Budget 2018: The Aftermath

Budget 2018 handed down by Treasurer Scott Morrison on Tuesday 8 May 2018 was described by the Australian Institute of Company Directors as “heroic” in its wage growth forecasts, by others as “all about tax” and from Opposition leader Bill Shorten that Australia “deserves better”. For all that, the Budget did receive the endorsement of former treasurer Peter Costello and opened up a healthy discussion on tax and tax reform. To analyse just what Budget 2018 was all about, Jennifer Hewett, National Affairs Columnist on Business & Politics at the Australian Financial Review and Adam Creighton, Economics Correspondent at The Australian addressed The Sydney Institute on Tuesday 22 MY 2018.

 BUDGET 2018: THE AFTERMATH

JENNIFER HEWETT

Thanks very much, Adam. That was a great collection of very sharp statistics, which tends to puncture a lot of the political rhetoric that we hear.

But, undeterred, I will talk about some of the political rhetoric and whether or not that’s effective. Although, this afternoon, as I was watching Question Time and thought about this topic as “the aftermath” it occurred to ne that there’s no aftermath to the budget; we’re just stuck in an endless loop, going round and round.

That’s not surprising, or unusual. The budget is a political document dressed up as an economic strategy, complete with relatively rosy economic forecasts. To a large extent, all budgets are designed to put the government in the best political light and offer voters hope for the future.

But this budget was certainly a little bit unusual in that the tax cuts and final reform of the tax rates were put off – many of them, much of it for seven years and seven elections away. Labor, naturally, is happy to mock this timetable as completely meaningless. The Coalition aim, as Adam pointed out, is to demonstrate or to try to demonstrate that the government actually has a longer-term vision rather than just being buffeted by short-term events and blocks in the Senate.

It particularly wants to maximise the difference – the rhetorical difference, the political difference – between its approach and Labor’s, particularly when it comes to taxing what used to be known as the “aspirational class”. For a while, we talked about “working families”. And combined this attack with Labor’s increases in areas like negative gearing, capital gains, the tax on dividends and increases for higher income earners, to scare a swathe of middle of Australia and also to galvanise older Australians to stick more to the Coalition.

So, every time Morrison declares to the Press Club, every time you hear Chris Bowen talk about budget repair, it means one thing: higher taxes suffocating the economy.

The government’s version of budget repair, of course, is to get the political benefit of promising much bigger tax cuts in years to come, without having to take the budget hit for it now or over the forward estimates.

So, how is that plan going? Morrison will continue to insist, as he’s doing, that the government’s personal tax cuts – no matter how staged over the several years – can only be considered as a whole package that hangs together, like the corporate tax plan, and one that cannot be split. It’s not a matter of considering votes in future elections, he argues, but having just one Senate vote, right away.

According to the Treasurer, voters need to ask their senators a simple question: why are you standing in the way of tax relief for me and my family? As we are seeing yet again this week, this will be a game of bluff for the Senate that the government at this stage still looks more likely to lose than not.

I can’t be sure what will happen, given the unpredictability of the independents. I’ve become a little more cautious about saying what can and can’t happen in politics these days, but certainly, the record is not promising.

The government may yet crack on, putting some of its personal income tax agenda through in stages. And the problem for the government – this agenda will inevitably be mixed up with the unpopular corporate tax cuts which, with Pauline Hanson’s criticisms and a 180-degree turn again today, now looks an even more remote chance to get through the Senate.

The government, of course, keeps reminding everyone that the decade-long timetable for corporate tax cuts means these are even further away than changes to personal income tax for higher income earners.

But Labor’s argument, that this is all a $65-billion giveaway to the big end of town complete with $17 billion to those terrible big banks, actually gets a lot more traction. There’s a lot of reasons for that, including the general cut through of simplistic slogans in the modern social media world, as well as a general appeal to the secular god of fairness, rather narrowly defined, in these times when people are feeling grumpy about their wages.

So, the claims that people earning a couple of hundred thousand will get thousands of dollars of tax breaks eventually compared to a few hundred dollars for lower-income earners registered more with the voters. The government’s hope is that such claims registered more with people who were going to vote Labor anyway, while their appeal is more to a middle of Australia keen to keep more of their money and who hate that they’re paying so much tax now.

This does, as Adam pointed out, conveniently ignore the fact that the budget adds yet more complexity and higher marginal tax rates for part-time workers, particularly via what is known now as LAMITO. You thought you had LITO, there’s LAMITO – Lower And Middle-Income Tax Offsets. Like energy policy, the details are so complex very few people understand it at all.

The budget picture is Scott Morrison’s argument that the government can still help those on lower incomes now, while realising it’s unsustainable. That under a quarter of taxpayers pay two-thirds of tax. Other figures suggest that the level of progressivity – a wonderful word – is even higher. At the moment, for example, the top 1% pay 17% of income taxes; the top 10% pay around 50%.

But according to Deloitte Access Economics, the top 20% of adults – as opposed to the only 53% of adults paying net tax – already pay close to 80% of taxes, and now continue to do around that under the government plan as well.

Although the Prime Minister and Treasurer have improved on telling and selling their more positive story about the economy, they don’t hammer the key points consistently and simplistically enough. Pauline Hanson was unkind enough to point this out today as she has explained her complete change of heart on corporate tax cuts, saying the government couldn’t sell them at all. Then there’s Longman where Hanson wants to up her vote and differentiate herself from the government, in the by-election, but that’s a different matter.

It is a huge blow for the government. How fatal? Who knows? But whether the government can improve its powers of persuasion, and without enduring more unforced errors of its own making, will be key to the election. And even to the by-elections, whenever they are held.

The fact that chances might improve would be the triumph of hope over experience so far. But it is true that this budget is about building hope and consumer confidence that the economy really is getting better, along with the growth of jobs, and the budget is getting better – even if wages aren’t moving much at all.

And there is actually quite a reasonable story, as Adam pointed out, on some of those things including investment in and help to support the creation of jobs, although the government doesn’t get much credit for it.

It is interesting, as Adam pointed out, to go through those figures that the government hasn’t made much progress on making major cuts in spending, relying instead on rising receipts for the improvement of the deficit. And, of course, the opposition is doubling down on that approach.

The first tough 2014 budget of the Abbott Government does seem a long time ago now, as well as a Prime Minister ago. Reasonably, the government figures there’s limited gain in getting all the political pain and putting out big cuts that just get knocked off in the Senate anyway. But it is also true that whether it’s education, or health, or defence it’s already included. There are some pretty major increases in spending to thwart Labor’s attacks in these areas.

At the same time, as Adam said, it claims it’s keeping spending at this terrible low rate of under 2 per cent, with that pain to come. But really it wants to contrast that with Labor’s time in office, and to argue there’ll be the same lax approach on spending next time around, as well as all those unjustified tax hikes, no matter what Chris Bowen is promising. ­

In the meantime, in the budget aftermath, the government is relying on still selling the fact that the economy is generating jobs at a pretty substantial rate of 420,000 last year, and getting people off welfare. In fact, Morrison says it is this, rather than rising commodity prices, that has been key to generating most of the unexpected surge in revenue growth. Making it easier to get the budget back into a very modest surplus a year earlier. This does rely on forecasts of wages growth that seem particularly optimistic and unrealistic given what’s been happening on that score, not just in Australia, but around the world.

It is a trend that has confused economists everywhere, not to mention politicians, about whether it’s actually permanent structural change – even in Western economies, for example like the US, that are growing relatively strongly. So, the catch is that Morrison is not going to be able to resolve that massive change through force of personality or talk of demand eventually leading to wage rises. Economic growth is okay, but it’s not that spectacular.

With a very uncertain future for the full package of either personal or corporate tax cuts, that makes far more difficult the government’s promise that things are going well and they’re all going to get better. Although that is obviously the impression that the government is very keen on leaving.

Another area that is particularly interesting is this government’s willingness to talk about infrastructure, but to fund a lot of it off budget on the basis that these investments will eventually make a financial return for the government. This is another incredibly optimistic assumption.

The NBN is the big one here, of course. With absolutely no prospect of that ever making the promised return, and I am sure needing to be written down in years hence. The inland rail will go the same way. Western Sydney Airport does have a slightly better prospect of making a return, but very much in the long term.

So, tax-payer accountability for paying such bills is even further away than the government’s whole package of tax cuts. That doesn’t mean it changes the priority now – the political priority – which is to try to leverage this budget to win an election against the political odds and to try to rebalance at least some of the debate on just what fairness means.

So far, success for the government doing that in the aftermath of the budget is probably less certain than the wafer-thin surplus promised for the next financial year. But that’s politics as opposed to economics.