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, Adam Creighton, Economics Correspondent at The Australian and Jennifer Hewett, National Affairs Columnist on Business & Politics at the Australian Financial Review addressed The Sydney Institute on Tuesday 22 May 2018.

BUDGET 2018 THE AFTERMATH

ADAM CREIGHTON

The topic I was given for tonight was simply: Budget 2018 The Aftermath.

I asked myself what is the aftermath for a budget? For journalists, the aftermath is typically a bad hangover. And I thought that’s not entirely a dissimilar experience for the nation as a whole. Extra spending must ultimately be paid for, through taxes, so to the extent taxes damage the economy we all in a sense suffer a hangover on budget morning.

Budgets have become political more than economic documents, and as such they entail announcement of new spending. The lock up itself in Canberra, of course, was a design of Paul Keating as Treasurer, a way to bring the more important journalists to Canberra as a captured audience.

This was my sixth budget as a journalist for The Australian. In that period annual federal government spending has increased 31 per cent, from $367bn to $484bn. Note that over that period our population has increased by 9.7 per cent to just under 25 million. If you’re wondering that’s about $19,400 per person.

Over that six-year period, the stock of government debt has more than doubled from $257.4bn to $561bn next year. The federal government’s interest bill has increased from $11.8bn a year to $18.7bn estimated next financial year.

So, was the budget a success?

The budget is about getting a bounce in the polls, which depending on which poll you look at, seems to have occurred. The atmospherics of the budget have been good: back to surplus sooner, paying off debt, tax cuts etc.

By the standards of recent ones, Scott Morrison’s third budget was probably his best. I think it’s about a 7 out of 10.

One important measure for judging a budget is how much the government chose to spend. In technical speak this is a question of “policy decisions”, which are conscious, versus “parameter variations”, which broadly aren’t.

What the government has most control over is its spending. Revenues it can only estimate, and often badly. Let’s have a look at the deliberate decisions over the past five budgets looking over the forward estimates: 14/15 cut $14bn; 15/16 increase $10.1bn; 16/17 cut $3bn; 17/18 increase $14bn; and 18/19, this year, cut $404m

So, all up a modest reduction in spending. This is impressive given this is likely to be an election budget. Moreover, there were few new initiatives.

I want to contrast the spin and reality of the budget. Certainly, this budget enjoyed the first obvious improvement in the fiscal and economic outlook for the first time in a decade. But that’s luck more than skill.

“Real expenditure growth remains below two per cent, the most restrained of any government in more than 50 years,” the Treasurer said in the budget night address. The reality is somewhat different.

Another key budget figure, perhaps the most interesting, is the annual rate of real growth in spending. In 2014/15 it was 0.3 per cent negative. That was the first full year of Coalition government. The next year it was 1.3 per cent, then 2 per cent in 16/17 and then 2.7 for this year 17/18. Next year, 18/19, real growth in spending will be 3.1 per cent, among the fastest rates in recent years. So, the growth in spending growth has accelerated every year of the Coalition.

Where does all this restraint come from? Well, after next year of course! Real spending growth crashes to 0.2 per cent in 19/20 and then remains around 1.1 per cent for the following two years of the budget estimate period. Impressive!

I have to stress these growth figures are “real”, so the actual dollars and cents increase is around 4 to 5 per cent a year. In the government’s defence, a lot of spending growth stems from past legislation – age pension, NDIS etc. Reducing spending seriously requires legislation.

What about all the talk of a budget surplus? There’s a small surplus pencilled in now for 19/20 of $2.2bn. This year the deficit is $18bn. But if you look at the headline balance, which includes everything, it’s $37bn. Next year’s deficit is $14bn, but on the headline measure it’s $28bn.

This is because the headline balance includes a much bigger variety of government incomings and outgoings. Think of the debt and equity investments in NBN, Western Sydney Airport, the Melbourne to Brisbane railway, Snowy 2.0 etc. As economist Saul Eslake has remarked, it’s a bit odd the “headline balance” doesn’t make the headlines more.

What about paying down debt? “With the budget returning to balance we will start paying down debt. Over the medium term gross debt will be $126 billion less in 2027-28 than was estimated at the mid-year update in December,” the Treasurer said.

Indeed, for the first time since the fin­ancial crisis more than a decade ago, the government has pencilled in a fall in the actual dollar value of the federal government’s total debt, which is now expected to stand at $558bn by 2028 rather than the $684bn projected as recently as December. But it’s worth stressing this is in 10 years time. Debt continues to grow, and the fall depends on extraordinary spending restraint in coming years.

As for the forecasts, they are looking a little dated already. The budget anticipates wage growth rising to 2.25 per cent this financial year, which would require the quarterly rate of growth to surge to more than 0.7 per cent — a level not seen for four years — over the final three months of 2017-18. Wage growth is then ­expected to rise to 3.25 per cent by financial year 2020.

But the official wage price index, which came out last week, showed incomes rose 0.5 per cent over the first three months of the year — the same slow rate as over the previous three months, leaving the crucial annual measure of private sector wage growth at 1.9 per cent.

Government keeps forecasting wage growth returns to “normal”, whatever that is. Given wages are just under 50 per cent of national income, even small changes in their growth have a big impact on taxes and economic growth.

What about “tax reform”? Well at least there was some attempt at reform – although we have to wait seven years. For the first four years workers earning between $48k and $90k will receive a $530 tax offset, which isn’t really reform. If you earn more than $90,000 you have a $2.70 tax cut to look forward to.

And don’t be fooled by all the talk of a “flat tax”. The government’s plan would increase the number of effective tax brackets from eight to 10, because of the Medicare Levy and the Low and now also the Middle Income Tax Offset.

In the final two years, the second top bracket would go entirely, leaving workers earning between $90k and $200k facing a 34.5 per cent marginal tax rate. The claims the progressivity of the system would increase are wrong. There’s an argument, the government’s tax plan, worth $140 billion over a decade, is tilted towards the rich.

Obviously, higher earners will always get the biggest reductions in dollar terms because they pay the bulk of the tax in dollar terms. But the share of taxpayers in the top tax bracket, which is a better measure of progressivity, would actually increase from 4 per cent in 2016 to 6 per cent by 2024, an increase of almost 400,000 workers.

Consider this: The top two income tax thresholds set at $80,000 and $180,000 in 2008, would have needed to ­increase to $98,400 and $221,400 had they been indexed to the consumer prices since. Yet in 2024 the top bracket will increase from $180,000 to $200,000.

Much more needs to be done on tax. Even after scrapping the 0.5 percentage point increase in the Medicare levy, previously slated to kick in from July next year, middle-income workers still face a seven percentage point increase in their average tax rate by 2021 compared with 2009: for a worker on $75,000 a year, that’s a $101 a week in additional tax. Certainly a lot more than the $10 a week they have to look forward to if the government’s plan passes the parliament.

No wonder some are grumpy about prioritising tax cuts for ­companies, which, facing a flat rate of tax, don’t encounter any ­bracket creep.

One fruitful area of reform, to get tax rates down, is the area of work-related tax deductions, which are excessively complex and distortionary, and out of control in this country, forcing all other tax rates to be higher. Australians claimed more than $22 billion of work-related deductions in 2015, which was almost 12 per cent higher than in 2013. Incredibly, 6.3 million people made clothing expense claims totalling almost $1.8bn.

It would mean that almost half of the individual taxpayer population was required to wear a uniform or protective clothing or had some special requirements for things like sunglasses and hats. The statistics also show more than 40,000 people claimed work-related travel expenses of more than $10,000 in 2015.

Taking a step back from the budget, economic conditions remain of a “goldilocks” variety. Economics growth remains solid and is expected to rise. Inflation is low and stable. Jobs growth has remained strong, despite sluggish wage increases.

And so far, fingers crossed, there hasn’t been a house price crash as many continually warn of. Asset prices, and therefore net wealth, are very high, for most people. For all the talk of the resource boom being over, the terms of trade, the prices we receive essentially for our iron ore and coal, are almost as high as they were in 2011 – the height of the boom.

There are at least four potential “bears”, though, that could crush the hopes of the budget drafters. An escalating trade war; a big drop in the rate of immigration that will sap house prices and tax revenues; rising interest rates that push up mortgage rates; and – most importantly – a further stagnation of wage growth which makes the politics of the royal commission even more difficult for the government. But these are topics for another time.