very dependent on continued strong growth in the Chinese economy for our ongoing prosperity. However, China’s ability to sustain continued strong growth over the medium term is imperilled by the increasing volume of (actual and potential) bad debts in both its formal and “shadow” banking systems.</p>
<p>There’s also a growing risk of a liquidity crunch, against which China’s substantial foreign exchange reserves may not provide adequate insurance. </p>
<p>Australia’s terms of trade continue to fall - unwinding much of the massive upswing that occurred during the commodities boom of the preceding decade. We are also seeing very low levels of inflation across the developed world, much of the developing world and more recently here in Australia as well.</p>
<h2>The earnings problem</h2>
<p>All of this means that we now have what the treasurer calls “an earnings problem”.</p>
<p>The growing pressure around the world (and here in Australia) for greater control by national governments over the movement of goods and services, capital and people across national borders – reversing the general trend of the last three decades – does represent a genuine threat to the global and national policy settings which have helped make it possible for Australia to enjoy 25 years of more or less continuous economic growth.</p>
<p>And, partly as a result of the inability of successive Australian governments to fulfil their undertakings to return the budget to surplus, Australia is now less well-placed to use fiscal policy to respond to any economic shocks that may emanate from abroad than we were at the onset of the global financial crisis. </p>
<p>For a different set of reasons, which Glenn Stevens outlined in his <a href="https://theconversation.com/reserve-bank-governor-calls-for-hard-talk-about-budget-repair-63765">final speech</a> as Reserve Bank governor, we are also less well placed to deploy monetary policy to the same end than we were then. </p>
<p>Thus the treasurer made a solid case for action to ensure the budget is returned to surplus, and the level of public debt reaches a peak and begins to come down.</p>
<h2>The taxed and the taxed nots</h2>
<p>The treasurer is also right to identify as a problem the fact that, as he put it: </p>
<blockquote>
<p>more Australians today are likely to go through their entire lives without ever paying tax than for generations. More Australians are also likely today to be net beneficiaries of the government than contributors.</p>
</blockquote>
<p>That’s partly a consequence of an ageing population. But it is also the direct result of a whole series of decisions made during the last two terms of the Howard government.</p>
<p>That’s when a raft of new status-based (as opposed to needs-based) entitlement programs were introduced, and when a wider range of individuals (including people over the age of 60, small business operators, people with significant superannuation balances, and people earning income in the form of capital gains) were granted preferential income tax treatment compared with wage and salary earners. This continued under the Rudd and Gillard governments. </p>
<p>And while both the previous Labor government and the Abbott and Turnbull governments have sought to unwind some of this largesse – indeed, that’s what the superannuation measures in Scott Morrison’s first budget were partly about – none of them has been willing fully to acknowledge this reality. </p>
<p>According to forecasts set out in the 2016-17 <a href="http://budget.gov.au/2016-17/content/bp1/download/bp1.pdf">federal budget</a>, government spending is set to be fully 1.5 percentage points higher as a proportion of GDP in the current financial year than the 24.3% which it was, on average, during the Howard-Costello years.</p>
<p>And the Turnbull government has no plans to return it to that level: the longer-term projections in the 2016-17 budget envisage government spending declining as a share of GDP to 25.2-25.3% of GDP over the next decade. </p>
<p>Rather, the government expects revenue to increase from 23.3% of GDP in the current financial year (a percentage point below the average for the Howard-Costello years) to 25.5% of GDP (half a percentage point above the average for the Howard-Costello years) in a decade’s time.</p>
<p>Yet if what the treasurer refers to as Australia’s “earnings problem” persists, it will be on the revenue side of the budget that the reasons for the inability to return the budget to surplus will reside, at least in the first instance.</p>
<h2>Grasping the nettle</h2>
<p>Against that background, it scarcely makes sense that the government’s two most significant initiatives – in terms of their long-term impact on the budget – are a big increase in government spending (on defence procurement) and a big reduction in taxes (in the form of phased reduction over ten years in the company tax rate).</p>
<p>Both of these measures make it harder, not easier, to return the budget to the position where the treasurer rightly wants it.</p>
<p>It’s fair enough for the government to insist that the Opposition support saving measures it supported during the election campaign. But it hardly seems reasonable for the government to, as the treasurer put it, “expect them to engage on expenditure savings they have habitually blocked” while the government refuses to countenance revenue measures it has previously opposed. </p>
<p>It’s encouraging to see the treasurer seeking to lead the sort of hard-nosed conversation that Glenn Stevens called for last month in his valedictory speech as governor of the Reserve Bank. </p>
<p>But a conversation is a two-way exercise. If Morrison is to achieve the goal he seeks, he will need more flexibility on how to get there than was displayed today.</p><img src="https://counter.theconversation.com/content/64420/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Saul Eslake does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Federal treasurer Scott Morrison’s diagnosis of the risks and challenges confronting the Australian economy is hard to fault. But tackling those problems will require flexibility from the government.Saul Eslake, Vice-Chancellor’s Fellow, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/625542016-07-18T20:05:51Z2016-07-18T20:05:51ZA realistic strategy for federal budget repair<p><em>A federal election is an opportunity to take stock of how Australia is doing, where it’s going, and what governments can do about it. <a href="https://theconversation.com/au/topics/advice-to-government">This series</a>, written by program directors at the Grattan Institute, explores the challenges facing Australia. In this last piece of the series: budget repair.</em></p>
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<p>The persistent budget deficit is one of the re-elected Turnbull Government’s biggest challenges. But as revealed by the <a href="https://theconversation.com/where-are-they-now-tracking-down-the-promises-of-budgets-past-58627">long list of zombie measures</a> that the last government proposed and the Senate refused to pass, the politics of budget reform is never easy. Success will require tough decisions, and powerful public persuasion.</p>
<p>As the government <a href="https://theconversation.com/the-policy-agenda-what-the-government-should-do-now-61518">chooses its budget priorities</a>, inevitably it will look for measures that can be implemented without parliamentary approval or that other parties in the Senate are likely to approve. But given the scale of the budget problem, it will also have to identify reforms that other parties do not support (at least initially), and then carry the day by making the case for them with the public. </p>
<h2>The size of the budget problem</h2>
<p>In building that public support, the first step is to come clean about the scale of the problem. Successive Commonwealth governments have relied on <a href="http://grattan.edu.au/news/budget-2016-both-parties-budget-plans-are-simply-hoping-for-the-best/">over-optimistic projections</a> that expect revenues to recover quickly, and spending to grow only slowly. The May 2016 budget was the seventh to project a drift back to near surplus, primarily as a result of bracket creep, over the following four years. It was also the seventh budget in which the actual outcome for the current year showed minimal improvement over the year before. For eight years, budget deficits have persisted at about 2-3% of GDP. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/130680/original/image-20160715-2153-1uyu7du.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/130680/original/image-20160715-2153-1uyu7du.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/130680/original/image-20160715-2153-1uyu7du.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/130680/original/image-20160715-2153-1uyu7du.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/130680/original/image-20160715-2153-1uyu7du.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/130680/original/image-20160715-2153-1uyu7du.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/130680/original/image-20160715-2153-1uyu7du.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Most analysts believe that current budget projections are unduly optimistic. Over the last eight years, such projections have been used to justify a softly-softly approach to budget repair with few net savings. Both sides of politics have introduced significant savings measures, then used pretty much all the proceeds to fund new priorities rather than to reduce the budget deficit.</p>
<p>To build public support for actual budget repair, the <a href="http://grattan.edu.au/news/rose-tinted-budget-outlook-does-neither-party-any-favours/">Government needs a more realistic set of economic projections</a>. These should assume that Australia’s future will reflect the experience of most developed economies since before the global financial crisis, with corporate investment, real economic growth and inflation all lower. To counter optimism bias, the slowdown should be presumed to be permanent until proven otherwise. With such projections, the government has a chance of persuading the public that tougher budget measures that impose net costs are needed.</p>
<h2>The need for budget repair</h2>
<p>The Government will also have to explain why budget repair matters. Again this needs plainer speaking. Australia is exposed to a downturn in the global economy – and there are plenty of reasons to fear it will happen. Budget repair now will make it easier for governments to employ fiscal defence in a downturn. If they want to use deficit funding to lift economic activity in difficult times, as the Rudd Government did in 2009, then they must deliver surpluses when growth has recovered. </p>
<p>The budget deficit is also unfair to future generations. About <a href="https://theconversation.com/young-australians-set-to-pay-for-government-policy-mistakes-35250">half of it</a> is a result of increases over the last decade in net transfers to households aged over 65. Spending per older household on health and the Age Pension has grown faster than the economy; income taxes per older household have fallen in real terms as a result of superannuation tax breaks. Every year we run a deficit at current levels, <a href="https://grattan.edu.au/report/the-wealth-of-generations/">younger households will have to pay an additional $10,000 in tax</a> over their lives to pay back the principal and interest.</p>
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<img alt="" src="https://images.theconversation.com/files/130681/original/image-20160715-2147-1knmood.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/130681/original/image-20160715-2147-1knmood.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/130681/original/image-20160715-2147-1knmood.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/130681/original/image-20160715-2147-1knmood.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/130681/original/image-20160715-2147-1knmood.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/130681/original/image-20160715-2147-1knmood.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/130681/original/image-20160715-2147-1knmood.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Finally, government should highlight the mounting cost of interest on the accumulating debt – at present 4% of Commonwealth income, or as much as it spends on public hospitals. </p>
<h2>What is achievable?</h2>
<p>The Government’s slim majority in the House of Representatives, and a large and diverse crossbench in the Senate, will not make budget repair easy. Worthwhile spending reductions that require legislative change are unlikely to pass easily, since inevitably they will involve cutting services to someone, creating political opportunity for opposition parties. The Government could buy change by supporting the wish lists of minor parties, but experience from the Gillard years shows that such horse trading, while productive, can be expensive.</p>
<p>So the Government will need to build a budget repair strategy that puts a priority on the big things and makes the most of what is politically possible. It should progress measures that don’t require specific parliamentary approval, favour measures where Parliamentary approval is plausible, and build public support for important reforms. </p>
<p>Other changes should be deferred, or ditched outright to preserve political capital for winnable wars. The Government should abandon potential budget savings that are unlikely to win support from either other parties or the public. For example, there is little prospect of <a href="https://grattan.edu.au/report/a-gst-reform-package/">increasing the GST</a> this parliamentary term. Many of the “zombie” measures from the May 2014 budget should be put out of their misery.</p>
<h2>A realistic strategy for budget repair</h2>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/130682/original/image-20160715-2127-tw5t9z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/130682/original/image-20160715-2127-tw5t9z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=364&fit=crop&dpr=1 600w, https://images.theconversation.com/files/130682/original/image-20160715-2127-tw5t9z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=364&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/130682/original/image-20160715-2127-tw5t9z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=364&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/130682/original/image-20160715-2127-tw5t9z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=458&fit=crop&dpr=1 754w, https://images.theconversation.com/files/130682/original/image-20160715-2127-tw5t9z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=458&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/130682/original/image-20160715-2127-tw5t9z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=458&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Note: Excludes budget savings measures not yet legislated but likely to have bipartisan support, such as increases in tobacco excise. Medicare levy assumes a 0.5 percentage point increase. Improving hospital efficiency, such as such as by establishing a national efficient price for hospital procedures, assumes savings will be shared between the Commonwealth and the States. Raising Age Pension and superannuation access ages assumes savings once the policy changes are fully implemented. Source: Various Grattan Institute reports; Commonwealth Budget papers (various years); ALP election costing documents; Productivity Commission, Grattan analysis.</span>
</figcaption>
</figure>
<h2>Changes that don’t require specific legislation</h2>
<p>First, the Government should reduce spending that does not require specific legislation. Healthcare, as the fastest-growing area of government expenditure, should be a particular focus. Its growth can be contained in ways that do not compromise the quality of care. For example, the Commonwealth <a href="https://theconversation.com/many-australians-pay-too-much-for-health-care-heres-what-the-government-needs-to-do-61859">can manage chronic disease better, and reduce waste by paying less for inefficient hospital care</a>. </p>
<p>There are also a myriad of spending programs, each benefiting a particular interest group, dangerously expensive as a whole. The election campaign has increased the size of the task, with its ample giveaways, often for <a href="https://theconversation.com/election-2016-will-the-infrastructure-promises-meet-australias-needs-61140">minor transport projects and sporting facilities</a>, <a href="http://www.theaustralian.com.au/business/opinion/bernard-salt-demographer/federal-election-2016-infrastructure-projects-in-marginals-overdone/news-story/7b77e5b98c4f348c38b14c7aae7a2abc">particularly in marginal electorates</a>. Ramping up the budget rhetoric should make it easier to resist such demands next time around.</p>
<h2>The political middle ground</h2>
<p>Second, the government should look for genuine political middle ground, as it did with the changes to the Age Pension means test passed by the last Parliament with support from the Greens.</p>
<p>Once the composition of the Senate is confirmed, government legislation will most likely need the support of either the ALP, or the Greens plus one or two independents, or virtually all the independent nine or 10 senators. Given the disparate backgrounds of the Senate crossbench, reaching across the aisle to the ALP, or the Greens, may be easier – and it might work. </p>
<p>With such a Senate, some of the new Turnbull Government’s best chances to improve the budget in this Parliament will be to increase taxes – such as by <a href="https://grattan.edu.au/report/hot-property/">reducing the capital gains tax discount</a>, or <a href="http://grattan.edu.au/news/election-2016-an-open-letter-to-malcolm-turnbull-on-medicare/">raising the Medicare Levy</a> to pay for rising spending on health services. The problem here will be with the Coalition party room, as illustrated by the backbench push to overturn the changes to superannuation tax breaks proposed in the May Budget reveals. </p>
<p>To succeed, the Government must abandon the fiction that there is no revenue problem. Both the politics of budget repair and the sheer size of the budget gap mean that the Commonwealth needs to both <a href="https://grattan.edu.au/report/balancing-budgets-tough-choices-we-need/">contain spending <em>and</em> boost revenues to return the budget to surplus</a>. Ironically, revenue increases – primarily through bracket creep – have been the <a href="https://theconversation.com/a-dull-and-routine-budget-that-relies-on-group-denial-41599">dominant plan for budget repair</a> under all Treasurers over the last eight years.</p>
<h2>Building public support</h2>
<p>Third, the Government could propose budget savings that are unlikely to obtain immediate bipartisan support, but may win out as public opinion and political reality force other parties to fold. For example, the Labor Party ultimately agreed to proposed changes to research and development tax incentives just before the election. </p>
<p>Surveys suggest that people understand the need for budget repair, and <a href="http://www.essentialvision.com.au/wp-content/uploads/2016/04/Essential-Report_160426.pdf">can be persuaded to slay sacred cows</a> such as negative gearing.</p>
<p>Among possible savings, Grattan Institute <a href="https://grattan.edu.au/report/balancing-budgets-tough-choices-we-need">reports</a> have identified increasing the age of access for the Age Pension and superannuation and including owner-occupied housing in the Age Pension assets test as being among the best opportunities to achieve Budget repair. </p>
<p>Other welfare priorities should include recovering more of the costs of aged care from those who benefit, and constraining the growth of carer payment, since these are among the fastest growing costs. Abolishing the Senior Australian and Pensioner Tax Offset (SAPTO), or just restricting its tax benefits to pensioners, could raise up to $700 million a year. In health, government needs to build the case for reforms to the <a href="https://theconversation.com/many-australians-pay-too-much-for-health-care-heres-what-the-government-needs-to-do-61859">Medicare schedule list, pathology pricing, and pharmaceutical pricing</a>.</p>
<p>Commonwealth funding for higher education is also increasing, and retaining a demand-driven system will require the Commonwealth to recover more of the growing HELP debt by <a href="https://grattan.edu.au/report/doubtful-debt-the-rising-cost-of-student-loans">lowering the income repayment threshold</a>, and <a href="https://grattan.edu.au/news/tackling-doubtful-debt-how-to-keep-the-student-loan-scheme-viable/">recovering debts from estates</a>.</p>
<p>Obviously, the public will need persuading on these reforms. Discussion papers and public argument should build popular momentum for change so compelling that the Labor Party or the Greens follow where the people led them.</p>
<p>This approach increases the importance of outside stakeholders: media, think tanks, and peak lobby groups. It increases the importance of following the evidence – it is pretty difficult to win over the public when even the experts are opposed.</p>
<h2>Institutional changes</h2>
<p>Institutional changes can also help to build the public argument for budget repair. Amending the <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/cobha1998258/sch1.html"><em>Charter of Budget Honesty</em></a> to force governments to bring down budgets that produce a surplus within the forward estimates would counter the “long-termism” that defers difficult decisions. Governments should also be required to produce long-term projections that spell out the impact of long-term decisions, countering the tendency to hide the impact of significant decisions just outside the forward estimates period.</p>
<h2>A budget strategy</h2>
<p>Hoping for the best is not a budget management strategy: it simply shifts the costs and risk of budget repair onto future generations. To make more progress than its predecessors, this Turnbull government will need to prioritise ruthlessly, make tough calls, compromise with other parties, and persuade the public where it matters.</p><img src="https://counter.theconversation.com/content/62554/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.</span></em></p><p class="fine-print"><em><span>Brendan Coates does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Hoping for the best is not a budget management strategy: but Australia can set realistic goals.John Daley, Chief Executive Officer, Grattan InstituteBrendan Coates, Fellow, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/608612016-06-14T20:04:57Z2016-06-14T20:04:57ZHow the two major parties shape up on debate around student loan reform<figure><img src="https://images.theconversation.com/files/126424/original/image-20160614-29229-d5zf6h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Both major parties support lowering the repayment threshold for student loans. </span> <span class="attribution"><span class="source">from www.shutterstock.com</span></span></figcaption></figure><p>Whichever party wins the 2 July election, changes to the <a href="http://studyassist.gov.au/sites/studyassist/helppayingmyfees">Higher Education Loan Programme (HELP) scheme</a> are on their way. </p>
<p>Both parties support lowering the threshold for starting repayment, although by different amounts. Both would abolish HELP debt reductions for some teaching and nursing graduates. But the Liberals are floating more radical ideas for fixing HELP’s financial problems.</p>
<p>The <a href="https://www.education.gov.au/portfolio-budget-statements-2016-17">May budget</a> estimated HELP’s 2016-17 costs at A$2.6 billion, mostly in interest subsidies and debt not expected to be repaid, commonly called doubtful debt. </p>
<p>A <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/research_reports/Higher_Education_Loan_Programme">Parliamentary Budget Office report</a> forecasts rapid escalation of these costs. This is why HELP reform is on the political agenda.</p>
<p>In March, <a href="http://grattan.edu.au/report/help-for-the-future/">a Grattan Institute report</a> argued that lowering the income threshold for repaying HELP debt was essential for controlling the scheme’s costs. </p>
<h2>Different repayment thresholds being proposed</h2>
<p>For 2016-17 <a href="https://www.ato.gov.au/Rates/HELP,-TSL-and-SFSS-repayment-thresholds-and-rates/">the threshold is $54,869</a>. Anyone earning less than that repays nothing; anyone earning more repays at least 4% of their income. </p>
<p>Labor says that it would reduce the <a href="http://www.theguardian.com/australia-news/live/2016/jun/10/australian-election-2016-labor-to-announce-support-for-cuts-to-family-payments-politics-live?page=with:block-575a4da3e4b01a5ff948b54c">initial threshold to $50,638,</a> with a 2% of income repayment rate, then the 4% rate kicking in at the current threshold. </p>
<p>The $50,638 threshold is a budget measure from the 2014 Coalition budget. But since then, Liberal thinking has moved on. </p>
<p>In May 2016, the Liberals <a href="https://docs.education.gov.au/documents/driving-innovation-fairness-and-excellence-australian-education">released a discussion paper</a> on future higher education policy. In it they mooted a <a href="https://theconversation.com/higher-education-in-policy-paralysis-after-budget-2016-what-now-58815">much lower threshold</a> of between $40,000 and $45,000.</p>
<p>Our Grattan report also suggested an initial threshold in this range, of $42,000. The reason why can be seen in the chart below. It adjusts a $50,638 threshold for 2016-17 back to 2013-14, the last year for which we have <a href="https://data.gov.au/dataset/taxation-statistics-individual-sample-files">income data on HELP debtors</a>, to see how many more people would repay at different thresholds. </p>
<p>A $50,638 threshold does too little to bring more HELP debtors into repayment. With a 2% of income repayment rate, it would increase annual HELP compulsory repayments by only 4%. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/126238/original/image-20160613-12948-1fbexcv.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/126238/original/image-20160613-12948-1fbexcv.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/126238/original/image-20160613-12948-1fbexcv.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/126238/original/image-20160613-12948-1fbexcv.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/126238/original/image-20160613-12948-1fbexcv.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/126238/original/image-20160613-12948-1fbexcv.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/126238/original/image-20160613-12948-1fbexcv.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/126238/original/image-20160613-12948-1fbexcv.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">HELP thresholds and numbers of people repaying.</span>
<span class="attribution"><span class="source">Australian Taxation Office, 2013-14 individual sample file</span></span>
</figcaption>
</figure>
<h2>Will low-income graduates be more affected?</h2>
<p><a href="http://www.sharonbird.com.au/liberals_vet_crisis_is_set_to_spread_to_universities">Labor argues </a>that a $42,000 threshold would affect lower-income earners too much. </p>
<p>Because HELP debtors often live with other people, their personal income is not always a reliable guide to their living standards. They share expenses and sometimes income with others. <a href="http://grattan.edu.au/report/help-for-the-future/">Grattan’s analysis</a> found that half the debtors who would be affected by a $42,000 threshold live with a partner.</p>
<p>These partnered debtors are of particular interest in HELP policy. The loan scheme is designed to protect people in financial hardship, but 70% of partnered debtors live in households with combined after-tax disposable incomes exceeding $80,000 a year. </p>
<p>These partnered HELP debtors don’t need to work full-time to have a good standard of living, increasing the risk they will never repay. </p>
<p>Basing HELP repayments on family income, as mentioned in the Liberal discussion paper, would fix this problem. But family-income based repayment is unlikely to happen due to <a href="http://andrewnorton.net.au/2016/04/09/should-help-repayments-be-based-on-family-income/">major fairness and implementation problems</a>. Reducing the threshold to lift repayments is a better way of reducing doubtful debt. </p>
<p>Of the single HELP debtors affected by a $42,000 threshold, 80% would end up with after-tax disposable incomes between $35,000 and $45,000 a year (including untaxed income). For many in this group, low income is temporary as they transition into full-time work or wait for a pay rise. </p>
<p>While a growing share of first full-time graduate jobs <a href="http://grattan.edu.au/report/help-for-the-future/">pay less than the threshold</a>, median graduate salaries <a href="http://www.graduatecareers.com.au/wp-content/uploads/2015/07/Beyond_Graduation_2014.pdf">increase by a third</a> in the first three years after graduation. </p>
<p>Nobody pretends that it would be easy to live on your own earning $42,000 a year. But the threshold would remain well above social security benefits or the minimum wage, now <a href="http://www.mywage.org/australia/main/salary/minimum-wage">about $35,000 a year</a>. It’s not clear why HELP debtors should be treated so generously compared to other forms of government income protection, especially when many of them are not poor. </p>
<p>A lower threshold of around $42,000 would still achieve HELP’s income protection aims: students would not have to pay their fees up-front, repayments would still adjust to earnings, and HELP debtors on low incomes would not have to repay anything.</p>
<h2>Ending HELP benefits for careers already chosen</h2>
<p>While differing on thresholds, Labor and Liberal now agree on ending the <a href="http://studyassist.gov.au/sites/studyassist/payingbackmyloan/hecs-help-benefit/pages/hecshelpbenefit">HECS-HELP benefit</a>. This benefit is a reduction in HELP debt of <a href="https://www.ato.gov.au/Rates/HECS-HELP-benefit-maximum-annual-amounts/">just under $2,000 a year</a> to people with degrees in certain fields working in related occupations, sometimes in particular locations. In practice, <a href="https://www.education.gov.au/report-review-demand-driven-funding-system">most of the money goes to teachers and nurses.</a></p>
<p>The main argument against the HECS-HELP benefit is simple: it pays graduates to do what they were going to do anyway. If someone spends three or four years studying to be a teacher or a nurse, do they become a teacher or a nurse because their HELP debt will be reduced by $2,000 a year, or because that is their chosen career? </p>
<p>The benefit is a windfall gain to people who find out they could save money by <a href="https://www.ato.gov.au/Individuals/Study-and-training-support-loans/In-detail/HECS-HELP-benefit/HECS-HELP-benefit---Overview/?page=1#Lodging_your_application">filling in Australian Taxation Office forms</a>. </p>
<p>Unfortunately, Labor is promising another similar scheme, <a href="http://www.alp.org.au/futuresmartuniversities">by writing off the HECS-HELP debts of science, technology, engineering and maths graduates</a> who finish the degree they started.</p>
<p>Neither Labor nor Liberal has confirmed policies on HELP that would significantly affect large numbers of students or graduates, although the Liberals are leaning towards major threshold reform. </p>
<p>But as HELP’s costs steadily increase, it is likely that both parties will develop such policies in the coming years. They just won’t announce them during an election campaign.</p><img src="https://counter.theconversation.com/content/60861/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>In the late 1990s, Andrew Norton was a policy adviser to a Liberal education minister. He was also appointed by a Liberal minister in 2013 as co-reviewer of the demand driven funding system for higher education. </span></em></p>The threshold for paying back student loans will vary depending on which party wins the election.Andrew Norton, Program Director, Higher Education, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/600412016-05-26T06:25:44Z2016-05-26T06:25:44ZSuper not so super after all for women over 50<figure><img src="https://images.theconversation.com/files/124083/original/image-20160526-16685-1nj6a97.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Higher earning women aged in their 50s are penalised by prospective super changes.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Superannuation changes proposed in the latest Federal budget will affect women aged 50 - 64 more than males, new research using NATSEM’s tax/transfer microsimulation model has found.</p>
<p>The superannuation change that had the most impact was reducing the concessional contributions cap of $30,000 for those under 49 and $35,000 for those aged 49 and over to $25,000 for everyone. The aim of this change was to discourage high income workers from contributing large amounts of pre-tax dollars into superannuation.</p>
<p>NATSEM used their tax/transfer microsimulation model to look at the impact of this policy by age and gender, and found that the greatest impact was on women aged 50-64, who would pay an additional 0.97% of their income in tax, compared to males of this age who would pay an additional 0.42% of their income in tax. The reason for this was that the median income of males adversely affected by the policy was $230,000, whereas the median income of women was $113,000.</p>
<p>The reduction in the cap is intended to reduce the incentives for high income people contributing to super, and this is a good policy. Most of the people affected were earning over $220,000 a year, and using the concessional contributions cap as a form of tax free saving. </p>
<p>However, in many policies, there are “unintended consequences”, and looking at the impact of the policy on particular age groups, and for men and women, can highlight important differences in the impacts. What this analysis shows is that there is an unintended consequence of this policy on women aged 50-64, who are probably contributing at this age group because broken careers, part-time work and family duties when aged 30-49 mean their superannuation contributions were low. This is an age when they are playing catch-up with their superannuation, to be able to fund their retirement.</p>
<p>Some of this effect may be reduced by the policy of being able to accrue the difference between the limit and the actual concessional contributions over five years on a rolling basis, but once a woman aged 50-64 is able to take advantage of this, their low contributions phase will probably be over.</p>
<p>One suggestion to encourage the use of these concessional contributions by those with reasonable, but not high salaries is to use an income cutoff, and reduce the concessional contributions amount for higher income earners. </p>
<p>As an example, those earning $150,000 or less may have a concessional contributions cap of $30,000 depending on their current superannuation balance; and those earning more than $150,000 may face a reduced concessional contributions cap, depending on their previous superannuation contributions or their current balance. This continues to encourage those with enough income to have some spare money to put into concessional superannuation to do this, but caps those with very high incomes putting large amounts into superannuation.</p>
<p>Our superannuation policy needs to encourage those in their life stage where they can afford to put more into super to do this, but at the same time discourage high income earners using the system for tax breaks. An income cut off would do this, and would mean that women who have had lower contributions earlier in their careers when establishing families would be able to make up these contributions when they have a reasonable income and their family has grown up.</p>
<p>What this analysis has also shown is the importance of looking at the impacts of policy on different groups. The tax/transfer system is a complex system, and any change may have unintended consequences on different groups. This research highlighted a policy designed to have an impact on the very rich had an impact on women who, while they were reasonably well off, were also trying to do the right thing by bumping up their super contributions. </p>
<p>There are some limitations to this modelling. One is that we have not been able to model all the superannuation policies announced in the budget. The main one we have not been able to model is the lifetime cap, as we have no information on lifetime contributions in our model. </p>
<p>The second limitation is that we have not attempted to model how much the final superannuation balances will be, nor retirement incomes based on superannuation balances - this would require information on rates of return, and contributions each year until retirement, and the type of superannuation fund being contributed to. </p>
<p>We have also not been able to model the accrual of the cap over a 5 year rolling basis, and the main reason for this is that our model does not have the capacity to consider five year time-frames - we use data for one year. The final limitation is that the groups affected have very high incomes, so minor changes in parameters used to inflate income and assumptions on salary sacrifice can have a large impact on the result. The income inflators we have used in the model are from the ABS and Treasury.</p><img src="https://counter.theconversation.com/content/60041/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Modelling the proposed superannuation policies on gender has revealed unintended consequences.Robert Tanton, Professor, University of CanberraJinjing Li, Associate Professor, NATSEM, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/590792016-05-23T05:49:39Z2016-05-23T05:49:39ZExplainer: what is the Office for Learning and Teaching – and why does it matter?<figure><img src="https://images.theconversation.com/files/122927/original/image-20160518-9487-3neqz2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Teaching innovation in our universities may now be at risk.</span> <span class="attribution"><span class="source">from www.shutterstock.com</span></span></figcaption></figure><p>The Coalition announced in the budget that it would <a href="https://theconversation.com/innovation-in-learning-and-teaching-is-too-important-to-cut-58629">stop funding</a> the Office for Learning and Teaching (OLT) – an organisation that that has helped to enhance learning and teaching in universities. This means that from 30 June, the organisation will cease to run, and from July there will be no more grants and fellowships. The decision puts teaching innovation in our universities at risk.</p>
<p>There is no replacement institute, despite the government <a href="http://www.education.gov.au/portfolio-budget-statements-2015-16">promising this in last year’s budget</a>.</p>
<p>This is not just a problem for the higher education sector. It will contribute to significant losses to the wider economy that flow from having a highly skilled, professional workforce.</p>
<p>It will also lead to missed opportunities for enhancing the educational experience of students.</p>
<h2>What does the OLT do?</h2>
<ul>
<li>Provides funding for initiatives that improve the teaching and learning experience;</li>
<li>Recognises (by awarding and celebrating) teachers who were exemplars in their fields;</li>
<li>Funds fellowships that allow the best teachers to share their knowledge and practices throughout the sector; and</li>
<li>Improves the quality of teaching and learning by providing mechanisms for teachers to collaborate and share resources.</li>
</ul>
<p>The Coalition said that only the teaching awards will remain. These will be funded <a href="https://theconversation.com/innovation-in-learning-and-teaching-is-too-important-to-cut-58629">at a fraction of the current amount</a>.</p>
<h2>Why does it matter that the funding has been cut?</h2>
<p>In 2015, our higher education sector was the major contributor to almost <a href="https://internationaleducation.gov.au/research/research-papers/Documents/ValueInternationalEd.pdf">$20 billion</a> of international student export revenue. </p>
<p>Teaching and learning practices are at the core of higher education. These practices are required to constantly adapt to new global realities. Bodies such as the OLT have helped give Australia its competitive advantage.</p>
<p>Australian higher education is known internationally for its quality learning and teaching. One of the reasons for this is that the OLT and its predecessors have created a culture of collaboration and engagement. The funding was <a href="https://theconversation.com/australias-declining-investment-in-quality-university-teaching-43243">widely distributed</a> and it encouraged collaboration across multiple institutions. This made sure that the benefits of the projects were felt across many institutions.</p>
<p>Quality learning and teaching is a shared concern, and the loss of funding puts shared solutions at risk. </p>
<h2>The impact of grants and fellowships</h2>
<p>When innovation in higher education is mentioned, most people think of research. Yet it is teaching that is at the core of our universities. In fact, teaching subsidises research. By one <a href="https://grattan.edu.au/report/the-cash-nexus-how-teaching-funds-research-in-australian-universities/">estimate</a>, one dollar in five spent on research comes from surpluses from teaching. </p>
<p>Grants and fellowships provide critical information to policymakers and politicians. Here are three examples of how they impact students and lecturers.</p>
<p><strong>1) Toolkit to boost retention rates</strong></p>
<p>Karen Nelson from the University of the Sunshine Coast developed two <a href="http://www.olt.gov.au/resource-good-practice-safeguarding-student-learning-engagement-higher-education-institutions-2012">frameworks</a> that help universities foster student <a href="http://www.olt.gov.au/resource-framework-transforming-student-engagement-success-retention">success and retention</a>. At least 14 Australian institutions now use this work to help retain students and improve completion and success rates. Over 400,000 students now benefit from the practices. <a href="https://safeguardingstudentlearning.net/">Examples</a> include maps that help students to locate support. Social media tools increase connections between peers. Student and staff advisers access training to help students in need. And students participate in the design, enactment and evaluation of their programs. </p>
<p><strong>2) Establishing course standards for accounting degrees</strong> </p>
<p>Mark Freeman from the University of Sydney consulted over 2,000 people across the sector to establish <a href="http://www.olt.gov.au/resource-accounting-ltas-statement-altc-2010">discipline standards</a> for accounting degrees. Standards set out what students should have learned by the end of their courses. It is important that everyone agrees what these should be. Freeman focused on accounting, where two-thirds of students in our universities are from overseas. The team also found a more efficient way of ensuring that assessment judgements are consistent across different universities. This substantially reduced the time and cost of post-assessment moderation. <a href="http://www.olt.gov.au/project-achievement-matters-external-peer-review-accounting-learning-standards">The standards work</a> is now in use across the sector and it reaches around 47,000 students. </p>
<p><strong>3) Using capstones to build student understanding and confidence</strong></p>
<p>Capstone experiences – that can be in the form of an academic project, assignment or internship – enable students to apply their learning in a real world scenario such as a professional project or an industry placement. Victoria University’s <a href="https://www.vu.edu.au/contact-us/nicolette-lee">Nicolette Lee</a> used her <a href="http://www.olt.gov.au/olt-national-senior-teaching-fellow-nicolette-lee">Australian National Learning and Teaching Fellowship</a> to define and improve capstone experiences. Lee worked with over 200 teachers across Australia to improve and design powerful capstone experiences for students. Students from fashion design to engineering engaged in immersion projects, placements, guided reflections, leadership opportunities and team challenges. The <a href="http://www.capstonecurriculum.com.au">resources</a> now mean that students across disciplines and institutions can achieve stronger employment and satisfaction outcomes. </p>
<h2>How will the loss of funding affect learning and teaching in universities?</h2>
<p>Now that the OLT is closing and the grants and fellowships are lost, it is not clear how or whether the government will play an active role in enhancing teaching excellence in our institutions. </p>
<p>Teaching excellence is not solely the government’s responsibility, but then OLT funding did not exist to help universities do their job or to address deficiencies. </p>
<p>Through OLT funding, academics enhanced the attractiveness of an Australian education to international students. They ensured that our students are better equipped to improve Australia’s social and economic well being. Without the OLT, Australia’s advantages in those respects are at significant risk.</p>
<p><em>• The figure 175,000 was replaced with 47,000 to specifically reflect the number of accounting students.</em></p><img src="https://counter.theconversation.com/content/59079/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tim Pitman works for a university which the OLT has previously funded. He has also been awarded funding from the Australian Learning and Teaching Council, which was a fore-runner to the OLT. </span></em></p><p class="fine-print"><em><span>Dawn Bennett has previously received funding from the Australian Government Office for Learning and Teaching and its predecessors. She convenes the Australian Learning and Teaching Fellows' national network. </span></em></p>Now that the OLT is closing and the grants and fellowships are lost, it is not clear whether the government will play an active role in enhancing teaching excellence in our universities.Tim Pitman, Researcher in higher education policy, Curtin UniversityDawn Bennett, Professor of Higher Education, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/595942016-05-22T20:06:27Z2016-05-22T20:06:27ZAustralia needs a better independent fiscal agency<p>The Government’s <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/PEFO-2016/HTML">Pre-election Fiscal Outlook (PEFO)</a> was a non-event in one sense but it did underscore two important lessons, the absurdity of a 10 year forecast and the need for a stronger Parliamentary Budget Office. </p>
<p>Coming only 17 days after the 2016-17 budget, PEFO essentially <a href="https://theconversation.com/infographic-pefo-2016-at-a-glance-59668">confirmed the budget numbers</a>. It would have been worrying if it had not done so, considering the PEFO comes from the same Treasury and Department of Finance that produced the budget.</p>
<p>The first important lesson we should draw from the budget and PEFO is the absurdity of costing spending or tax changes over a 10 year period. We are told for instance that the budget cut to the company tax rate to 25% will cost A$48.2 billion over 10 years, while <a href="http://www.abc.net.au/news/2016-05-06/turnbulls-corporate-tax-cuts-under-scrutiny-by-treasury/7389426">Treasury noted that</a> “as with all projections over 10 years these costings have considerable uncertainty attached to them”. Then why produce a number to one decimal point? It conveys an entirely unjustified degree of precision.</p>
<p>This year’s<a href="http://www.budget.gov.au/2016-17/content/bp1/download/bp1.pdf">Federal Budget Paper No 1</a>, Statement 7 is a sobering read. Chart 5, see below, shows the forecast errors for tax receipts, not 10 years out, but one year out. It compares the budget forecast for the forthcoming year with the actual outcome for that year. </p>
<p>In every one of the six years since 2010 the forecasts have been wrong by large margins – but worse, the errors are all in the same direction, that is, receipts have been less than forecast. </p>
<p>This forecasting record calls into serious question Treasury’s stubborn adherence to assumptions that repeatedly turn out to be wrong. The biggest single source of error is company tax receipts which were overestimated last year by A$3.5 billion, which makes a projected number like A$48.2billion over not one but 10 years an exercise in pure fiction, and to give the number to a decimal point is silly.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=350&fit=crop&dpr=1 600w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=350&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=350&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=440&fit=crop&dpr=1 754w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=440&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/123439/original/image-20160522-4478-1m6xwto.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=440&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Budget forecasts.</span>
<span class="attribution"><span class="source">Author supplied</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The budget forecasts (which apply to the next four years) as distinct from the projections (which extend for a further 6 years) come with “confidence intervals”. For example Treasury can only be 70% confident that tax receipts will turn out to be equal to the budget figure plus or minus A$30 billion (1.8% of GDP) by 2017-18, implying a 30% chance that the budget figure could be wrong by more than A$30 billion. The 90% confidence interval is wider - plus or minus A$50 billion (2.9% of GDP). </p>
<p>These are wide margins considering we are talking about outcomes only three or four years away. These margins get wider the further into the future. So 10 years out we really have no idea.</p>
<p>Perhaps the more important lesson from the budget and PEFO outcomes is the need to elevate the role of the Parliamentary Budget Office (PBO). It needs more teeth.</p>
<p>Its <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office">current role</a> is “to inform the Parliament by providing independent and non-partisan analysis of the budget cycle, fiscal policy and the financial implications of proposals.” This needs strengthening.</p>
<p>Rather than just providing independent analysis of the budget the PBO should independently produce fiscal rules aimed at fiscal sustainability, ensuring that government debt is not set to rise inexorably under current settings and that our AAA credit rating is maintained. A government that breaches the fiscal rules should be called out by the PBO and suffer public censure. </p>
<p>The PBO should take account of the likelihood of the Senate passing legislation, of political compromises, of credit rating changes, and of international economic risks arising for example from commodity prices and China’s economy. The fiscal councils in Belgium, Denmark and Sweden operate rather like this and the <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.2008.00556.x/abstract">evidence</a> suggests that they have improved fiscal discipline by increasing the political costs on governments for lack of discipline.</p>
<p>We could go further and allow the PBO to operate like Australia’s independent Reserve Bank which controls the key monetary policy instrument and sets monetary policy independent of government. In that case the PBO would provide the government with a maximum spending limit and a deficit limit, consistent with fiscal targets.</p>
<p>The government would control the mix of spending and taxation consistent with these fiscal targets. Admittedly this is extreme and has not been tried in other countries, but with increasing government indebtedness around the world perhaps it should be.</p>
<p>The federal government’s debt has risen from minus A$45 billion (a net asset position) in 2007-8 to <a href="http://www.budget.gov.au/2016-17/content/bp1/download/bp1.pdf">A$285 billion in 2015-16</a> (or 17.3% of GDP). The global financial crisis and subsequent drop in commodity prices had a lot to do with this.</p>
<p>But now that it is clear the economic cycle is not going to repair the budget, the government should tighten its belt to ensure that future generations are not picking up the tab. This is not currently happening – the budget forecasts net debt in four years’ time to be in fact higher than now, at 17.8% of GDP, and with no reduction in spending as a share of GDP. </p>
<p>A beefed-up PBO, acting as an independent fiscal agency, would call out the government on such a lack of fiscal discipline.</p><img src="https://counter.theconversation.com/content/59594/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has received funding in the past from the ARC but does not currently receive funding.</span></em></p>The Pre-election Fiscal Outlook shows two things, the ridiculousness of 10 year forecasts and that we need a tougher Parliamentary Budget Office.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/596682016-05-20T05:46:50Z2016-05-20T05:46:50ZInfographic: PEFO 2016 at a glance<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1823&fit=crop&dpr=1 754w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1823&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/123333/original/image-20160520-4478-1wxultf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1823&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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</figure><img src="https://counter.theconversation.com/content/59668/count.gif" alt="The Conversation" width="1" height="1" />
Your at a glance guide to all the figures in the Pre-election Financial and Economic Outlook statement for the 2016 election.Helen Westerman, Business + Economy EditorWes Mountain, Social Media + Visual Storytelling EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/589962016-05-20T05:31:17Z2016-05-20T05:31:17ZQuestioning the assumptions underlying the Pre-Election Economic and Fiscal Outlook<figure><img src="https://images.theconversation.com/files/123331/original/image-20160520-4466-6b840n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Major economic indicators have not changed since the federal budget.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/betta_design/7439292302/in/photolist-ckojqo-rdQyK-ezy7uW-shXeD-5cN6qV-738xJh-aoPXm5-sKrNo-6sMpCF-5XtmDd-fAaYES-8A3HU-nx64fK-6CqCX3-eLoVG8-82ypMQ-82ytib-oBHYt1-7BYqyW-7BUCzT-2aQxKP-ejQ3vY-orrhf5-7GL489-7BUCzr-fPxGqz-mLdAPK-76ScsJ-aSheV2-67vc1K-pUTaZT-eix6Fm-aSheP6-cw7peQ-aShaJB-oBJagL-82yq1d-obYzGS-Thth9-ThtgJ-7BNZiU-daWGUM-daWJQJ-otc6ak-cugF1E-c5eMfJ-obYmcL-nni3V8-jYtsQJ-f41xnj">Flickr/Francisco Martins</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Coming just weeks after the federal budget, the Pre-Election Economic and Fiscal Outlook (PEFO) was unlikely to reveal anything new. </p>
<p>And in general this is the case, with the projected deficit for 2016-17 remaining at $37.1 billion (although the underlying cash balance for the current year has decreased by $1.8 million). </p>
<p>Forecasts for other indicators for growth, inflation and unemployment remain basically unchanged. However, the PEFO papers provide an opportunity for voters and commentators to cast aside the “what’s in it for me” reaction to the Budget to more closely examine the estimates and forecasts of the key economic indicators on which the Budget position is based.</p>
<p>The expected or assumed trends in economic growth, inflation and unemployment feed into the Budget bottom line and government debt into the future. If these expectations and assumptions are wrong, then the estimated deficit and debt numbers will also be wrong. </p>
<p>If these assumed trends are based on optimistic assumptions about the growth of our trading partners, the strength of our currency, the pace of innovation and improvements in labour productivity, then the expected Budget deficit will be lower and the public debt higher than if more conservative assumptions are made. So how realistic are they?</p>
<p>The May 2016 Federal Budget assumes the Australian economy would continue to grow by 2.5% in the next two years increasing to 3% in the following year. This is below the previous trend of 3.1% but higher than the average (excluding 2012) of more recent years of 2.4%. Why would we expect trend growth to increase from 2017/18? The short answer is that we wouldn’t and we shouldn’t.</p>
<p>More than ever before, Australia’s economic growth is tied to what is happening globally. Influences such as renewed volatility in financial markets, uncertainty over the long term growth in the Chinese economy and continued post-global financial crisis slow growth in many developed countries. So if, as PEFO affirms, global economic growth remains slow then Australia too is likely to experience slower growth. </p>
<p>What about our sensitivity to changes in commodity prices? Here PEFO confirms that the risk to economic growth forecasts from commodity price falls mentioned in the Budget papers is unchanged with averages and spot prices showing conflicting pressures on prices. </p>
<p>What about domestic demand? This could be an issue as PEFO queries the expected pick-up in non-mining investment within Australia. If this does not materialise then the economic growth figures are likely to be down by 0.5%, possibly settling at a new trend of 2% per annum for a number of years. Still higher than labour productivity growth of 1.4%, so good growth - but not what Australia is used to. </p>
<p>The outlook for jobs growth, which relies on overall economic growth forecasts, is confirmed by PEFO to have plateaued with only slightly lower unemployment rates into next year. </p>
<p>For the Federal government, lower than expected economic growth means lower than expected tax receipts and higher welfare payments both of which mean higher, not lower, deficits and debt. Unless a new impetus for growth is found. The answer here could be a re-structured economy based on private business growth and diversification, and growth in services. </p>
<p>In the case of business, the Budget recognises that the majority of businesses in Australia are small and half of these are owner-operated. Tax incentives that encourage these businesses to grow and diversify should increase the deficit in the coming year but contribute to tax revenue and lowering the deficit over the long haul if they remain in place and if these businesses respond in the expected way. Two big ‘if’s.</p>
<p>Growth in services, two thirds of the value of our national output, is likely to continue. The growing middle class in countries like India and China will seek overseas education and Australia is well placed to deliver this. More tourists than ever before are travelling to Australia which is a desired destination due to its stable government and attractive exchange rate as well as its tourism hot spots. Population growth as well as an ageing population will also contribute to services growth. </p>
<p>When the Australian economy is doing well, annual inflation runs at about 3%. If quarterly figures suggest that the annual rate is picking up, the Reserve Bank increases the cash rate to dampen business and household spending. However, if the inflation rate is hovering below 2%, then there is little the Reserve Bank can do. </p>
<p>It may lower the cash rate as it decided to do at its May 2016 meeting. But, as we found with the May 2015 decision which also cut the cash rate by 0.25%, it is unlikely to provide sufficient incentive to encourage consumers and businesses to throw caution to the wind and increase their spending. Having low borrowing costs might invite debt-fuelled expenditure but households and businesses also need assurance that that the economy is strong and worth getting into more debt for.</p>
<p>Whether the Budget fulfills the promises of jobs and growth without jeopardising our credit rating, only time will tell.</p><img src="https://counter.theconversation.com/content/58996/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Margaret Giles receives funding from Australian Research Council. She is affiliated with National Tertiary Education Union.</span></em></p>Treasury is standing by the assumptions made in the federal budget.Margaret Giles, Senior Lecturer in the School of Business, Edith Cowan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/595822016-05-20T01:25:44Z2016-05-20T01:25:44ZBackpacker tax: if it were never broke, why try to fix it?<p>The Federal Government has announced it will delay the start of the so-called backpacker tax by six months. The delay has been welcomed by the tourism sector and farmers, who rely on backpackers as a relatively cheap source of labour, especially in the crucial harvest season.</p>
<p>But change to the status quo is unnecessary. The furore appears to be based on a misunderstanding of Australia’s residency rules and how they currently apply to backpackers. Enforcement appears to have been the real problem, not the law itself.</p>
<p>In last year’s budget (2015-16), then-treasurer Joe Hockey proposed to “change” the tax residency rules to treat temporary working holiday makers as non-residents (foreign residents) for income tax purposes, regardless of how long they are here. The change meant the non-resident tax rate of 32.5% would apply immediately to any earnings, with no tax-free threshold.</p>
<p>Last year’s Budget Papers stated: </p>
<blockquote>
<p>“…a working holiday maker can be treated as a resident for tax purposes if they satisfy the tax residency rules, typically that they are in Australia for more than six months.”</p>
</blockquote>
<p>This seems to represent a misunderstanding of one of the residency rules. At best, this can be explained as summarising gone too far.</p>
<p>To be a resident of Australia, a person must satisfy one of the residency tests. In brief they are: (i) an ordinarily resides test (ii) a domicile test and (iii) a 183-day presence test.</p>
<p>The test referred to in the Budget Papers is the third test, the 183-day test; the other two tests have little hope of being met by backpackers. The 183-day test does indeed provide that a resident of Australia “includes a person who has actually been in Australia, continuously or intermittently, during more than one half of the year of income.”</p>
<p>However, this test also contains an exception, which reads: “unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia.” Mere presence for 183-days is not enough. </p>
<p>People who are temporarily in Australia on a working holiday have a usual abode outside Australia. And they clearly don’t intend to take up residence here.
Indeed, just two months before the 2015-16 budget, the Administrative Appeals Tribunal handed down three decisions dealing with the residence status of backpackers under the 183-day test. </p>
<p>The deputy president, Professor R.L Deutsch concluded, <a href="http://taxlawaus.blogspot.com.au/2015/06/clemens-vs-federal-commissioner-of.html">in all three cases</a>, the taxpayers were non-residents.</p>
<p>So why did the 2015-16 budget announce a measure to “change” the law to treat backpackers as non-residents when current law already does this? </p>
<p>The most likely explanation is that backpackers had been asserting they were residents in their tax returns to obtain the (effective) tax-free threshold of $20,500 applicable to residents ($18,200 threshold along with the $445 low income tax offset). They were probably advised to do so by backpacker agents, or registered tax agents operating in areas of high backpacker concentration.</p>
<p>One significant downside of our self-assessment system of taxation, where the ATO generally accepts tax returns at face value, is that incorrect taxpayer reporting can go undetected for many years. The tax return is lodged, processed and a tax refund is issued pretty much automatically (assuming some tax was withheld by the farmer on payment).</p>
<p>The backpackers are either out of the country when the refund is paid, or they leave pretty soon after. And, it simply isn’t worth it to the ATO to chase them down. They don’t even have to set up camp on an island somewhere and fake a heart attack to avoid extradition. Not for a tax debt of a couple of thousand dollars.</p>
<p>The above does not describe a problem with the substantive residence tax rules. Enforcement appears to be the problem. It may be that the 2015-16 budget measure was mainly a signalling to all concerned that the Government wants the tax law enforced.</p>
<p>Effectively, the farming and tourism sectors complaint is that the backpackers should continue to be incorrectly treated as residents for tax purposes, or that something similar to that tax treatment should apply to backpackers.
As a result of the announced delay, a full policy analysis can be undertaken which can take account of all stakeholder interests in the issue. </p>
<p>Our best bet out of this review is that backpackers will continue to be treated as non-residents and that a concessional rate of tax will apply to backpackers’ “harvest” earnings - and perhaps hospitality industry earnings - of somewhere between 0% and 32.5% (most likely 15%-19%).</p>
<p>Non-harvest earnings and perhaps non-hospitality industry earnings will continue to be taxed under the normal non-resident tax scales (that is, 32.5% from first dollar of income).</p><img src="https://counter.theconversation.com/content/59582/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Backpackers always were treated as non-residents for tax purposes, that’s why changes aren’t necessary.Stephen Lawrence, Sessional academic, UNSW SydneyDale Boccabella, Associate Professor of Taxation Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/596052016-05-19T19:37:14Z2016-05-19T19:37:14ZWhy the budget income tax cuts look fair – in the longer run<p>Fairness, and which party is more committed to it, will be a big theme in the federal election. There has already been lots of argument about whether the May budget was fair, particularly in its changes to personal income tax. But as is so often the case, “fairness” depends on your perspective. </p>
<p>Treasurer Scott Morrison announced just one change to personal income tax in the Budget. From July, the $80,000 tax bracket will rise to $87,000. As a result, those earning over that amount will pay $315 less in tax each year. Those earning under $80,000 get no relief. In addition, the Temporary Budget Repair levy, which puts a 2% impost on personal income earned above $180,000, was not extended and will expire in June 2017. </p>
<p>Opposition Leader Bill Shorten thought these changes and non-changes to personal income tax were an unfair gift to the rich. In his Budget Reply, he said:</p>
<blockquote>
<p>Was this really the point of the Turnbull experiment? Tax cuts for high income earners – and nothing for families. Not one cent for ordinary working Australians.</p>
</blockquote>
<p>The Labor leader is right that fewer than a quarter of taxpayers will receive any tax relief from lifting the $80,000 threshold to $87,000. By definition they are the quarter of taxpayers who earn the highest incomes. And the expiry of the Temporary Budget Repair Levy only helps the 3% - 4% of taxpayers with taxable incomes above $180,000. </p>
<p>However, the picture is a little more complicated than Shorten makes out. To understand it requires a grasp of the phenomenon known as fiscal drag, commonly called bracket creep. </p>
<p>Fiscal drag occurs when wages increase at the rate of inflation or faster, but tax brackets don’t change. The extra wage is taxed at a worker’s marginal tax rate (the tax rate that applies to the highest tax bracket they are in), not at the worker’s average tax rate (the tax paid divided by their total income). </p>
<p>As a result, inflation results in the worker paying a growing share of their income in tax each year, even if their real income doesn’t rise. Like any increase in income tax, this reduces the incentives to work.</p>
<p>In 2013-14, an individual on the median income paid 13.1% of income in tax. By 2015-16, bracket creep had pushed the figure up to 14.5%. </p>
<p>Fiscal drag, while having no impact on the incomes of those remaining below the income tax free threshold, nevertheless tends to make the income tax system less progressive. That is because people on middle incomes suffer the fastest increase in the percentage of their income paid in tax. </p>
<p>Even a government with the best of intentions and flawless execution cannot reverse bracket creep perfectly. Income growth tends to be smooth, while the effect of fiscal drag can be sharp for those who move into the next tax bracket as a result of wage rises.</p>
<p>The chart below shows how fiscal drag affected taxpayers, measured in percentiles of income, between 2013-14 and 2016-17. It is based on the actual tax they paid in 2013-14 and projects forwards given inflation and the tax scales that will apply. It shows that fiscal drag most affected those just below the median income (at the 45th percentile). They paid almost 2% more of their incomes in tax. By contrast, someone earning $170,000 – in the top 4% of taxpayers – paid only an extra 0.8% of income in tax. </p>
<p>The chart also reveals that lifting the second highest tax bracket from $80,000 to $87,000 only helps the top 25% of taxpayers – and not those who have suffered most from fiscal drag over the last three years.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/141533/original/image-20161012-16206-6woqzp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/141533/original/image-20161012-16206-6woqzp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/141533/original/image-20161012-16206-6woqzp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/141533/original/image-20161012-16206-6woqzp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/141533/original/image-20161012-16206-6woqzp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/141533/original/image-20161012-16206-6woqzp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/141533/original/image-20161012-16206-6woqzp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/141533/original/image-20161012-16206-6woqzp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Grattan Institute</span>, <span class="license">Author provided</span></span>
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</figure>
<p>But this chart does not paint the full picture. While it shows the most recent data on individual tax distribution, it does not include the significant change to income tax policy built into the carbon tax legislation package. The package included tax cuts for low-income earners in 2012-13, and was retained even after the carbon tax was repealed.</p>
<p>If instead we take 2011-12 as our starting point, the picture is very different. Those in the bottom 30% of income earners are either paying no tax, or less tax on their income, than they paid before the 2011-12 change. Conversely, the top 20% of income earners have lost a greater percentage of their income than others. Moving the threshold from $80,000 to $87,000 largely balances out the relative losses they suffered in 2011-12. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/141535/original/image-20161012-16203-obkflw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/141535/original/image-20161012-16203-obkflw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/141535/original/image-20161012-16203-obkflw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/141535/original/image-20161012-16203-obkflw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/141535/original/image-20161012-16203-obkflw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/141535/original/image-20161012-16203-obkflw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/141535/original/image-20161012-16203-obkflw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/141535/original/image-20161012-16203-obkflw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Grattan Institute</span>, <span class="license">Author provided</span></span>
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<p>So whether the latest Budget changes income tax in a fair way depends on your time frame. Over the short term, the Budget disproportionately helps those on high incomes. But in the context of other changes to income tax over a longer time-frame, the Budget does a reasonable job of distributing fiscal drag equally among taxpayers. </p>
<hr>
<p><em>The graphs in this story have been updated since first publication so that the temporary budget repair levy is consistently included in all calculations.</em></p><img src="https://counter.theconversation.com/content/59605/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.</span></em></p><p class="fine-print"><em><span>Hugh Parsonage does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Short-term, the bracket creep measures help high income earners. But longer-term it evens out.John Daley, Chief Executive Officer, Grattan InstituteHugh Parsonage, Associate, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/594582016-05-18T10:38:16Z2016-05-18T10:38:16ZThe full story on company tax cuts and your hip pocket<p>A long-term plan to cut the company tax rate from 30% to 25% is the centrepiece of the Coalition’s economic plan for jobs and growth. The Coalition maintains the change will boost GDP by more than 1% in the long-term, at a budgetary cost of $48.2 billion over the next 10 years. </p>
<p>But the very Treasury research papers relied on by the Coalition tell a more modest story than the headlines. Using these papers, we show that the net benefit to Australians in the real world will be only about half of the headline benefit, and it will be a long time before we are any better off at all.</p>
<h2>The short story</h2>
<p>The Government has made two claims about the economic impacts of its plan to cut the company tax rate. </p>
<p>On Budget night Treasurer Scott Morrison <a href="http://sjm.ministers.treasury.gov.au/media-release/055-2016/">said</a> that the tax cuts would: </p>
<blockquote>
<p>“… mean higher living standards for Australians and an expected permanent increase in the size of the economy of just over one percent in the long term.”</p>
</blockquote>
<p>Later last week, Prime Minister Malcolm Turnbull <a href="http://www.theaustralian.com.au/federal-election-2016/federal-election-2016-pm-bolstered-by-160bn-reform-promise/news-story/e5fe769c97a196959b6e34e14bcc273d?nk=21bd5293c6c9bf91e73e578611f79538-1463363505&login=1">said</a>:</p>
<blockquote>
<p>“The Treasury estimated last year…that for every dollar of company tax cut, there was four dollars of additional value created in the overall economy.”</p>
</blockquote>
<h2>Sound in theory, but there’s a back story</h2>
<p>In theory, cutting the company tax rate boosts the economy in the long term. All taxes distort choices, and thereby drag on economic activity. Taxes on capital often have especially large economic costs because they discourage investment, which is mobile across borders. By some estimates, roughly <a href="http://onlinelibrary.wiley.com/doi/10.1111/1467-8462.12127/abstract">half of the economic costs</a> of Australian company tax ultimately fall on workers, as lower company profitability leads to lower investment, and therefore lower wages and higher unemployment. </p>
<p>But while the theoretical argument for company tax cuts is straightforward, the real story is more complicated. </p>
<h2>The twist: a tax cut for foreign investors</h2>
<p>The twist in the tale comes from Australia’s system of dividend imputation, or franking credits. The effect of this system is to make the company tax rate for Australian resident shareholders effectively close to zero. In <a href="http://www.copsmodels.com/ftp/workpapr/g-260.pdf">nearly every other country</a>, company profits are taxed twice: companies pay tax, and then individuals also pay income tax on the dividends, albeit often at a discount to full rates of personal income tax. </p>
<p>But in Australia, the shares of Australian residents in company profits are effectively only taxed once. Investors get franking credits for whatever tax a company has paid, and these credits reduce their personal income tax. Consequently, for Australian investors, the company tax rate doesn’t matter much: they effectively pay tax on corporate profits at their personal rate of income tax. </p>
<p>As a result, although Australia has a relatively high headline corporate tax rate compared to our peers, in practice the comparable tax rate is lower – at least for local investors. As a result, many of the international studies about the impact of cutting corporate tax rates are not readily applicable to Australia.</p>
<p>Local shareholders do get one small benefit from cutting corporate tax rates. If companies pay less tax, then they have more to reinvest, so long as the profits are not paid out to shareholders. Yet in practice, <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/%7E/media/ACCEB9F5E157439AAE854A9702D1136C.ashx">most profits are paid out</a>. Therefore a company tax cut will generate little change in domestic investment. </p>
<p>By contrast, foreign investors do not benefit from franking credits. They pay tax on corporate profits twice: first at the company tax rate, and then as income tax on the dividends. This means that a cut to the company tax rate provides big benefits to them. </p>
<p>This week <a href="http://www.tai.org.au/sites/defualt/files/P256%20-%20Comapny%20Tax%20Gift%20to%20US%20IRS%20-%20Richardson%20May%202016.pdf">The Australia Institute</a> pointed out that foreign investors from the United States and other countries that have tax treaties with Australia may not benefit from the company tax cut, because their home governments will collect the gains from any cut to Australia company tax as additional company tax. Yet this would only occur when foreign firms repatriate profits earned in Australia to the home country. </p>
<p>The big reductions in net tax revenue – and therefore the large benefits to companies – are expected when the corporate tax rate is cut from 30% to 25% between 2022 and 2027 for larger companies, including the bulk of businesses that are foreign-owned. </p>
<p>The headline from the <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2016/Budget%20Modelling/Downloads/PDF/160503_Economy-wide%20modelling.ashx">Treasury modelling for the 2016-17 Budget</a> is that this cut will ultimately increase GDP by up to 1.2% meaning larger foreign companies are attracted to invest more in Australia. The finding is based on work contained in a <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/working-paper-2016-02">Treasury research paper</a> that modelled the long-term impact of a company tax cut. </p>
<h2>Activity is not income</h2>
<p>However, it is a mistake to assume that all the increase in economic activity will make Australians better off. We often use Gross Domestic Product – the sum of all economic activity – as a short-hand measure for prosperity. But when the benefits disproportionately flow to non-residents, GDP can be misleading. It’s much better to look at Gross National Income (GNI), which measures the increase in the resources available to resident Australians. </p>
<p>Treasury expects that cutting corporate tax rates to 25% will only increase the incomes of Australians – GNI – by 0.8%. In other words, about a third of the increase in GDP flows out of the country to foreigners as they pay less tax in Australia. And because most of the additional economic activity is financed by foreigners, the profits on much of the additional activity will also tend to flow out of Australia.</p>
<h2>You don’t get something for nothing</h2>
<p>Yet even this increase in GNI of 0.8% is not the best estimate of the improvement in living standards Australians can expect from the Government’s company tax plan. If company taxes are lower, other taxes have to be higher, all other things being equal. In the modelling discussed so far, Treasury first assumes that these revenues can be collected by a fantasy tax that imposes no costs on the economy. </p>
<p>But that’s not what happens in the real world. So the Treasury research paper also models the scenario in which personal income taxes rise to offset the reduced company tax revenue. On this more realistic assumption, Treasury estimates that GNI will increase by just 0.6% in the long term, or roughly $10 billion a year in today’s dollars. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/122984/original/image-20160518-13455-yxfw6e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<h2>Other wrinkles in the story</h2>
<p>Even this more modest Treasury figure may well over-estimate the long-term boost to GNI. In the real world, progressive income taxes impose <a href="http://taxreview.treasury.gov.au/content/html/commissioned_work/downloads/kpmg_econtech_efficiency%20of%20taxes_final_report.pdf">higher costs</a> than the hike to a hypothetical flat-rate personal income tax that Treasury modelled. Companies may also not increase investment as much as Treasury expects, and those firms that are part of oligopolies in Australia may not increase wages by as much as Treasury assumes. </p>
<p>While these are reasons to expect that the Treasury modelling overestimates the economic benefits of a company tax cut, they are offset by some more conservative assumptions. Treasury believes that tax cuts modestly change how much firms shift profits overseas; it may overstate how much tax cuts flow into additional profits rather than higher wages in those industries that it does recognise as oligopolies; and it may discount the benefits of investors making less distorted choices between debt and equity funding. </p>
<h2>The verdict on the first claim</h2>
<p>The bottom line is that, on Treasury’s own modelling, a corporate tax cut will increase Australian incomes in the long term by up to 0.6%. The Treasury research paper doesn’t commit itself to a timeframe, but it cites other work that expects the economic benefits of company tax cuts to take 20 years to bear fruit, with half the benefit in 10 years. Given that the important (and expensive) part of the corporate tax cuts only starts to take effect from 2022, Australia will be waiting 25 years for a 0.6% increase in incomes.</p>
<p>This economic benefit needs to be seen in context. If Australian per capita GDP and GNI increase at 1.5% a year (as the budget papers routinely assume), then over 25 years, incomes will rise by 45.1%. Corporate tax cuts mean that instead, incomes will rise by 45.7% – or perhaps a bit less. It may still be worth doing, but it’s not a plot twist that dramatically changes Australia’s story.</p>
<p><a href="http://www.tai.org.au/content/company-tax-cuts-report-shows-lack-evidence-%E2%80%98growth-dividend%E2%80%99">Others</a> claim that in the past, company tax cuts have had no measurable effect on the economy. This is <a href="../../../../../../Library/Caches/TemporaryItems/Outlook%20Temp/cis%20corporate%20tax%20cut">disputed</a> – there may well be a link between corporate tax cuts and economic growth. But it’s inevitably hard to see in practice because on Treasury’s own modelling the economic effect of company tax cuts is small relative to other changes.</p>
<h2>Not four-to-one, more like dollar for dollar</h2>
<p>This brings us to the Government’s second claim. Late last week, Mr. Turnbull said that each dollar in company tax revenue cut would deliver an extra four dollars in GDP.</p>
<p>His claim appears to be drawn from an <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2015/working-paper-2015-01">earlier</a> 2015 Treasury research paper that modelled the economic impact of major Australian taxes, including company tax. The more <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/working-paper-2016-02">recent</a> Treasury working paper, released in Budget week, implies a slightly larger $4.30 increase to GDP from each $1 in revenue cut.</p>
<p>But again this misses a big part of the story. </p>
<p>First, this claim is about GDP, and therefore includes the disproportionate increase in the income of foreigners. Our analysis of the Treasury modelling shows that the increase to Australian incomes, or GNI, is only $2.80 per dollar of revenue lost from a corporate tax cut. </p>
<p>Second, when corporate tax is replaced by a still hypothetical but marginally more realistic flat rate income tax – rather than a complete fantasy tax that has no impact on the economy – the increase to Australian incomes is less again: only $1.80 per dollar of revenue lost. </p>
<p>Third, the Prime Minister has framed the boost to the economy in terms of the long-term increase to GDP per dollar of company tax cut. Treasury calculates the revenue “dollar” lost after considering the additional tax revenue that the government hopes to collect from all taxes in twenty years time as incomes rise because of greater investment. </p>
<p><a href="http://www.theaustralian.com.au/federal-election-2016/federal-election-2016-pm-bolstered-by-160bn-reform-promise/news-story/e5fe769c97a196959b6e34e14bcc273d?nk=21bd5293c6c9bf91e73e578611f79538-1463363505&login=1">Many people</a> would interpret the Prime Minister’s statement to compare the ultimate benefit per dollar of tax revenue given up <em>in the shorter term</em>. On this basis, the increase to Australian incomes in the long term is only $1.20 for every dollar given up in the short term as a result of corporate tax cuts.</p>
<p>This story ends the same way. Corporate tax cuts may be worth doing, but the outcome is unlikely to set pulses racing. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/122985/original/image-20160518-13481-1ugr3e5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<h2>The journey matters</h2>
<p>So far, as the Treasury research paper does, we’ve focused on the long-term economic boost from a company tax cut once the economy has fully adjusted. But the journey to get there also matters.</p>
<p>For a decade, a cut to corporate taxes will reduce national income. Foreigners will pay less tax on the profits from their existing investments in Australia, reducing Australian incomes. Foreigners own about 20% of all capital in the economy, so it’s a big windfall gain for them. We estimate that when a 5 percentage point tax cut for big business is first implemented, national incomes will be reduced by about 0.5%, as a result of the immediate loss in company tax revenues formerly paid by foreign investors.</p>
<p>The benefits to Australians from a corporate tax cut only accumulate slowly as foreigners make additional investments. Treasury cites a paper that estimates that the benefits of corporate tax cuts take 20 years to flow through. Assuming that these benefits increase at a constant rate, Australian income will only be larger than otherwise after about 10 years. </p>
<p>Of course, the upfront costs of a company tax cut over the first decade must be offset against the long-term gains. On our estimates, the loss of income incurred over the first decade will only be offset by higher incomes after about 19 years. If Australians want the modest economic benefits of a corporate tax cut, they will be waiting a long time.</p>
<h2>The moral of the story</h2>
<p>Company tax cuts are not a knight in shining armour to save the Australian economy. On the basis of the modelling that the government uses to support its case, corporate tax cuts can make a modest contribution, and then over the very long term. That story won’t sell as many copies. Truth, on this occasion, is duller than fiction.</p><img src="https://counter.theconversation.com/content/59458/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.</span></em></p><p class="fine-print"><em><span>Brendan Coates does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Two government claims about the apparent boost to the economy of company tax are put to the test.John Daley, Chief Executive Officer, Grattan InstituteBrendan Coates, Fellow, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/589882016-05-17T08:13:38Z2016-05-17T08:13:38ZElection FactCheck: has the government cut $80 billion from schools and hospitals?<blockquote>
<p>The same $80 billion of cuts to schools and hospitals – still in this budget. – Opposition Leader Bill Shorten, <a href="http://www.businessinsider.com.au/here-is-bill-shortens-budget-reply-speech-2016-5">budget reply speech</a>, May 5, 2016.</p>
</blockquote>
<p>Among Labor’s most popular refrains is the claim that the government has cut $80 billion from schools and hospitals.</p>
<p>Is that true?</p>
<h2>The source of the $80 billion figure</h2>
<p>The Conversation asked the Labor campaign media team to provide evidence to support the assertion and did not receive a quotable reply about sources, but rather this statement from shadow education minister Kate Ellis:</p>
<blockquote>
<p>Malcolm Turnbull is giving big business a tax cut at the same time as he rips $29 billion from Australia’s classrooms over the next decade. Malcolm Turnbull talks big on the economy and innovation – but this means nothing without investment in a strong education system.</p>
</blockquote>
<p>Nevertheless, as outlined in <a href="http://www.abc.net.au/news/2014-07-03/does-the-federal-budget-cut-80-billion-from-schools-hospitals/5562470">this ABC FactCheck</a> from 2014, the source of the $80 billion figure is former treasurer Joe Hockey’s <a href="http://www.budget.gov.au/2014-15/content/overview/download/Budget_Overview.pdf">2014-15 federal budget</a>. </p>
<p>There, on page seven, it says:</p>
<blockquote>
<p>In this budget the Government is adopting sensible indexation arrangements for schools from 2018, and hospitals from 2017-18, and removing funding guarantees for public hospitals. These measures will achieve cumulative savings of over $80 billion by 2024-25. </p>
</blockquote>
<p>The $80 billion figure has been appropriated by Labor for use in a key election campaign attack line – that there have been “$80 billion of cuts to schools and hospitals” – even though Labor never projected out spending as far as 2025 in their last budget of 2013. </p>
<p>Despite that, Labor clearly felt justified in claiming these as “cuts”, as these were the “savings” claimed by the government itself.</p>
<p>Of that $80 billion, about <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/estimate/000741db-2d46-45cc-b4b7-8057cb9518fd/toc_pdf/Economics%20Legislation%20Committee_2014_06_04_2549_Official.pdf;fileType=application%2Fpdf#search=%22committees/estimate/000741db-2d46-45cc-b4b7-8057cb9518fd/0000%22">$30 billion was for schools and about $50 billion for hospitals</a>. (The Parliamentary Budget Office <a href="http://www.aph.gov.au/%7E/media/05%20About%20Parliament/54%20Parliamentary%20Depts/548%20Parliamentary%20Budget%20Office/Submissions/Senate%20Select%20Committee%20on%20Health%20-%20PBO%20submission%20030216.pdf?la=en">projected</a> the figure for hospitals would be closer to $57 billion).</p>
<p>Included in the 2014-15 budget is this chart:</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/121456/original/image-20160506-5666-kxeosf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/121456/original/image-20160506-5666-kxeosf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121456/original/image-20160506-5666-kxeosf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=320&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121456/original/image-20160506-5666-kxeosf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=320&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121456/original/image-20160506-5666-kxeosf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=320&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121456/original/image-20160506-5666-kxeosf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=402&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121456/original/image-20160506-5666-kxeosf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=402&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121456/original/image-20160506-5666-kxeosf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=402&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.budget.gov.au/2014-15/content/overview/download/Budget_Overview.pdf">Federal Budget 2014-15</a></span>
</figcaption>
</figure>
<p>As you can see, the line in that chart continues up – so it’s not that funding is now <em>decreasing</em>. It has not been decreasing.</p>
<p>It’s more that the funding is increasing more slowly than it would under Labor. To Labor, that’s a cut; to the Coalition, that’s not a cut, because funding is <a href="http://www.senatorbirmingham.com.au/Latest-News/ID/3062/Labors-biggest-lie-of-all-on-schools">continuing to increase</a>.</p>
<h2>What’s new?</h2>
<p>In recent months, the Turnbull government have made a couple of announcements regarding hospital and school funding in the period between 2017 and 2020.</p>
<p>First, at the <a href="https://theconversation.com/hospital-funding-deal-experts-respond-57122">Council of Australian Governments (COAG) meeting</a> in April, Turnbull agreed with state premiers to increase hospital funding by $2.9 billion from July 2017 to June 2020, with growth in federal funding capped at 6.5%. The <a href="https://www.coag.gov.au/sites/default/files/files/HeadsofAgreement-MASTER-CLEAN.pdf">COAG agreement</a> said a “longer term” hospital funding arrangement for 2020 onwards will be considered by COAG before September 2018.</p>
<p>Then, a few days before this year’s budget, the government <a href="http://www.heraldsun.com.au/news/federal-budget-2016-1b-backtobasics-test-for-schools/news-story/af4c57f3e34b50cb4b57dce9061b9c23">announced</a> a <a href="http://www.budget.gov.au/2016-17/content/bp2/html/bp2_expense-10.htm">$1.2 billion increase in schools funding</a> between 2018 and 2020.</p>
<p>So a small portion of the $80 billion worth of “savings” identified in the 2014-15 budget has been restored to the government’s spending plans. </p>
<p>That means future funding will continue to increase substantially faster than the 2014-15 budget planned for the period to 2020; but still not as fast as was promised under the previous Labor government.</p>
<p>Critically for the $80 billion figure, the Coalition’s plans for hospital and school funding post-2020 remain unclear, which is when the vast majority of the $80 billion of health and education savings were to be made. </p>
<h2>Comparing the Coalition government plans with the previous Labor government’s plan</h2>
<p>Under <a href="http://www.budget.gov.au/2016-17/content/bp1/download/bp1.pdf">Coalition plans for hospital funding</a> (agreed to at the 2016 COAG meeting), federal government spending on public hospitals will rise from $17.2 billion in 2015-16 to $21.1 billion in 2019-20. This represents growth in spending of $2.9 billion or 17% over four years. </p>
<p>Labor is yet to announce its 2016 health policy, but the <a href="http://www.budget.gov.au/2013-14/content/overview/download/Overview_update.pdf">previous Labor government’s plan</a> indicated a rise in spending to around $26 billion in 2020. On this basis, the current government’s plans represent a 19% reduction in federal funding to public hospitals by 2020 compared to the previous Labor government’s funding plans.</p>
<p>Similarly, having previously planned to reduce growth in education spending by the order of $30 billion through to 2024-2025, the current government has committed to tip in an additional $1.2 billion over the 2018-20 period with no commitments beyond 2020. </p>
<p>In principle, school funding commitments have been reduced by $28.8 billion, though we might expect further growth commitments in future budgets.</p>
<h2>Verdict</h2>
<p>Labor’s claim that the Coalition has “cut” $80 billion from schools and hospitals is misleading. There has not been a cut from <em>current</em> levels of funding – it’s more that significant future funding promises made by the previous Labor government were “unpromised” by the Coalition in its 2014-15 budget.</p>
<p>And some of the “unpromised” future funding was put back in the 2016-17 budget. <strong>– Peter Sivey and Buly Cardak</strong></p>
<hr>
<h2>Review</h2>
<p>This is a sound analysis. </p>
<p>Between 2010 and 2013, then Prime Minister Julia Gillard, leading a minority government, ramped up the Commonwealth’s future funding commitments to health, education and national disability programs. She promised this money to the states and territories, in some cases if they put in some partially matching contributions. The generous Gillard funding did not commence when she made the announcements but would supposedly be delivered over a period of seven years from 2014-2020, and in some predictions out to 2024. </p>
<p>However, these bounteous projections were changed by Treasurer Joe Hockey in the Coalition’s 2014-15 budget by replacing the nominal increases with a more modest indexation of grants to the states. Since then, both the state and territory governments and the federal opposition have called these “cuts” of $80 billion.</p>
<p>The optimistic funding promises were never legislated (or appropriated) by parliament and although some were incorporated in Commonwealth-state agreements, they were, at best, nominal projections.</p>
<p>As the article above makes clear, the so-called “cuts” are not really cuts but simply changed promises (or promise reversals = perhaps “unpromises”) that in effect reduce the rate of growth of health and educational spending. <strong>– John Wanna</strong></p>
<hr>
<p><div class="callout"> Have you ever seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.</div></p><img src="https://counter.theconversation.com/content/58988/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Sivey receives funding from the Australian Research Council and has previously been funded by Health Workforce Australia and the National Health and Medical Research Council.</span></em></p><p class="fine-print"><em><span>Buly Cardak has received funding from the National Centre of Student Equity in Higher Education to do research into higher education issues.</span></em></p><p class="fine-print"><em><span>John Wanna does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Among Labor’s most popular refrains is the claim that the government has cut $80 billion from schools and hospitals. Is it true?Peter Sivey, Senior Lecturer, Department of Economics and Finance, RMIT UniversityBuly Cardak, Associate Professor, Department of Economics and Finance, La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/586372016-05-13T04:08:52Z2016-05-13T04:08:52ZConsumers feel glum about the budget, but will it matter at the voting box?<p>Australians, so far, appear not to have been convinced by the Coalition’s ‘jobs and growth’ pitch in the 2016 federal budget. But it’s far from clear how this negative reaction may impact on the fortunes of either party in the current election campaign. </p>
<p>Using information from the Westpac-Melbourne Institute Consumer Sentiment Index (CSI), we have analysed how Australians have reacted to the last six federal budgets – the three handed down by Labor Treasurers in 2011-2013, and the three by Liberal Treasurers in 2014-2016. </p>
<p>Comparing the reading of the CSI before and after the release of the Budget, we found it dipped by 4.4% following the release of the 2016 budget. But somewhat surprisingly, our research indicates voting intentions appear to be irrelevant when it comes to how people respond to budgets.</p>
<p>The Westpac-Melbourne Institute Consumer Sentiment Survey is a monthly representative survey of 1200 consumers across Australia. In May each year, the survey is carried out during the week of the budget release. We analysed the CSI in May, before and after the Budget announcements for the last six budgets. </p>
<p>Overall, we found four out of the six Budgets were not well received, with consumer sentiment declining most substantially by 9.6% in 2014, by 6.1% in 2012, by 4.0% in 2011 and it was negative again this year (see the figure below). </p>
<p>Positive reactions were registered in 2013 and 2015 with the consumer sentiment index rising post Budget announcement (compared to the pre-Budget reading) by 3.4% and 0.7%, respectively.</p>
<iframe src="https://datawrapper.dwcdn.net/qLkwT/1/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>The figure below gives the changes in the index pre- and post-Budget day: </p>
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<p>Not surprisingly these reactions are a direct consequence of perceived gains or losses by consumers. The <a href="http://www.budget.gov.au/2013-14/">2013 Budget</a> included many sweeteners like support for young jobseekers, senior Australians, farmers, huge commitments to Medicare, private health insurance, disability and cancer care.</p>
<p>In contrast, the Abbott-Hockey <a href="http://www.budget.gov.au/2014-15/">2014 budget</a> included cost-cutting measures like reducing the Family Tax Benefit, increasing petrol excise, introducing a GP co-payment, reducing benefits for young jobseekers, tightening the criteria for disability pension and the Seniors Health Card, and removing Seniors supplement for Commonwealth Seniors Health Card holders. (Many of these initiatives were killed off or stalled in the minority-held Senate).</p>
<p>The 2015 budget, with its centrepiece of a small business package that included a tax cut for businesses under $2 million, saw only a small uptick in consumer sentiment, despite the government by then having backed away from a number of its more contentious proposals. </p>
<p>What is surprising though is the reaction when grouped by political voting intentions. In general, throughout the year, consumers supporting the party in office are more optimistic than consumers whose party is in opposition. But come Budget time, voting intentions appear to be irrelevant.</p>
<p>The figures below give the changes in the consumer sentiment index, in the May survey week, pre-post budget release for the last six years, organised according to voting intentions: Australian Labor Party (ALP); Liberal-National Coalition (LNC); Greens and other parties; refused or don’t know (undecided).</p>
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<p>Interestingly ALP voters were less negative about the 2016 budget than Coalition voters with a drop of 2.8% among Labor voters compared to 4.7%, probably indicating a backlash from (potential) Liberal voters concerned about planned changes to superannuation concessions for high income earners.</p>
<p>Only once in the last six years did Coalition supporters react positively to a budget release (rising by 16.4%) and that was in 2013 - an election year - for a Budget handed down by the Labor Treasurer Wayne Swan. Supporters of the Labor Party, the Greens and the rest, all gave it the thumbs down that year. </p>
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<p>The strongest positive reception from Labor supporters was in 2015 for the Budget handed down by the Liberal Treasurer Joe Hockey. The upswing in sentiment by supporters of the Labor Party in 2015 was 14.2%, which is a much stronger response than the 3.5% rise for the 2011 Budget handed down by the Labor Treasurer Wayne Swan.</p>
<p>The 2016 ‘election’ budget was not well-received across all categories of voting intentions. Whether the intention is to vote for the ALP, the Coalition, the Greens, other minor parties, or even a ‘don’t know’, the change in sentiment pre-post Budget was negative. It appears that, when it comes to the Budget, voting intentions are no guide to consumer reactions.</p><img src="https://counter.theconversation.com/content/58637/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>More often than not, Australians find budgets hard to like. But research shows a fascinating response on voting intentions.Guay Lim, Professorial Fellow, The University of MelbourneViet Nguyen, Research Fellow in Applied Macroeconomics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/575512016-05-12T20:05:17Z2016-05-12T20:05:17ZWhy neither party should ignore gender in this election<figure><img src="https://images.theconversation.com/files/122077/original/image-20160511-18150-15fb533.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">False assumptions about the "average worker" impacts on decisions about childcare, paid parental leave and aged care funding.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/91997797@N00/7209490152/in/photolist-bZ5wfm-hzsAhK-jcwfLj-8g8Ufh-7HMoNu-jDzsfC-rHzvHj-f6Mobt-FTP16-6pMg7J-cpcCnN-6AsHBm-jJ9519-4NREEq-a4H1i6-e2KpA4-d29xh5-9Cqter-KYauq-PfdL-7B4VS1-7UH9aT-amVyis-d29xYA-nuFp92-3ybWE-aKfHQ8-hrmFcq-7vYzEu-8ugYGa-6iezqZ-fVnL8H-9QaLn2-kt2vtt-a4KRDj-eLwMps-552gS5-5XhrB7-dFA72b-7HjPT4-5RHfgd-9F4cWx-6n5kDH-5BKYbm-sh74Hq-o8DPD6-2spx37-2zAmj-6mphhL-rcbTHG">Flickr/Ian</a></span></figcaption></figure><p>Gender was <a href="https://theconversation.com/women-left-behind-by-a-budget-that-does-little-to-redress-inequality-58856">invisible in the 2016 Budget</a>. But as our gender audit of last week’s federal budget reveals, neither party can afford to ignore it in the current election campaign. </p>
<p>Treasurer Scott Morrison <a href="http://sjm.ministers.treasury.gov.au/transcript/080-2016/,">has previously implied that women’s concerns</a> about the inequality in tax and expenditure measures are “petty”. But gender bias in economic thinking ignores the gender division of labour, including women’s under-representation in paid work, their over-representation in unpaid and low paid caring work, and men’s over-representation in full-time work, and higher paid jobs. </p>
<p>It results in false assumptions about the “average worker” and inhibits a proper understanding of the investment impacts of childcare, paid parental leave and aged care funding. The oversight and attitude need to be remedied in the development of policy for the next term of government.</p>
<h2>Gender and jobs</h2>
<p>Gender equality is not only an important end in itself but also a means to raise a country’s standard of living. Reducing gender gaps have been shown to increase jobs and growth. For instance Australia’s GDP could grow by 11% if the <a href="http://www.asx.com.au/documents/about/gsjbw_economic_case_for_increasing_female_participation.pdf">female labour force participation rate rose to equal men’s</a>. </p>
<p>Australian men have higher participation rates and currently work relatively long hours, while women’s paid work hours are relatively low, due to a high rate of part time work.</p>
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<p>Women’s participation rates had been on the increase but the growth in women’s workforce participation rates stalled around 2009-10.</p>
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<p>The participation gap is a significant brake on Australia’s economic performance and policies and budgets that address the constraints on women’s participation in the workforce are required. Remedying the relatively low rate of female workforce participation would also go a long way to addressing concerns about government revenues and expenditures. The extra employment would increase tax revenues and reduce welfare spending.</p>
<h2>Gender and bracket creep</h2>
<p>However, the measures in the 2016 budget, which flagged the current government’s “economic plan”, focused on the incentives for full-time workers (who are mostly men) to work “an extra shift”, and they did nothing to lessen the barriers to women’s workforce participation. The changes to the income tax thresholds will benefit individuals on annual incomes greater than $80,000. The average full time male wage rate is just over $87,604 and, thus, many men will benefit from the change. </p>
<p>However, <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6302.0Nov%202015?OpenDocument">the average full time female wage rate is only $69,846</a>; a number well south of the cut off point for the tax cut. Perhaps more importantly, the majority (56.3%) of women who work in part time jobs were missing in the Treasurer’s calculations of “the average worker”.</p>
<h2>Childcare subsidies and aged care cuts</h2>
<p>The postponement of new streamlined childcare subsidies and the Community Child Care Fund to July 2018 will mean that participation in paid work will continue to be financially unviable for many women. It’s a cost-cutting measure that goes against the weight of research evidence, which demonstrates the importance of affordable and accessible high-quality childcare to the workforce participation of women from <a href="https://crawford.anu.edu.au/files/uploads/crawford01_cap_anu_edu_au/2015-12/childcare_fs.pdf">low-income households in particular</a>. </p>
<p>The cuts to aged care spending will also exacerbate the barriers to women’s workforce participation. As with childcare, when aged care is not adequately funded women’s unpaid care burdens increase, and <a href="http://espace.library.curtin.edu.au/R?func=dbin-jump-full&local_base=gen01-era02&object_id=196220">this reduces their capacity to participate in paid work</a>.</p>
<h2>Paid parental leave</h2>
<p>The changes in Paid Parental Leave (PPL), included in the 2014 budget and retained in the current “economic plan”, will force women to choose either government or employer-funded PPL with adverse social and economic impacts. The amount of paid leave available for many mothers to spend with their newborns <a href="http://sydney.edu.au/business/__data/assets/pdf_file/0007/253258/Analysis_of_impact_of_new_PPL_cuts_W_And_WRG_12.01.2016.pdf">will be reduced</a> and the costs of time off work for parents will rise. </p>
<p>Some women will not return to work, resulting in a loss of skills and expertise from the workforce. Others will be forced to return to work earlier than the 26 weeks recommended by experts and recently recognised as desirable by the Productivity Commission.</p>
<p>A more effective, efficient and fair economic plan would invest in childcare and aged care services to boost employment earnings and economic growth, as well as foster gender equality. The major source of jobs in the Australian economy is the caring industries.</p>
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<p>An investment of 2% GDP in the caring industries has been estimated to generate an additional 600,000 new jobs; many more than could be <a href="http://www.lse.ac.uk/genderInstitute/news/2015-16/WBG-CareEconomy-ITUC-briefing-final.pdf">generated from equivalent investments in other sectors</a>. </p>
<p>Importantly, because the caring industries rely heavily on the skills and competencies of women, investment in them will increase the incentives and opportunities for women to participate in paid work. Through the provision of childcare and aged care services, investment in these industries will also help to resolve key “supply side” barriers to women’s workforce participation.</p>
<h2>International recognition</h2>
<p>Gender equality policies are increasingly being recognised by economists and international institutions like the World Bank for making a positive contribution to growing jobs and raising living standards. Recently <a href="http://www.oecd.org/newsroom/elusive-global-growth-outlook-requires-urgent-policy-response.htm">the OECD advocated governments taking advantage of low interest rates</a> to fund investments in pro-growth structural policies. </p>
<p>Australia needs an economic plan that sets out how government spending and revenue raising will capture these benefits.</p><img src="https://counter.theconversation.com/content/57551/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Siobhan Austen has received funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Rhonda Sharp has in the past received funding from the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Therese Jefferson has received funding from the Australian Research Council.</span></em></p>False economic assumptions beset the federal budget and that should worry both political parties.Siobhan Austen, Associate Professor, School of Economics & Finance, Curtin UniversityRhonda Sharp, Adjunct professor, Division of Education, Arts and Social Sciences, University of South AustraliaTherese Jefferson, Associate Professor, Graduate School of Business, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/590692016-05-11T20:06:55Z2016-05-11T20:06:55Z‘Jobs and growth’ and deja vu: reprising a failed American experiment<p>During his budget speech Treasurer Scott Morrison <a href="http://www.businessinsider.com.au/heres-how-many-times-scott-morrisons-budget-speech-used-the-catchphrase-jobs-and-growth-2016-5">said the phrase “jobs and growth” 13 times</a>. It seems he is not a superstitious man. But <a href="https://en.wikipedia.org/wiki/Triskaidekaphobia">Triskaidekaphobes</a> were not the only ones left with a queer feeling after his speech. Students of the history of tax reform experienced a strange sense of déjà vu.</p>
<p>In 2003 US President George W Bush campaigned on a <a href="http://edition.cnn.com/2003/ALLPOLITICS/01/07/bush.speech/">10-year ‘economic plan’ for “jobs and growth”</a> by cutting taxes. The centrepiece was the “<a href="https://www.congress.gov/bill/108th-congress/house-bill/2">Jobs and Growth Tax Relief Reconciliation Act</a>”. It was the second part of the infamous <a href="https://en.wikipedia.org/wiki/Bush_tax_cuts">Bush Tax Cuts</a>, which began in 2001 and have dogged America’s finances ever since. </p>
<p>The <a href="https://georgewbush-whitehouse.archives.gov/news/releases/2003/05/20030528-9.html">rationale President Bush gave for those tax cuts</a> needs little more than a nationality swap to stand in for Treasurer Scott Morrison. </p>
<blockquote>
<p>“We’re helping small business owners looking to grow and to create more new jobs… By ensuring that [Australians] have more to spend, to save, and to invest, this [budget] is adding fuel to an economic recovery. We have taken aggressive action to strengthen the foundation of our economy so that every [Australian] who wants to work will be able to find a job.”</p>
</blockquote>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121831/original/image-20160510-20584-1rykttg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">White House Archives.</span>
<span class="attribution"><span class="source">Paul Morse/Whitehouse Photo</span></span>
</figcaption>
</figure>
<p>The US tax system is notoriously complex. Comparisons between it and Australia’s are fraught. Further, the Treasurer’s tax cuts are not as sweeping as President Bush’s. Yet, striking similarities remain. </p>
<p>Both are tax cuts which will <a href="http://www.abc.net.au/news/2016-05-03/rich-benefit-most-from-scott-morrison's-tax-reforms/7380660">overwhelmingly benefit the well-off</a>. Both aim to increase “jobs and growth” by encouraging investment. Both aim to <a href="http://www.smh.com.au/entertainment/tv-and-radio/qa-recap-audience-member-delivers-an-early-campaign-reminder-to-all-politicians-20160510-goqb4v.html">“grow the pie”</a>; that is, spur economic growth so that taking a smaller proportion of tax will still generate a larger tax base, in real terms.</p>
<h2>The consequences – ballooning federal debt</h2>
<p>In light of the similarities, it is worth considering how effective the Bush Tax Cuts were. In short, not at all.</p>
<p>In 2001 Conservative think tank, the Heritage Foundation, calculated that the first part of the Bush Tax Cuts alone would <a href="http://origin.heritage.org/Research/Reports/2001/04/The-Economic-Impact-of-President-Bushs-Tax-Relief-Plan">eliminate US national debt by 2010</a>. In fact, US national debt more than doubled in that time; <a href="https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm">from $5.8 trillion to $13.5 trillion</a>. </p>
<p>The non-partisan <a href="https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/01-26-outlook.pdf">Congressional Budget Office</a> noted that US Federal revenue collapsed, from 20% of GDP in 2000 to 14.6% in 2009, at the end of Bush’s term. Unemployment doubled; from 4% to 8% and rising in that same period.</p>
<p>These results were a body blow for political advocates of “supply-side doctrine” or “trickle-down economics”. It is unsurprising that politicians were – and remain – excited by the idea that government can raise more money simply by lowering taxes. Sadly, many very good ideas have to be abandoned because they don’t work in practice.</p>
<h2>Same, but different</h2>
<p>There is one key point of difference between the American experience and Australia’s. Unlike the United States, Australia has a dividend imputation system. It is a complicated system, often not well understood. Morrison has not taken pains to explain it. Indeed, his statements on the effect of these tax cuts are apt to confuse. Some have accused the Treasurer of <a href="http://www.abc.net.au/news/2016-05-03/budget-2016-scott-morrison's-tax-plan-is-a-big-con-here's-why/7380830">“exploiting widespread ignorance of how the company tax system actually works”</a>.</p>
<p>Dividend imputation means the tax paid by a company is credited to its shareholders. Thus, the tax individual shareholders pay on profits from their investments in companies is not determined by the company tax rates. The proposed cut to the company tax rate - from 30% to 25% - will likely have little impact on Australian investors.</p>
<h2>Why this difference won’t end up helping individual investors</h2>
<p>Imagine Susan, an investor who earns an income from salary of $85,000 who also owns some shares in a company. The company makes a profit, and Susan’s share of that profit is $1,000. </p>
<p>The company tax rate is currently 30%. So the company pays $300 of Susan’s $1,000 share of the profit to the Australian Tax Office and gives the remaining $700 to Susan. Dividend imputation means that Susan also receives franking credits worth the value paid to the ATO - $300. </p>
<p>When it comes time for Susan to pay tax, the Tax Office adds up the value of the dividend <em>and</em> the franking credits then adds the total to her income for the year. Susan is then assessed tax on her whole income - $85,000 in salary, plus $1,000 made up of the $700 dividend and $300 of franking credits.</p>
<p>Since Susan pays 37 cents on every dollar she earns over $80,000, the effect of adding $1,000 to her salary is that she owes the tax office an extra $370 in taxes. The tax office deducts the $300 in franking credits that they already hold, leaving Susan owing a total of only $70 to the Tax Office. Overall, she has received $630 after tax from her investment ($700 in dividends, minus $370 income tax, plus $300 franking credits).</p>
<p>The value of her investment after tax is determined by her income tax rate, not the company tax rate. In practice, the rate of company tax has no impact on the amount of tax Susan pays; she is always assessed at her marginal tax rate.</p>
<p>In the above scenario, let’s imagine the company tax rate drops to 25%. The company has made $1,000 in profit. Now it pays only $250 to the ATO. It distributes the remaining $750 to Susan.</p>
<p>At this stage it looks as though Susan is in front. She has received $750 in dividends, rather than $700 – an extra $50. But we need to factor in franking credits. Under the lower rate of company tax, Susan only receives $250 in franking credits. </p>
<p>And she is still assessed income tax on both the dividend and the franking credits – the full $1000. Her marginal tax rate has not changed, so she still owes $370 on that income. She may deduct the $250 in franking credits, leaving her owing the tax office a remainder of $120. </p>
<p>The extra $50 she received in dividends is offset by the $50 less she receives in franking credits. Overall, her position has not changed; she still receives $630 after tax from her investment, as she would if the company tax rate had remained at 30%</p>
<p>It is the rate of income tax, not company tax, that matters for the individual taxpayer. It is unclear how a change to the company tax rate that will not make investing more attractive to individuals, from a tax perspective, can encourage ‘jobs and growth’.</p>
<h2>Who does benefit? Foreign investors</h2>
<p>So who does benefit from a cut to the company tax rate? The answer depends on the complexity of your tax structures. But there is one clear winner; foreign investors. Foreign investors do not receive franking credits, because they do not pay income tax in Australia. So, any cut to the corporate tax rate has an immediate benefit for foreign investors. </p>
<p>The changes to the company tax rate will make little difference to Australian investors. However, those whose investments are managed from an off-shore company - say, one incorporated and paying tax in the Cayman Islands - stand to benefit significantly. </p>
<p>Which might well give one a strange sense of déjà vu…</p><img src="https://counter.theconversation.com/content/59069/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tomas Fitzgerald has received funding from the WA Bar Association. He is a member of the NTEU and WA Labor.</span></em></p>In 2003, US President George W. Bush campaigned on a 10-year ‘economic plan’ for “jobs and growth”. If it sounds familiar, it should.Tomas Fitzgerald, Senior Lecturer, Law, University of Notre Dame AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/591592016-05-11T04:39:01Z2016-05-11T04:39:01ZElection FactCheck: is Labor planning to increase taxes by $100 billion over ten years?<blockquote>
<p>Labor has no plan for Australia except to increase taxes by $100 billion over ten years. <strong>- Prime Minister Malcolm Turnbull, Liberal Party of Australia email to subscribers, May 8, 2016.</strong></p>
</blockquote>
<p>Tax is shaping up to be a hot button issue in this election, with both <a href="http://www.afr.com/news/politics/election/election-2016-scott-morrison-steps-up-high-tax-attack-on-labor-20160504-gommwl">major parties</a> aiming to <a href="https://www.pennywong.com.au/transcripts/sky-news-to-the-point-2/">paint their opponents</a> as high taxers. So is Prime Minister Malcolm Turnbull right to say that Labor plans to increase taxes by A$100 billion over ten years?</p>
<p>It all depends on the question: what exactly is that “increase” based on?</p>
<h2>Where does the figure of $100 billion come from?</h2>
<p>In his <a href="https://theconversation.com/shorten-budget-reply-labor-finds-big-dollars-by-rejecting-most-of-budgets-company-tax-cut-58947">budget reply speech</a>, Opposition Leader Bill Shorten promised to deliver savings of A$71 billion over ten years, chiefly by rejecting almost all the budget’s company tax cut.</p>
<p>But in an <a href="http://www.abc.net.au/lateline/content/2015/s4443619.htm">interview with the ABC</a> in April, Shadow Treasurer Chris Bowen said</p>
<blockquote>
<p>Our fiscal rule is very clear and we’ve led the way with $100 billion - more than $100 billion worth of improvements to the budget bottom line.</p>
</blockquote>
<p>The Conversation understands that prime minister’s statement about the $100 billion was based on Labor’s own numbers relative to the Coalition’s position. The policies that would add up to a A$100 billion increase include:</p>
<ol>
<li> Labor’s policy to <a href="http://www.alp.org.au/negativegearing?_ga=1.238618245.480909297.1462849443">limit negative gearing</a> to new residential housing</li>
<li> Labor’s policy to increase Australia’s <a href="http://www.100positivepolicies.org.au/positive_plan_on_housing_affordability_capital_gains_tax_reform">capital gains tax</a> rate by 50% </li>
<li> Labor’s policy to leave Australia’s top marginal <a href="http://www.100positivepolicies.org.au/fair_income_taxes_for_budget_repair_thats_fair">income tax</a> rate at 47% (49% including the Medicare Levy)</li>
<li> Labor’s policy to <a href="https://theconversation.com/shorten-budget-reply-labor-finds-big-dollars-by-rejecting-most-of-budgets-company-tax-cut-58947">reject the reduction in company taxes</a> laid out under the Coalition’s <a href="http://www.budget.gov.au/2016-17/content/bp2/html/bp2_revenue-10.htm">Enterprise Tax Plan</a></li>
<li> Labor’s <a href="http://www.100positivepolicies.org.au/keeping_super_fair">superannuation</a> policies.</li>
</ol>
<p>So the PM is arguing that Labor’s plan is a $100 billion increase on what the Coalition has promised; it’s <em>not</em> $100 billion more than what the federal government currently collects in taxes. </p>
<p>Note that the only appearance of the word “increase” in this list is in item two, on the capital gains tax rate. I think it’s also fair enough to think of a proposed limit on negative gearing in item one as a “tax increase”, although it would really be a removal of a tax subsidy, not an increase in a tax rate. (You can read more <a href="https://theconversation.com/factcheck-has-the-government-introduced-17-new-taxes-46875">here</a> on what meets the official definition of a tax.)</p>
<p>But to suggest Labor’s rejection of the Coalition’s plan to reduce company taxes in item four is a “tax increase” is a bit rich (pardon the pun).</p>
<p>In the typical use of the English language, an “increase” refers to a positive change in something relative to a well-established reality, not relative to a hypothetical scenario. </p>
<p>If my boss doesn’t give me a pay raise when I ask for one, I might be disappointed. But I can’t really call it a “pay cut” just because I asked for a raise. My current pay is the baseline reality. My requested raise is a pure hypothetical.</p>
<p>In terms of an “increase in taxes”, a reasonable baseline reality would be projected tax receipts under existing tax rates prior to the recent budget. </p>
<p>But the Coalition’s position that includes cuts to company taxes is really a hypothetical scenario until passed by parliament.</p>
<p>Labor’s plan is not to “increase taxes by $100 billion” from current levels, but rather it is to limit negative gearing; raise capital gains taxes; maintain the current top marginal income tax rate; not cut company taxes in the way proposed by the Coalition; and apply different policies to superannuation than the Coalition. </p>
<p>This is clearly a more complex set of policies than just a simple tax increase. </p>
<h2>A more accurate statement</h2>
<p>It would be fair to say that Labor’s plan could lead to $100 billion more (or thereabouts) in taxes than the Coalition’s plan over the next ten years. But, once again, the difference is not all due to an actual <em>increase</em> in taxes. Some of it is due to <em>not decreasing</em> taxes.</p>
<p>Perhaps I am asking for too much precision of language from our politicians who have been trained to produce highly simplified sound bites. But “increase” is a widely used and well understood word. So its misuse here is problematic.</p>
<p>Finally, it’s worth noting that an average of $10 billion more a year in taxes equals only about 0.6% of current total income in the Australian economy. It is a near certainty than any projection will be off by far more than this at some point in the next decade, regardless of who wins the election. </p>
<h2>Verdict</h2>
<p>The PM’s statement is misleading. As I interpret it, his quote makes it sound as though Labor plans to increases taxes from the <em>current</em> levels by $100 billion over ten years.</p>
<p>It would be fairer to say that Labor’s plan could lead to $100 billion more in taxes than the Coalition’s plan over the next ten years. But the difference is not all due to an actual <em>increase</em> in taxes. Some of it is due to <em>not decreasing</em> taxes. <strong>– James Morley.</strong></p>
<hr>
<h2>Review</h2>
<p>I like this article and its attempt to diagnose a difficult issue. I am not sure that arguing over long projections such as ten year horizons is all that useful. No one knows what the future holds so far out, and future governments can chop and change these measures in subsequent budgets or economic statements.</p>
<p>This FactCheck also makes the valid point that “saving measures” are not inherently “tax increases”. Not providing or matching a promised tax cut is not necessarily a “tax increase”. </p>
<p>Take, for example, business company tax: Labor’s plan would keep the tax take at about the same level as now, so that’s not a tax increase in any normal sense. However, it would imply that Labor would have business paying more tax than the Coalition under the current proposals. </p>
<p>I am not sure that the verdict is accurate that Turnbull is being “misleading”. If you add up the impact over four years Labor’s proposed negative gearing changes, superannuation changes, capital gains tax increase, plus the higher income supercharge on high income earners, and the hike in the tobacco tax, then Labor may be raising $100 billion more in revenue in the medium to longer term. </p>
<p>However, while Labor has announced it is increasing these taxes, the Coalition is also increasing superannuation taxation (with three coordinated changes to current arrangements) and increasing the tobacco tax. That said, the Coalition has also announced tax reductions to business, those earning above A$80,000, and the very high income earners who currently pay the extra levy. So the comparable “net effect” of the tax proposals from both sides is likely to be far less than the $100 billion Turnbull claims.</p>
<p>The last statement in this FactCheck article is a fair representation of the facts. <strong>– John Wanna</strong></p>
<hr>
<p><div class="callout"> Have you ever seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.</div></p><img src="https://counter.theconversation.com/content/59159/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Morley receives funding from the ARC.</span></em></p><p class="fine-print"><em><span>John Wanna does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Is Prime Minister Malcolm Turnbull right to say that Labor plans to increase taxes by A$100 billion over ten years?James Morley, Professor of Economics and Associate Dean (Research), UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/592392016-05-11T02:50:03Z2016-05-11T02:50:03ZBowen’s budget rebuttal scored points, but the key point will be trust<figure><img src="https://images.theconversation.com/files/122051/original/image-20160511-18123-1mxyc3o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Duncan Storrar is the man of the moment.</span> <span class="attribution"><span class="source">Source: ABC website</span></span></figcaption></figure><p>Shadow Treasurer Chris Bowen’s <a href="http://www.chrisbowen.net/media-centre/speeches.do?newsId=7187">National Press Club address this week</a> on Labor’s “agenda setting economic plan” has echoes of Kevin ’07. Bowen admits to being a “progressive” from the “left-of-centre ”; he says, “I too am a fiscal conservative”; indeed, he is a “better one”. The clear inference is that Labor has a BIGGER plan than the Turnbull/Morrison Jobs and Growth plan.</p>
<p>Both sides have relied on spin and hypocrisy more than substance when it comes to budget repair – both essentially kicking the task down the road, mostly beyond the two-year budget forecast period.</p>
<p>Both sides are still committed to significant additional expenditure, especially spreading into and through the next decade, in the key areas of education, health, defence, the National Disability Insurance Scheme (NDIS), the NBN and other infrastructure. Both also seek to create the impression that they can do this with a minimal increase in the tax burden over all, while “reforming” the tax system.</p>
<p>With our economy likely to remain locked into slow growth, at best, in a particularly volatile and challenging, weak, global economy, and with sluggish international trade, a budget surplus, from either side, is still probably a decade or so away.</p>
<p>Of course, Bowen didn’t attempt to offer the detail of an alternative budget, but he did paint a clear alternative approach, admitting to more expenditure funded by higher tax. He attempted this while claiming to defend our AAA rating, and by committing to a mini-budget, based on a more realistic economic assessment than the optimistic one assumed in the Government’s budget, within three months of being elected.</p>
<p>To give credit where credit is due, the Shorten-led Opposition has taken the political risk of attempting to set the political agenda by their clear commitments to more significant spending on education and vocational training, and health, and by identifying certain areas where they would increase tax to notionally pay for it.</p>
<p>Specifically, they have proposed placing limits on negative gearing, capital gains tax and superannuation concessions, increasing the tax on tobacco, and by keeping the deficit levy on high income earners, while opposing the government’s proposed cut in the corporate tax rate for large business.</p>
<p>Obviously the inherent political strategy is to consolidate their traditional base, in particular hoping to pull back those who flirted with an Abbott-led government. This echoes the successful strategy behind the “surprise” wins in the recent Victorian and Queensland State elections, where the focus was on these traditional “bread and butter” issues.</p>
<p>They would also hope to attract new voters by being prepared to take the political risks of attempting to lead the debate on controversial issues, against the Turnbull alternative that - while popular - has been seen to vacillate and dither, and to be “unfair”.</p>
<p>By comparison, Turnbull is obviously hoping to gain some broader electoral credibility by claiming to have a “plan” for our future, and by being prepared to disadvantage his own base by promising to pare back the superannuation concessions that are biased, so conspicuously, in favour of the wealthy, while protecting middle income earners and encouraging small business.</p>
<p>Interestingly, so far, at least, neither side has responded to the <a href="http://www.smh.com.au/federal-politics/political-news/election-2016-qa-star-duncan-storrar-puts-a-human-face-on-the-budget-battle-20160509-goqc7d.html">“Duncan moment”</a> on the ABC’s Q&A this week, which generated a considerable focus on the plight of low income earners, who were not receiving any significant improvement in their benefits or incomes, when many benefits, such as Newstart and the aged pension, are below generally accepted poverty lines.</p>
<p>Bowen did score a significant point by focusing on the fact the Government’s “Jobs and Growth” plan to drive the “transition” from a resource/construction boom-based economy, to whatever, was completely silent on the “whatever”.</p>
<p>Here he highlighted the proposed “cuts to infrastructure”, the decline in public investment, the neglect of renewables as a new growth sector, the cuts to CSIRO, the underfunding of schools, the second-class NBN, and limits on housing affordability, and so on.</p>
<p>However, the key point in this election is whether the electorate will actually believe what either side claims or promises. It will be an issue of trust.</p>
<p>Bowen’s claim is essentially that the ALP can also be trusted to manage the economy – he would say that they should be trusted more – against the long-established electoral perception that favours the LNP in economic management, while playing to their electoral edge that the ALP is better able to manage education and health, and with greater fairness.</p>
<p>The framework for this campaign has been set – now for the detail, please!</p><img src="https://counter.theconversation.com/content/59239/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>John Hewson is chair of the Asset Owners Disclosure Project, and was federal leader of the Liberal Party from 1990 to 1994.</span></em></p>Chris Bowen’s budget response set the framework for this campaign - now for the detail.John Hewson, Professor and Chair, Tax and Transfer Policy Institute, Crawford School, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/586362016-05-10T20:19:40Z2016-05-10T20:19:40ZWhy we need environmental accounts alongside national accounts<p><em>The Federal Budget has been delivered and Australians are headed for the polls. In this series, Reform Revisited, we ask writers for innovative ways to tackle our reform agenda.</em></p>
<p>Charles Dickens’ character Oliver Twist is perhaps best known as the boy who wanted more. Of course, he got none. Instead, his efforts prompted Mr Bumble, the parish beadle (official) to offer a princely £5 to anyone who would take the boy off his hands.</p>
<p>The environment is something of a modern Oliver Twist in the budget workhouse. There’s certainly no more porridge on offer – indeed significantly less <a href="https://www.pm.gov.au/media/2016-03-23/turnbull-government-taking-strong-new-approach">counting the changes to renewable energy funding announced on 23 March</a>. Last Tuesday’s federal budget contained no new policy and no new money, only some savings and the allocation of funds already set aside for environmental purposes. And, Mr Bumble-like, the Government remains committed to its “one-stop shop” policy of transferring environmental approval powers to “willing jurisdictions”, to use the terminology of the <a href="http://www.environment.gov.au/epbc/publications/regulatory-cost-savings-oss">Department of Environment</a>.</p>
<p>But how much budget porridge is needed for a hungry environment? And what does the environment do that deserves porridge anyway? The budget might at least be expected to consider the environment’s contribution to the economy (for example, through agriculture) if not in relation to the broader goal of maintaining the environment for its inherent value, as articulated by <a href="http://www.environment.gov.au/minister/hunt/2016/mr20160503.html">Environment Minister Greg Hunt’s budget media release</a>.</p>
<p>The budget continues to support some worthy initiatives, such as the management and protection of the Great Barrier Reef through the <a href="http://www.environment.gov.au/marine/gbr/long-term-sustainability-plan">Reef 2050 Plan</a>. But, overall, we do not know if the budget funding will deliver the desired results across the environment, to maintain the functions that support our economy and lifestyle. Compare this the comprehensive information and accounting systems in place to measure the performance and contribution of different industries (agriculture, manufacturing, retail trade and education) in the economy.</p>
<p>The deficiency could be remedied by making better use of data – both scientific and economic. The economic part of the budget is well served with information and forecasts of economic conditions, but the environmental part is not, despite the increasing availability of environmental information, not only from established sources such as the <a href="http://www.environment.gov.au/science/soe/2011">five-yearly State of the Environment Report</a>, <a href="http://www.bom.gov.au/climate/ahead/">rainfall and temperature outlooks from the Bureau of Meteorology</a>, but from new sources, such as the recently released <a href="https://theconversation.com/environmental-score-card-shows-australia-is-once-again-in-decline-58583">Australia’s Environment in 2015</a> which is the latest example of distilling the increasingly large amount information available from remote sensing technology.</p>
<p>None of this is factored into the Budget in the way that economic indicators such as unemployment or economic growth rates are, so the impacts and risks of the changing environment on the economy are ignored.</p>
<p>These days, the problem is more one of data organisation rather than data availability. The obscurely-titled <a href="http://unstats.un.org/unsd/envaccounting/seearev/">System of Environmental-Economic Accounting</a> (SEEA) attempts to do for the environment what the <a href="http://unstats.un.org/unsd/nationalaccount/sna2008.asp">System of National Accounts</a> has done for the general economy: systematically and regularly present data in a way that reveals what is going on, and to some extent, why. </p>
<p>The <a href="http://abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyCatalogue/9EF05B385442E385CA257CAE000ED150?OpenDocument">ABS already uses SEEA to produce accounts</a>, although these are as yet very basic. If Treasury used information from a comprehensive set of environmental accounts alongside its existing information in developing the Budget, the economic and environmental justifications for environmental spending would be much clearer. More fundamentally, we would have a much better sense of whether we were on the path to sustainability, and if not, where additional investment could have most impact.</p>
<p>Oliver Twist was of course fiction. But in penning his novel Dickens had a real-world target: the British Poor Law Amendment Act of 1834, which ushered in a primitive work-for-the-dole scheme in the form of parish workhouses. While the immediate problem in the story might have been Oliver’s empty bowl, the underlying problem in the real world was that with the industrial revolution, the parish system on which British society had operated for centuries was breaking down rapidly as rural workers migrated en masse to the newly-industrialised cities. Forcing the indigent into workhouses was a budget fix, when what was really needed was a new welfare system.</p>
<p>The approaches taken in managing Australia’s environment, including through the Budget, are as obsolete as the Poor Law was in Dickensian Britain. We don’t know how much environmental investment is needed, or where best to place it. But just as the Turnbull government has a 10-year economic plan for reducing company tax, and is making a 40-year investment in submarines, we need a long-term plan for environmental investment. Until we have a comprehensive set of environmental accounts linked to existing economic information, such a plan will lack foundation and our modern Oliver Twist will have no option beyond the poorhouse plea: “Please, sir, I want some more.”</p>
<p><em>Read more in the series <a href="https://theconversation.com/au/topics/reform-revisited">here</a>.</em></p><img src="https://counter.theconversation.com/content/58636/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Vardon was employed by the Australian Bureau of Statistics and has consulted to the United Nations and World Bank on environmental accounting. He is a member of the World Bank's Policy and Technical Expert Committee supporting the Wealth Accounting and Valuation of Ecosystem Services (WAVES) project.</span></em></p><p class="fine-print"><em><span>Peter Burnett is a member of the Australian and New Zealand Society for Ecological Economics (ANZSEE), a branch of the International Society for Ecological Economics (ISEE). </span></em></p>We count unemployment and economic indicators in the budget, so why not environmental ones?Michael Vardon, Visiting Fellow at the Fenner School, Australian National UniversityPeter Burnett, PhD Candidate, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/587732016-05-10T07:15:56Z2016-05-10T07:15:56ZElection FactCheck: does Labor have a $19.5b black hole in its funding plan?<blockquote>
<p>But Shorten is short by $19.5 billion. Shorten’s black hole just got bigger. – <a href="https://www.youtube.com/watch?v=ZOOwrkb4muo">Advertisement</a> authorised by the Liberal Party of Australia. </p>
</blockquote>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/ZOOwrkb4muo?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Liberal Party of Australia ad.</span></figcaption>
</figure>
<p>Both the Coalition and the ALP have committed to raising tobacco excise by 12.5% a year for four years, starting on September 1, 2017. However, both sides have produced vastly different estimates of the revenue gain over the next decade. </p>
<p>Ads authorised by the Liberal Party claim that the ALP faces a $19.5 billion “black hole” arising from the differences in the costings between the two parties.</p>
<p>Is that assertion correct?</p>
<h2>What are the major parties proposing for tobacco tax?</h2>
<p>The federal government imposes a tobacco excise on locally produced and imported tobacco products, raising an estimated $10.2 billion in 2016-17.</p>
<p>The <a href="http://www.alp.org.au/bestpracticetobaccopolicy">ALP’s tobacco policy</a>, released in November 2015, outlines a plan to increase the tobacco excise by 12.5% a year, each year, from September 2017 until September 2020. The ALP says that</p>
<blockquote>
<p>The policy has been independently costed by the Parliamentary Budget Office to raise $3.8 billion over the current forward estimate period and $47.7 billion over the medium term.</p>
</blockquote>
<p>In his 2016-17 <a href="http://www.budget.gov.au/2016-17/content/speech/html/speech.htm">budget speech</a> on May 3, federal Treasurer Scott Morrison announced that the Coalition would also </p>
<blockquote>
<p>implement a further four annual 12.5% increases in tobacco excise, with the first increase to take effect on 1 September 2017.</p>
</blockquote>
<p>In the 2016-17 <a href="http://www.budget.gov.au/2016-17/content/bp2/download/BP2_consolidated.pdf">Budget Paper 2</a>, on page 16, the Coalition government states that the increases in tobacco excise would raise $4.7 billion over the four years of the forward estimates – from 2016-17 to 2019-20.</p>
<p>However, we have no published figure in the budget papers for the government’s 10-year costing of the tobacco excise hike. Instead, <a href="http://www.theaustralian.com.au/national-affairs/budget-2016-labor-faces-claim-of-20-billion-black-hole/news-story/de59d292bab141971a8a22e577da9c0b?nk=21bd5293c6c9bf91e73e578611f79538-1462358087">news reports</a> quoting the Treasury’s 10-year costings refer to a separate leaked Treasury document, circulated prior to the release of the budget, that reported its forecasts for the government. </p>
<p>Under both Coalition and ALP policy, the tobacco excise rate is expected to rise from around $0.54 per cigarette this year to about $1.10 per cigarette in 2020, as shown in the chart below. This includes continued <a href="https://www.ato.gov.au/business/excise-and-excise-equivalent-goods/tobacco-excise/excise-rates-for-tobacco/">indexation</a> of the tobacco excise rate to wages. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/121847/original/image-20160510-20742-1v3z65a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121847/original/image-20160510-20742-1v3z65a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121847/original/image-20160510-20742-1v3z65a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121847/original/image-20160510-20742-1v3z65a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121847/original/image-20160510-20742-1v3z65a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121847/original/image-20160510-20742-1v3z65a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121847/original/image-20160510-20742-1v3z65a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<h2>Why are there two different revenue estimates for the same policy?</h2>
<p>The government and opposition parties use different public institutions to estimate the fiscal impact of their policies.</p>
<p>The government’s tobacco excise policy was costed by <a href="http://www.treasury.gov.au/">Treasury</a>, and the revenue estimates published in the 2016-17 Budget. Treasury estimates the policy will raise $28.2 billion over ten years. </p>
<p>The ALP’s revenue estimate was prepared by the <a href="http://www.aph.gov.au/about_parliament/parliamentary_departments/parliamentary_budget_office">Parliamentary Budget Office</a> (PBO), which costs policies submitted to it by parliamentarians. The PBO estimated the same policy will raise $47.7 billion over the same period. </p>
<p>The ALP have not publicly released the full PBO response. However, a PBO response to what appears to be a very <a href="https://www.dropbox.com/s/lqvvtazn6qrimj6/PBO%20Costing%20response.pdf?dl=0">similar policy request by Liberal Democratic Party Senator David Leyonhjelm</a> reveals estimates in line with those cited by the ALP.</p>
<p>The difference between the PBO’s $47.7 billion estimate and Treasury’s $28.2 billion estimate is $19.5 billion. </p>
<h2>How can the revenue estimates be so different?</h2>
<p>Over very long time periods, small differences in assumptions can compound to large differences in revenue estimates over a decade.</p>
<p>But even over the four years to 2019-20 – a relatively short period of time – there is a 25% difference between Treasury’s estimate in the Budget papers ($4.7 billion) and the PBO estimate published by Senator Leyonhjelm ($6.3 billion). </p>
<p>The chart below shows tobacco excise revenue forecasts for the last two budgets are similar, after subtracting the impact of the new increase to the excise rate from the 2016-17 forecast. So use of different underlying forecasts, absent any policy change, doesn’t seem to be the most likely explanation for the $19.5 billion discrepancy between the PBO’s estimate and Treasury’s estimate. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/121837/original/image-20160510-20734-14xdpi3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/121837/original/image-20160510-20734-14xdpi3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121837/original/image-20160510-20734-14xdpi3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=472&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121837/original/image-20160510-20734-14xdpi3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=472&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121837/original/image-20160510-20734-14xdpi3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=472&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121837/original/image-20160510-20734-14xdpi3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=593&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121837/original/image-20160510-20734-14xdpi3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=593&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121837/original/image-20160510-20734-14xdpi3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=593&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Grattan Institute</span></span>
</figcaption>
</figure>
<p>The most likely source of difference between the revenue estimates is differing assumptions about how increases in tobacco excise will reduce demand for cigarettes. Past increases in tobacco excise rate have clearly reduced tobacco consumption. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/121838/original/image-20160510-20746-cz1q8e.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/121838/original/image-20160510-20746-cz1q8e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121838/original/image-20160510-20746-cz1q8e.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=476&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121838/original/image-20160510-20746-cz1q8e.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=476&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121838/original/image-20160510-20746-cz1q8e.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=476&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121838/original/image-20160510-20746-cz1q8e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=599&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121838/original/image-20160510-20746-cz1q8e.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=599&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121838/original/image-20160510-20746-cz1q8e.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=599&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Grattan Institute</span></span>
</figcaption>
</figure>
<p>As Treasury has <a href="http://archive.treasury.gov.au/documents/1304/HTML/docshell.asp?URL=02_Treasury_costings_of_taxation_policy.asp">noted before</a>, estimating how people will respond to changes in taxes is notoriously difficult, especially in the long term. </p>
<p>It’s hard to isolate the impact of tobacco excise on the level of smoking. For example, changes to policy – plain packaging reforms or the <a href="http://www.tobaccoinaustralia.org.au/15-7-legislation">many expansions</a> of smoking bans – and to social norms have occurred at the same time as excise increases.</p>
<h2>Comparing the estimates</h2>
<p>To see whether differences exist between the behavioural assumptions in the Treasury and PBO costings, we compared the forecast increase in revenue to the planned increase in the excise rate. </p>
<p>If there were no change in behaviour, every 10% increase in the excise rate would lead to a 10% increase in revenue. But if people are assumed to smoke less or quit as a result of the increase, a 10% rise in the excise rate will generate a smaller increase in revenue.</p>
<p>In the third year after the tobacco excise hikes begin (2019-20), the PBO costing expects each 10% rise in the excise rate to increase excise revenue by 7.8%. By comparison, Treasury expects excise revenue to rise by just 5.6% in that year. </p>
<p>So the Treasury estimates clearly assume that the tobacco excise hike will have a larger impact on consumption than has been assumed by the PBO.</p>
<p>Shadow Finance Minister Tony Burke <a href="http://www.tonyburke.com.au/tony_burke_transcript_abc_rn_breakfast_tuesday_3_may_2016">told the ABC</a> that:</p>
<blockquote>
<p>We used the long-held Treasury assumptions that had previously been used. Those were the assumptions determined by the Parliamentary Budget Office and they go through to previous assumptions used by Treasury. </p>
</blockquote>
<p>However, a similar increase in tobacco excise was costed by Treasury for the former ALP government and published in the previous government’s 2013 <a href="http://www.budget.gov.au/2013-14/content/economic_statement/download/2013_EconomicStatement.pdf">Economic Statement</a>. </p>
<p>In the third year after the 2013 tobacco excise hikes began, the Treasury expected each 10% rise in the tobacco excise rate to lead to a 5.4% increase in revenue. This suggests the Treasury is using a very similar behaviour change assumption in 2013 to the one it used when costing this year’s budget.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/121839/original/image-20160510-20742-1qoo878.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/121839/original/image-20160510-20742-1qoo878.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121839/original/image-20160510-20742-1qoo878.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121839/original/image-20160510-20742-1qoo878.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121839/original/image-20160510-20742-1qoo878.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121839/original/image-20160510-20742-1qoo878.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121839/original/image-20160510-20742-1qoo878.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121839/original/image-20160510-20742-1qoo878.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Grattan Institute</span></span>
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</figure>
<p>Treasury <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/estimate/b70c2618-6c93-4663-9c4a-26d392a8b0a4/toc_pdf/Economics%20Legislation%20Committee_2016_05_06_4415.pdf;fileType=application/pdf">confirmed at Senate Estimates</a> last Friday that the behavioural assumption used in the 2016-17 Budget costing was a “minor variation” from the 2013 estimate. Treasury’s assumption is based on the range of estimates published by the <a href="http://www.who.int/tobacco/economics/2_2estimatingpriceincomeelasticities.pdf">World Health Organization</a>.</p>
<h2>Treasury has the final say</h2>
<p>Treasury is responsible for estimating the budgetary impact of revenue policy changes according to the <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2016/Charter%20of%20Budget%20Honesty%20Policy%20Guidelines/Downloads/PDF/charter-of-budget-honesty-guidelines.ashx">Charter of Budget Honesty</a>. If elected, an ALP government would have to rely on Treasury’s estimate of the revenue gain from its tobacco excise policy when preparing the budget.</p>
<p>Shadow Treasurer Chris Bowen has already <a href="http://www.afr.com/news/politics/election/budget-2016-tobacco-revelation-is-an-embarrassment-for-labor-20160502-goklg6?login_token=hxs1D0prqpV97LU1oix6343N3ya4p3wwP0JcimZU2qEZzwGJeNBcVB3mdZbabdyAwyMVCEMK6qTN8YadOU_txQ&expiry=1462500090&single_use_token=TWqbadwNNRjRNHGgsMp-CEEUR9H929eOg8sx-lvxAdtFH6omygtHFgV-GI00zkSxA3tV3MDnu4UlcxnmoHQXRw">pledged</a> to accept the Treasury estimates over those produced by the PBO. </p>
<p>Labor has played down the impact the discrepancy will have on their spending plans. Asked about the revised figure of $28.2 billion in tobacco tax revenue produced by Treasury modelling, <a href="http://www.tonyburke.com.au/tony_burke_transcript_abc_rn_breakfast_tuesday_3_may_2016">Burke told the ABC</a> that:</p>
<blockquote>
<p>… if you go through the commitments Labor has so far announced, we were already well south of even that revised figure. We have already more than the improvements to the budget bottom line to pay for everything we have put forward.</p>
</blockquote>
<h2>Verdict</h2>
<p>It is true that there’s a $19.5 billion discrepancy between Labor and Treasury’s revenue estimates. The Parliamentary Budget Office, which costed Labor’s plan, said the tobacco tax hike would rake in $47.7 billion. Treasury estimated the tobacco excise increase would bring in just $28.2 billion. $47.7 billion - $28.2 billion = $19.5 billion.</p>
<p>Treasury estimates clearly assume that the tobacco excise hike will have a larger impact on cigarette consumption than has been assumed by the PBO modelling.</p>
<p>Even though it has relied on independent costings from the PBO, the ALP now has to accept its tobacco excise policy is predicted to raise nearly $20 billion less revenue over ten years than it had expected. However, Labor has said that it can comfortably budget for the lower Treasury forecasts. <strong>– Brendan Coates</strong></p>
<hr>
<h2>Review</h2>
<p>This FactCheck provides a sound overview of tobacco taxation in Australia. It correctly identifies that the likely main difference between the Federal Treasury estimate and the Parliamentary Budget Office estimate of tobacco revenue relates to the assumption made around behavioural change resulting from the increased tobacco excise rates - what economists call the “<a href="http://www.investopedia.com/terms/d/demand-elasticity.asp">demand elasticity</a>”. </p>
<p>The author makes a fair judgement that the difference between the two costings is likely to mean that Labor will have $20 billion less revenue over the next ten years. <strong>– Ben Phillips.</strong></p>
<hr>
<p><div class="callout"> Have you ever seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.</div></p><img src="https://counter.theconversation.com/content/58773/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>FactCheck unpacks claims that Labor has a $19.5 billion black hole in its economic plan.Brendan Coates, Fellow, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/589822016-05-10T02:35:35Z2016-05-10T02:35:35ZSuper contribution cap changes could end up benefiting the rich<p>The <a href="https://theconversation.com/government-pitches-for-integrity-in-tax-and-super-experts-respond-58153">superannuation changes</a> announced in last week’s federal budget will better target super towards its core purpose of supplementing the Age Pension. But in such a complex area as super, appearances can deceive. Parts of the budget package may make the system even more generous to high-income earners – and more expensive for the government. </p>
<h2>Carry forward won’t help women and carers to ‘catch up’</h2>
<p>Under the plan, people will be able contribute more to their super when they have not reached their pre-tax contributions cap in previous years. Taxpayers with a super balance of less than A$500,000 will be able to draw on unused caps from the previous four years to make “catch-up” contributions. </p>
<p>These caps are currently $35,000 a year in pre-tax contributions for a taxpayer over 50, $30,000 for one under 50. The budget will create one cap of $25,000 a year. Being able to make these payments is excellent for one’s tax bill, as they attract only 15% tax for those with incomes of under $250,000, and 30% for higher earners – rates far lower than most people’s marginal tax rate. </p>
<p>The budget papers trumpet the ability to bring forward unused caps as helping women and carers and anyone with a broken work history. But as Grattan’s <a href="http://grattan.edu.au/wp-content/uploads/2016/01/Submission_Grattan-Institute_Economic_Security_Women_in_Retirement2.pdf">submission</a> to the recent Senate Inquiry into Economic Security for Women in Retirement demonstrates, all the evidence shows that few middle-income earners – and even fewer women – make large catch-up contributions to their super fund. </p>
<p>Women aged below 50 make up only 12% of people that age with balances less than $500,000 who contribute more than $25,000 a year to super. Most women simply can’t afford to make large catch-up contributions. A mere 2% of women with superannuation balances of less than $500,000 – 130,000 people – made pre-tax contributions of $25,000 or more in 2013-14. And 80% of them are among the top 20% of income earners. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/121680/original/image-20160509-20612-17up4t0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121680/original/image-20160509-20612-17up4t0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121680/original/image-20160509-20612-17up4t0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121680/original/image-20160509-20612-17up4t0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121680/original/image-20160509-20612-17up4t0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121680/original/image-20160509-20612-17up4t0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121680/original/image-20160509-20612-17up4t0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<h2>Helping high-income earners to get even further ahead</h2>
<p>Instead of helping women and carers to “catch up”, allowing unused caps to be carried forward is likely to help younger high-income earners, overwhelmingly men, to get even further ahead. </p>
<p>Typically, only high-income earners have enough disposable income to hit the new $25,000 cap on pre-tax super contributions. Almost two-thirds of taxpayers who contributed over $25,000 in 2013-14 and had super balances of less than $500,000 were in the top two taxable income deciles. Of these, over 60% were men, mostly younger men on high incomes. These people will probably never qualify for a pension yet will benefit substantially from the carry-forward policy.</p>
<h2>Another boon for tax planning</h2>
<p>The government’s plan will also increase the opportunities for tax planning for older high-income earners. Tax-free superannuation benefits for over 60s permit middle- and high-income earners to substantially reduce their tax liability by recycling wage income through their superannuation fund, irrespective of whether these workers are actually saving for retirement. As Grattan’s recent report, <a href="https://grattan.edu.au/report/super-tax-targeting/">Super Tax Targeting</a> shows, over 60s can already recycle income through superannuation to reduce their income tax bills by around $5000 a year. Such strategies do little to boost retirement savings, but come at tremendous cost to the budget, and other taxpayers.</p>
<p>Under the new rules, when older workers turn 60 and have unused caps, they will be able to recycle even more of their income through superannuation, generating even larger tax advantages. For example, someone turning 60 and earning $115,000 a year – one and a half times average earnings – will gain an extra tax benefit of about $1,000 a year. And that’s after factoring in the lower $25,000 cap on pre-tax contributions.</p>
<h2>Carry forward increases budget costs in the medium term</h2>
<p>The proposal will also have significant budgetary costs beyond the four years of the forward estimates, even after adjusting the annual cap on pre-tax contributions down to $25,000 a year. </p>
<p>The government estimates the measure will only cost $350 million over the four years to 2019-20. However, since taxpayers will only be able to carry forward the unused portion of their contributions cap from 1 July 2017 onwards, the full cost of the policy change will only become apparent from 2021-22 onwards, when individuals have access to unused caps over the previous four years. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/121681/original/image-20160509-20612-8ab24h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121681/original/image-20160509-20612-8ab24h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121681/original/image-20160509-20612-8ab24h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121681/original/image-20160509-20612-8ab24h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121681/original/image-20160509-20612-8ab24h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121681/original/image-20160509-20612-8ab24h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121681/original/image-20160509-20612-8ab24h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
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<p>So how could the policy be improved?</p>
<h2>$500,000 threshold is too high</h2>
<p>The government’s move to limit exactly who can carry forward these unused amounts is a sensible one. But the $500,000 super balance threshold is far too high. </p>
<p>A $500,000 super balance might not sound like much to some, but it’s more than what 95% of taxpayers have in super right now. In 2013-14, the latest data available, a man aged 60 to 64 years could expect to retire with average superannuation savings of $292,000, whereas a woman had an average super balance of only $138,000</p>
<p>Even in a mature super system, where workers receive compulsory superannuation contributions of at least 9% for their entire working lives, most people will not retire with $500,000 in super. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/121682/original/image-20160509-20577-14kebpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121682/original/image-20160509-20577-14kebpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121682/original/image-20160509-20577-14kebpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121682/original/image-20160509-20577-14kebpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121682/original/image-20160509-20577-14kebpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121682/original/image-20160509-20577-14kebpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121682/original/image-20160509-20577-14kebpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>A lower balance threshold, such as $300,000, could better target the policy at those it is intended to help by excluding taxpayers with the top 10% of super balances. These people are already unlikely to ever qualify for even a part-rate Age Pension, so why give them extra tax breaks to save via superannuation?</p>
<p>But a broader question is whether the new bring-forward rules are needed at all. </p>
<p>The government <a href="http://budget.gov.au/2016-17/content/glossies/tax_super/downloads/Budget2016-17-Tax-Super.pdf">claims</a> its reforms will better target superannuation tax breaks to those that need them. Yet the new $25,000 annual cap on pre-tax contributions is still incredibly generous. The <a href="https://grattan.edu.au/report/super-tax-targeting/">Super Tax Targeting</a> report shows that people contributing $11,000 each year to super, together with the savings they tend to make outside super, are likely to enjoy a comfortable retirement without an Age Pension. It also shows that very few – other than high-income earners – will ever come close to breaching the new $25,000 cap. With such a generous annual cap on contributions still in place, the bring-forward rules are unnecessary. </p>
<p>The government has made many sensible changes to superannuation tax breaks in this year’s budget. But the move to more flexible annual caps on pre-tax contributions is not one of them. While it is intended to help women and carers catch up, it will largely help younger high-income earners get further ahead.</p><img src="https://counter.theconversation.com/content/58982/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.</span></em></p><p class="fine-print"><em><span>Brendan Coates does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government made many sensible changes to superannuation tax breaks in the budget. But the move to more flexible annual caps on pre-tax contributions is not one of them.Brendan Coates, Fellow, Grattan InstituteJohn Daley, Chief Executive Officer, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/585932016-05-09T20:04:57Z2016-05-09T20:04:57ZExplainer: why we can’t fix the structural deficit without tax and spending reform<p><em>The Federal Budget has been delivered and Australians are headed for the polls. In this series, Reform Revisited, we ask writers for innovative ways to tackle our reform agenda.</em></p>
<p>It is generally recognised that Australia has a <a href="https://theconversation.com/budget-explainer-the-structural-deficit-and-what-it-means-57437">structural budget deficit</a> which needs to be reduced. There is also quite widespread acceptance that our <a href="https://theconversation.com/six-simple-tax-reforms-plagued-by-politics-44906">tax system is in need of reform</a>. Two glaring omissions from the recent federal budget were plans to reduce the deficit any time soon or embark on meaningful tax reform. Is there any connection or conflict between the two?</p>
<p>In trying to address this question there are really three different issues: the size of government expenditure; how much of this expenditure should be financed from taxes; and how the tax system should be structured in order to prevent endless deficits in the future.</p>
<p>In theory these three issues are quite separate but inevitably they become confused and political. For instance, Labor might say schools expenditure must rise because improving education of the nation’s children is far too important for us not to do so. This means raising more revenue through increasing the deficit (borrowing) or raising taxes where the burden must fall on “big business” or “wealthy people”. The Coalition would have a different set of priorities which change the mix or amount of government expenditure, how it is financed and who bears the tax burden.</p>
<p>Governments provide many goods and services, including health, education, infrastructure and national defence. They also regulate individual and private sector business activity. One way to address the structural deficit is to permanently reduce government expenditure as a percentage of gross domestic product (GDP). Government expenditure as a proportion of GDP is currently higher than the long-term average. </p>
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<p>There is a well-articulated economic theory underlying the principles governing efficient government expenditure on goods and services. There is no space here to develop this further but the main point is that the benefits of this expenditure should exceed the costs in terms of all the other things that could be done with these funds. Clearly governments of all persuasions have been somewhat less than rigorous in spending wisely according to this criteria rather than according to their own or, vested interests’, preferences. </p>
<h2>Equity vs efficiency</h2>
<p>Much of government expenditure however, is not based mainly on the efficient provision of goods and services such as infrastructure projects, which facilitate economic growth and productivity. Instead, it aims to address equity issues based on the principle that the market, left to its own devices, will result in an inequitable allocation of income, goods or wealth. Thus, the biggest single item of government expenditure in Australia is social welfare. </p>
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<p>It could be argued that most social welfare reduces economic efficiency since most welfare payments go to people who produce little or no market output such as the unemployed, disabled or elderly, but most humane societies accept the need to help the worse off. Countries, however, differ quite markedly in the weight given to equity versus efficiency.</p>
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<p>Governments also need to allocate expenditure just to actually carry out the functions of government administration through, for instance, the public service and the legal system. The size of these operations depends, among other things, on the amount of regulation imposed on individuals and firms plus the number and quality of programs government uses to provide goods and services.</p>
<p>To raise the revenue for these activities governments must impose taxes on households, consumers and firms. Most taxes are used to raise revenue, but some taxes, such as those on cigarettes or alcohol, are also intended to discourage what society views as “undesirable” behaviour. But the fact that these taxes are such huge revenue raisers implies they are pretty ineffective at reducing consumption. </p>
<p>Income tax is the largest source of revenue for the federal government and is levied on the wages, salaries and other income of households (personal income tax) and the profits of firms (company income tax). Clearly, reducing the deficit is most easily done by raising income tax rates since revenue from this source is so big. Restructuring the tax system to rely less on direct (income) tax to indirect tax (such as the GST and excise taxes) requires a big shift in revenue collection.</p>
<h2>Why reform is so hard</h2>
<p>Although raising taxes seems like the easy way out for reducing the deficit, critics (many economists) argue that the loss to efficiency (growth and productivity) of raising taxes, particularly income taxes, is too great. Even harsher critics argue that the current level (and structure) of taxation is stifling economic activity. </p>
<p>The essential argument, which again would require another article to elaborate on, is that the private sector (households and firms) is best placed to generate output and growth of goods and services in the economy; and reducing the resources available to the private sector leads to less output, jobs, etc. </p>
<p>Income taxes are regarded as particularly inefficient because they also reduce rewards to effort for both workers and firms and therefore act as a disincentive to wealth (and employment) creation. In fact, just about every tax (and most government payments) results in distortions, many of which were unanticipated, in behaviour by individuals – the most recent one that comes to mind is <a href="https://theconversation.com/au/topics/negative-gearing">negative gearing.</a></p>
<p>Unfortunately, in economics any distortion usually has people who gain from government revenue and taxes. So although it may be in the interest of the economy as a whole to reduce taxation, change the tax structure, rationalise benefits and reduce the structural deficit, some groups (which may be quite large) of individuals will usually be worse off by the changes. </p>
<p>And in a democracy these individuals vote, have the ability to influence the media, or lobby politicians to prevent any changes which would disadvantage them. Witness the way just about every idea to reduce the deficit, reduce government expenditure or restructure taxes tends to get shot down so quickly in Australia without sensible consideration or debate.</p>
<p>Perhaps fixing the structural deficit is too big a task given the reluctance to tackle any meaningful tax and spending reform!</p>
<p><em>Read more in the series <a href="https://theconversation.com/au/topics/reform-revisited">here</a>.</em></p><img src="https://counter.theconversation.com/content/58593/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Phil Lewis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. He also has no relevant affiliations. During his career he has received funding from many private and public sector organisations including most recently the ARC, NCVER, DEEWR, the AFPC, ABLA and CPA Australia.</span></em></p>Reform remains a challenge when every idea to reduce the deficit, reduce government expenditure or restructure taxes tends to get shot down in Australia.Phil Lewis, Professor of Economics, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/588642016-05-09T11:59:36Z2016-05-09T11:59:36ZRushed reform benefits no one in the end<figure><img src="https://images.theconversation.com/files/121667/original/image-20160509-20609-6li578.jpg?ixlib=rb-1.1.0&rect=7%2C651%2C2469%2C2126&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The government's options for higher education reform come with significant trade offs.</span> <span class="attribution"><span class="source">from www.shutterstock.com</span></span></figcaption></figure><p>For students and universities, the 2016-17 budget held few surprises. <a href="https://theconversation.com/higher-education-in-policy-paralysis-after-budget-2016-what-now-58815">“Full deregulation”</a> is dead and the budget provided a one year deferral on the cuts to teaching which have not yet passed parliament. </p>
<p>The government has signalled its intention to pause, though not retreat, on changing the system.</p>
<p>The education minister, Simon Birmingham, released a <a href="http://www.education.gov.au/news/consultation-future-higher-education-reform">discussion paper</a> which provides a wide range of options for future and presumably more popular change to achieve the “savings outlined in the budget”. </p>
<p>What is clear from the paper is that the government will expect structural budget savings from whatever comes next. </p>
<h2>Trade offs</h2>
<p>The reality of the system is that to achieve large savings they must come with either a significant reduction in public funding for either research or teaching. </p>
<p>Both options come with significant trade offs. </p>
<p>On the one hand, reducing research funding will almost certainly shrink the total Australian research output. This would be a bad look at a time when the prime minister loudly pursues an <a href="https://theconversation.com/turnbull-seeks-ideas-boom-with-innovation-agenda-experts-react-51892">innovation agenda</a>. </p>
<p>On the other hand, without seriously sacrificing quality, reducing teaching funding can only be mitigated through an increase in student contributions. </p>
<p>This could come either directly as fees or through a less generous higher education loan program (HELP) which asked <a href="https://theconversation.com/is-lowering-the-student-loan-repayment-threshold-fair-for-students-56814">students to pay back their debt on a lower salary</a>.</p>
<p>In achieving this goal, the options explored in the discussion paper reveal the difficult trade offs in the absence of additional public funds.</p>
<p>While full deregulation is off the table, its presence still lives on in the idea for fee flexibility for a limited number of “flagship” courses at each university. This proposal is similar to that put forward following Jane Lomax-Smith’s Base Funding Review in 2011. </p>
<p>This is in effect an opt-in version of partial deregulation for some courses, and as the paper makes clear would need careful thinking to ensure that it achieved the diversity in student choice that the government intends. </p>
<p>A concentration of specialist “flagship” courses in a few high demand and high margin courses where universities could maximise revenue is not in anyone’s long-term interest. If designed poorly it will distort incentives for universities and not deliver the desired innovation in quality education. Does Australia need 41 flagship commerce or law degree courses? </p>
<p>The rules matter here. </p>
<p>The paper also signals options for change to HELP. As the <a href="https://grattan.edu.au/report/help-for-the-future/">Grattan Institute’s</a> work has recently shown, reform of the loan system is not simple but may be politically necessary if the growing costs are to be met. </p>
<p>The discussion paper also indicates the possibility of changing the way we publicly fund postgraduate coursework degrees.</p>
<h2>How should we fund undergraduate and postgraduate courses?</h2>
<p>This revisits the difficult question of how to design a system for postgraduate courses – that are supported by public subsidy – which both promotes diversity and choice, but is coherent across the whole sector. </p>
<p>We currently have demand driven public funding for bachelor level education but not government supported postgraduate places.</p>
<p>The compounding impact of keeping funding for the sector as a whole static without indexation quickly erodes its real value. This was all too evident in the mid 1990s when the amount of funds for universities did not keep up with inflation, meaning ‘no cuts’ actually meant less real funding for teaching and research. </p>
<p>The government has said it is open to ideas, and the paper signals the establishment of an expert group to oversee proposals for the next phase.</p>
<p>The paper only provides discussion points, and claims no preferred options as such. The onus is now on students, universities and the wider public to make clear what they want from higher education. This means also deciding where they stand on the inevitable trade offs, even if they reject some of the base premises.</p><img src="https://counter.theconversation.com/content/58864/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Gwilym Croucher is Principal Policy Adviser in the Chancellery at The University of Melbourne and Senior Lecturer in Melbourne Centre for the Study of Higher Education.</span></em></p>The onus is now on students, universities and the wider public to make clear where they stand on the options laid out in the discussion paper.Gwilym Croucher, Senior Lecturer, Melbourne Centre for the Study of Higher Education, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.