Image by Zooey CC 2.0 via Flickr

Budgets are about choices. With an unexpected surge in revenue, the government’s main options were to apply it to deficit repair, to spend it, or to give it back in tax cuts, or some combinations thereof.

The government’s base motive was political, to set the agenda for an election winning strategy, with an election possibly as early as August/September this year. The major challenge was their political standing, with the Abbott/Turnbull governments having lost more than 60 Newspolls, with an electorate having lost trust and belief in the major parties, and in our political system, unlikely to even listen to what Morrison might have to say, as it struggles to meet ever increasing costs of living.

Moreover, expecting the Labor Opposition to at least match any tax cuts, and to accept obviously necessary spending initiatives, and likely to attempt to define itself as “more fiscally conservative/responsible” (as Rudd did against Howard in 2007), the government couldn’t risk promising too much – ironically, it couldn’t afford to be too overtly “political”.

Yet, it did need to promise some tax relief, especially to the Labor heartland of low-middle income earners, and some increased spending to traditional Coalition supporters, and to hopefully underwrite growth, while attempting to reset key benchmarks of fiscal responsibility.

Someone obviously sat there checking off a list of key constituencies/interests – the speech degenerated into a box ticking exercise.

Hence, the modest, targeted, tax cuts, the spending on health, the aged, national security, and infrastructure, and the tax/GDP commitment while still promising a surplus one year earlier than foreshadowed.

But, all this hangs and, I would warn, precariously, on the sudden revenue surge being sustained, and on the “assumed” strength of the global and national economies. I have little confidence on both fronts.

The risks (economic and geo-political) and unpredictability of the global outlook are greater than I can recall over my working life. Recent data question whether there is indeed a sustainable, synchronised, economic recovery; “bubbles” are very real in stock, bond, and property markets, and exchange rates are seriously misaligned, all possibly facing a correction; central banks have seriously bloated balance sheets, and seem powerless to disengage from low interest rates; global debt is some US$165 trillion ($221 trillion), and some 40 per cent higher than at the global financial crisis; and then there is Trump, risking trade, and other wars.

Domestically, while our economy is transitioning from the resources boom, with growth picking up a little, but driven by health, aged, the NDIS, and some infrastructure, it is most unlikely to perform as “assumed” in this budget, with overall growth somewhat weaker, as households struggle with the costs of living, their wages still flatlining, excessive debt, and falling house prices. Once again, despite the encouraging “maths” in this budget, the return to surplus has (again) been assumed, and still yet to be delivered.

Just on the “maths” – even with the unexpected surge in revenue, the government was still short of making it all add up. Some 85 per cent of the (budget period total) cost of the $13.4 billion personal tax cuts comes from the clamp down on the black economy and illicit tobacco ($7569 million), on R&D ($1040 million), on superannuation ($1525million), and by tightening personal tax obligations ($1122million). The projected “surplus” of $2.2 billion in 2019/20 is more than achieved by the $3.275 billion assumed by combating illicit tobacco, just in that year.

The figuring is also helped by the new found practice – that makes the cash balance look much better than it would have been previously – by moving infrastructure projects “off balance sheet”, by treating them as “commercial ventures”, even though any genuine, full, cost/benefit analysis would probably suggest that they would never be commercially viable. So, it is easy to build an attractive list, and ignore the longer-term budgetary impacts as projects fail.

If, we were to accept, on face value, the assumed strength of the global and our domestic economy, surely it would be more appropriate to have embraced the opportunity for genuine, across the board, reform, to deal with mounting structural challenges in almost every area of public policy, and to deliver earlier and sustainable budget repair.

They chose to offer limited tax “relief”, rather than attempt to solve the cost of living problems directly. Voters will be naturally cynical.

The personal tax changes are entirely politically motivated and structured. They push much of the final cost, along with the still promised corporate tax cuts, well into the 2020s, on top of some significant spending commitments in education, health, the NDIS, defence and infrastructure. They significantly reduce the progressivity of the system, in the context of an effectively targeted welfare system, which clearly underpays some benefits such as Newstart and the base pension.

Genuine tax reform would have to address the structural weaknesses of our tax system, its inefficiency, its lack of resilience, its complexity, and its inequity (including the transfer system). The need to broaden the tax base including the GST; to address the excesses and inequities of tax concessions/expenditures; the full treatment of bracket creep; multinational tax avoidance; the proliferation of the “tax industry”; and so on.

Far too many structural, policy challenges have simply been kicked down the road for far too long, while debt has been accumulated to a level where we are particularly exposed to, say, a significant increase in global interest rates, or another GFC, with virtually no policy capacity to respond.

This budget will not be remembered for its “sins of commission”, but rather its “sins of omission” – the sin of not doing what we should do, especially when we have a unique opportunity to do it.

First published at the Sydney Morning Herald on Wednesday 9 May 2018. Watch John Hewson interview on the Business, ABC here.


More from our Budget Forum 2018 series:

Budget Forum 2018: This is not a Genuine or Equitable Way to Simplify the Personal Income Tax System by Andrew Podger

Budget Forum 2018: A Missed Opportunity for Enhancing Australia’s Budget Transparency on Distributional Information by Teck Chi Wong

Budget Forum 2018: Targeting the Black Economy by Joel Emery

Budget Forum 2018: Tax Caps and Tax Cuts: Good for Australia? by Miranda Stewart

Budget Forum 2018: Should Australia Produce a Citizen’s Climate Budget? by Usman W Chohan

Budget Forum 2018: The Future of Corporate Taxation by David Ingles

Budget Forum 2018: Cuts to Personal Income Tax – A Mixed Bag by Robert Breunig

Budget Forum 2018: A Political Budget Unlikely to Work Politically by John Hewson

Budget Forum 2018: The Government Could Be Boosting the Budget Bottom Line with a Change to How It Taxes Gas by Diane Kraal

This article has 5 comments

  1. Pingback: Budget Forum 2018: Targeting the Black Economy - Austaxpolicy: The Tax and Transfer Policy Blog

  2. Pingback: Budget Forum 2018: A Political Budget Unlikely to Work Politically - Austaxpolicy: The Tax and Transfer Policy Blog

  3. Pingback: Budget Forum 2018: A Missed Opportunity for Enhancing Australia’s Budget Transparency on Distributional Information - Austaxpolicy: The Tax and Transfer Policy Blog

  4. Pingback: Budget Forum 2018: Cuts to Personal Income Tax – A Mixed Bag - Austaxpolicy: The Tax and Transfer Policy Blog

  5. Pingback: Budget Forum 2018: Superannuation and Pension Changes in the Budget 2018-19 - Austaxpolicy: The Tax and Transfer Policy Blog

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