Federal Budget Analysis: Document fails to deliver on reform

Richard Eccleston

By Richard Eccleston

THE Clayton’s election campaign is hotting up and Prime Minister Turnbull is under mounting pressure to prove his leadership and policy credentials.

Given this context last night’s Budget is much more important than most. It will set the agenda for the coming campaign and will inevitably shape the outcome of what promises to be a close and hard fought election on July 2.

More important, last night’s Budget was an opportunity to respond to the growing threats to the economy, threats that contributed to yesterday’s unexpected interest rate cut.

Despite our growing economic vulnerability the Budget fell well short of providing a more detailed policy framework to promote Australia’s transition to a “stronger and more diversified economy”.

In short, this was a predictable political Budget featuring tax increases where they are unlikely to cause too much political pain by singling out multinationals, wealthy retirees and smokers.

The revenue from these measures will pay for a modest income tax cut for upper middle income earners (above $80,000) and a series of company tax cuts to be phased in over the next decade.

These are reasonable policies but unlikely to drive an economic transition.

There is little evidence that company income tax cuts of this nature deliver significant long-term growth in the absence of other measures. This is especially true in Australia due to our unique dividend imputation system.

Yet there were some noteworthy surprises.

Ending superannuation concessions that disproportionately benefit the rich should be commended.

Not only are high income earners going to pay 30 per cent on super contributions, but very generous transition to retirement rules are also going to be tightened as is the tax treatment of public service defined benefit schemes — Scott Morrison won’t be popular in Canberra today.

I agree with the Treasurer that we need to work with employers to develop new strategies to help unemployed young Australians find a pathway into the jobs market.

The proposed PATH training system has merit but must be rigorously evaluated. The real problem here is that the scheme is to be financed by cutting benefits to other welfare recipients, potentially increasing disadvantage and vulnerability.

What are the political and economic risks in the Budget?

It’s a budget night cliche, but the devil is in the detail.

The real difference between the Coalition and Labor is that the ALP is proposing modest additional tax measures in the form of reining in capital gains and negative gearing concessions to finance some more spending and budget repair.

While federal spending is at record highs (although much lower than any comparable country except the US), revenue has never recovered from the GFC.

ALL treasurers since Wayne Swan have promised a gradual return to surplus but in reality it won’t happen without gradual spending cuts or tax increases.

The Coalition is proposing that we should “live within our means” even if this leads to spending less as proportion of GDP on health and education (and providing less money to states) over the longer term.

This will be a hard sell with an ageing population, expectations about the full funding of the NDIS and aspirations to have a world class education, training and research system.

Also, as Tony Abbott learnt the hard way, the other challenge will be getting unpopular budget measures through the new Senate.

Finally, what does this mean for Tasmania?

At a glance there is little to cheer about. Many of the welfare savings measures are likely to hit hard while there appears to be little new funding for health, education or UTAS. Let’s hope the small business tax measures encourage investment and jobs in tourism and agriculture.

Overall the Budget was a timid document designed to reassure voters and maximise the Coalition’s chances of retaining office. Unfortunately for Tasmania and the nation as a whole, it fails the reform test.

The failure to repair the tax system will lead to more broken promises, conflicts with the states and an environment in which the most needy Australians are particularly vulnerable.

Perhaps of even greater concern is that the implicit “business as usual” approach leaves Australia more vulnerable when economic storm clouds are brewing.

Australia’s economic transition from resources and residential construction to the knowledge economy of the 21st century requires an active partnership between government and business.

My fear is that under the Coalition’s “plan” future Australian governments won’t have the capacity or inclination to steer us through the economic transition on which our future prosperity depends.

Richard Eccleston is director of the Institute for the Study of Social Change at UTAS who specialises in tax policy and public finance.

UTAS and the Mercury are hosting a “FairGo’ forum on the Budget at the Stanley Burbury Theatre at 6pm next Tuesday.

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