Scott Morrison began his budget speech by asking some rhetorical questions, which is generally a poor way to begin a speech, but I guess it’s better than breaking out laughing, which he must be sorely tempted to do given the amount of tax revenue he has to play with.
Last year I noted that “this budget will put to bed the argument that the only way to return to surplus is by cutting spending”. Of course that old line continued to be pushed – the need to crack down on welfare cheats still gets a few headlines – but as has always been the case, the path back to a balanced budget, and even a surplus, lies with increased revenue.
• Tax cuts for middle low and middle income earners with most saving between $200 and $530 a year on their tax bill through a tax offset
• Ambition for a flat tax rate by 2024 of 32.5% for everyone earning between $41,000 and $200,000
• $4.5bn earmarked for roads, but major public transport projects will have to wait years for the lion's share of funding announced in the budget. $24.5 billion has been directed to new commitments, but only $4bn of that is being spent in the next four years
• The controversial robodebt electronic debt recovery is to continue
• Newly arrived migrants will have to wait another year to receive welfare assistance, while refugees will see their wait for Newstart doubled to 26 weeks
• Superannuation funds to be banned from charging exit fees and fees for accounts under $3,000 will be limited to 3%
• ABC to have its funding cut by $83.7 million over three years. Meanwhile a Captain Cook statue in Scott Morrison’s electorate is to be built at a cost of $25m
• ‘Black’ economy is under the spotlight with government planning to claw back revenue it is losing to illegal tobacco. Home Affairs estimates it can earn $3.6 billion from a crackdown
• Pensioners will be able to earn an additional $25 a week without reducing their pension. The pension loan scheme is also being expanded, which allows pensioners to use their homes as equity to boost their retirement incomes
• $1.6bn is being spent to support an additional 14,000 additional high-level home care packages. A further $82.5m is being spent on mental health services for older Australians, including a $20m “loneliness” package, to help people “remain connected to their communities”.
• New measures to help crack down on multinationals avoiding tax commitments. The government is also moving to add to previously announced measures to make sure income earned in Australia, can be taxed by Australia.
Goodbye revenue problem
This budget sees the decade-long trough of revenue come to an end. Throughout the Howard years, revenue averaged 25.1% of GDP. That gorgeous run of good fortune was something Wayne Swan and the Labor party never experienced – the best they had was 23.3% of GDP in 2008-09.
And let’s put to bed the idea that this was because the Howard government was high-taxing and the ALP was low taxing. It was because the Howard government had the mining boom shovelling in tax revenue whereas the ALP had the worldwide recession that followed the global financial crisis.
To give it some context, in 2019-20 when estimates tell us the budget will be in a sliver thin surplus of $2bn (really more a balanced budget than a surplus), revenue is expected to hit 25.3% of GDP. Had we had that level of revenue during the ALP government years, the only year in deficit would have been in 2009-10 – every other year, Swan would have been announcing a budget surplus.
From this year on, over the next four years, the budget predicts revenue will grow by an average of 6.2% – almost double the average revenue growth during the ALP government and that experienced by Joe Hockey:
When things are going well revenue improves, when the economy is in the toilet, it falls. Right now, things around the world are improving, so much so that things are looking better than Treasury expected just five months ago when it did the mid-year economic and fiscal outlook.
The Treasury is expecting to get an extra $25.9bn in revenue over four years than it was anticipating in December’s Myefo. That is broken down as $8bn in 2018-19, $5.87bn in 2019-20, $4.9bn in 2020-21, and a nice $7.2bn cherry in 2021-22.
The largest contribution comes from income tax due to better than expected employment growth, and “mining profitability, as a result of higher commodity prices”.
Company tax is expected to grow by a stunning $15bn this year – up 22%, the biggest annual growth of company tax this century.
The budget is also pretty optimistic about personal income tax growing strongly – averaging 6.3% growth over the next four years. And that is even with the increase in the low-income tax offset:
It means that personal income tax will continue to account for around half of all taxation – significantly more than was the case before the GFC:
The government also suggests that cracking down on illicit tobacco sales will bring in $35bn worth of savings over the next four years. Which is one of those ‘don’t come back in four years and ask us to prove it but we’re going to bank it now’, measures.
Never fear, that wages breakout is on its way!
Last year the budget had some rather heroic predictions about wages growth. It predicted that by June next year wages would be growing at 3% (currently they’re growing at 2.1%). In the Myefo, that was revised that down to 2.75%, and the government has kept it there, but in the following year they still expect it to rise to 3.25% and then up to 3.5% by June 2021.
And that nice upsurge in wages – where we see wages growing at a pace they have not grown at since 2012 – is in spite of the budget also predicting employment growth will actually slow:
The government does expect unemployment to fall, but not by much until 2021-22 at which point even though it expects the unemployment rate to fall from 5.25% to 5.0%, it does not expect wage growth to increase. That is a bit odd and makes for a rather bizarre picture when we compare unemployment and wages growth:
Essentially, the government thinks wages growth will return to normal, but the past few years both here and overseas suggest that is a very hopeful view to take.
Last year the budget was saved because employment grew faster than expected which cancelled out the weaker than expected wages growth. Should wages growth not return as fast as the government hope, they’ll need employment growth to rescue them again.
Hello Middle Australia, nice to see you.
Finally, this year the government has discovered that most Australians earn less than $87,000.
The increase in the low income tax offset will mostly affect those around the median taxable income of $55,000. But Morrison continues to play fast and loose with reality when he talks about who will benefit and by how much.
In his speech, Morrison noted that “for middle income households with both parents working on average wages, this will boost their ‘kitchen table’ budget by more than $1,000 every year”.
But the problem is this: while the average wage of around $62,000 is close to the median earnings, a household with two people earning that amount is well above that level.
The government also seems desperate to continue the furphy that someone on average full-time earnings is somehow a special representative of middle Australia, and must be protected from having any part of their income taxed at 37%.
The current average full-time total earnings is $84,667 – and yet mostly we are talking about men. The average full-time earnings for women is currently just $74,245.
But even here we’re not even talking most full-time workers. The median full-time annual earnings is just $65,580 – which means their income would need to grow by a third before they would hit the old 37% tax threshold of $87,000, let alone the new one of $90,000.
As it is, if you earn more than $87,000 you make more than 86% of women and 73% of men:
The biggest tax cuts are set to occur in the years beyond which the budget has to pay for them. From July 2022 the government plans to take us down the flat tax path – wherein they will first raise the 32% tax threshold from $37,000 to $41,000 and then in July 2024 seek to abolish the 37% tax rate for those earning over $90,000.
This would see people earning between $41,000 and $200,000 being taxed at the same rate of just 32%.
Such a plan is so far off into the distance that the costings would not even have to be included until the May 2021 budget.
Such a far-off plan is no surprise given it would cost an absolute motza (and benefit mostly those earning over $90,000) and it would also require government spending to be slashed to account for the drop in revenue – or other taxes such as the GST would need to be raised.
Either way it would see a massive change in the role of government in both reducing inequality and providing services.
This budget does not do that – it’s about as nice a budget as you could expect, but just as the 2014 budget forecast horror cuts in future years, so too does Morrison’s desires for flatter tax highlight a desire for a horror cuts to return – but at such a time that means they will not have to tell voters at the next election where those cuts will come from.
- Greg Jericho is a Guardian Australia columnist
