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My view on the budget

May 12, 2011

An old co-worker once told me that he never reads the newspapers as he doesn’t want to read something written with less than a days consideration. Wise man. So this is the “two day consideration” version of my views on the 2011/12 federal budget.

Budget balance

The first strange thing about this budget is that everybody is talking about the 2010/11 budget balance (-$49.4 billion) or the 2012/13 budget balance (+$3.5 billion). This is understandable for political reasons. The Coalition want to point to the big deficit and Labor wants to point to a surplus. But the 2010/11 is old news, and the 2012/13 is an unreliable forecast for a future budget. The actual cash bottom line for 2011/12 (the budget year) is -$22.6 billion. Given the current state of the economy, we should have a small surplus now and not a deficit, so the government has to lose a few marks on fiscal policy.

Total government spending for 2011/12 is predicted to be $365.8 billion, of which the biggest element is welfare ($121.9 billion) followed by health ($59.9 billion), education ($29.9 billion), and defence ($21.3 billion). Total cash spending is 4.3% higher than the previous year, which is above inflation.

The savings that weren’t

Two annoying budget tricks is to add up multiple years and report a four (or five) year total, and to refer to taxes as “savings”. I don’t mind that politicians and bureaucrats play these tricks… lying is effectively part of their job description. But the sad thing is that the journalists just mindlessly report it. Either the journalists want to pass on the same lies as the government, or they are just incompetent.

The headline “savings” figure is $22 billion of savings, but that is over five years. The savings in the current budget year (2011/12) are only $3.8 billion, and that includes $1.6 billion from taxes and another $1 billion that mysteriously comes from “other”. That leaves $1.2 billion of identified savings out of a budget of $365.8 billion, which is clearly not “tough”.

Whatever savings the government made were more than offset by more government spending, so that the impact of government policy over the last six months was an increase in government spending of $1.7 billion. If the government really wanted to tighten their belt then the most obvious first step is “stop spending more money”. But apparently they just can’t help themselves.

Having said all of that, the government does deserve some credit for at least trying to deal with the growing problem of middle-class family welfare. Some in the opposition have objected to the government cutting $2 billion from families, but that misses a few key points. First, we need to remember that those families never earned this money. The money was created by hard-working people and businesses that are already over-taxed, and is then handed out as welfare. Second, middle-class welfare is a wasteful policy that leads to >$150 billion of pointless tax-welfare churn, and is ultimately unsustainable. Unless we reform our welfare system (including middle-class welfare) it will send Australia broke. And finally, the actual change will save less than $0.1 billion for the budget year (out of total welfare of $121.9 billion), rising to only $0.8 billion 2014/15 (out of total welfare of $139.2 billion)… so it is not a big reform. Indeed, we will need much more welfare reform if we are to make the budget sustainable in the long-run. Back in 2009 I suggested a “tax-welfare swap” where the middle class give up $90 billion in welfare in exchange for $90 billion in income tax cuts.

Tax

The government has complained that they aren’t getting as much tax as they would like. But if you consider the fact that the government doesn’t actually *make* any money (they just take it), and their activities generally destroy wealth, then I think they should be happy with what they get. And what is that? For 2011/12 the federal government expects $342.4 billion, which is a 12.7% increase on the previous year. Not a bad pay rise for the state.

The government has found a few new ways of getting more money from the productive class in this budget. Of course, there was the flood levy… but there is also an increase in fringe benefits tax regarding cars, and a handful of other small adjustments. The government removed a few little tax expenditures, but then added a new one… so the tax system remains as complex as ever. And then there is the plan for an extra mining tax and carbon tax in the near future. Not good.

There is also a suspicious looking adjustment at the bottom of Table 5 in Budget Statement 5, where the government has shifted $0.7 billion in tax from 2011/12 into 2012/13. This probably doesn’t mean anything for the real world, but it helps to make the budget look a bit better for 2012/13, where the government wants to be able to say it is in surplus. I think we can expect more of these sort of convenient adjustments in the coming year.

The biggest tax remains income tax, which is expected to net the government $154.7 billion in 2011/12. The reported income tax tables continue to be misleading, separately reporting the base rate, medicare levy and the low-income tax offset for no reason other than to obscure the truth. The actual tax rates in Australia are:

==============================

-> $16,000              0%
-> $18,839               15%
-> $22,163               25%
-> $30,000             16.5%
-> $37,000             20.5%
-> $67,500              35.5%
-> $80,000              31.5%
-> $180,000            38.5%
> $180,000              46.5%

==============================

Of course, these tax rates make no sense. There are two places where they are regressive, and people on an average income are actually paying 35.5% when they think they are paying 30%. The government continues to hide the actual marginal rates, and so far nobody in the media has been smart enough to work out the truth (despite the actual rates being published by Policy magazine two years ago). The budget was silent on income tax reform.

Conclusion

In total, it’s a pretty boring budget. Perhaps that was the intention. I think John Howard was right to say that the budget would not occupy the national debate for long. There was one half-step in the right direction on middle-class family welfare, and then a few meandering steps backwards with more government spending in general and a couple of new taxes, while the budget continues to be in deficit when we should have a small surplus by now. In short… it lived down to my expectations.

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  1. Dan Hillier
    May 12, 2011 at 11:51 pm

    The term “middle class welfare” is deceptive and misleading. It was coined to denigrate a reasonable appropriate outcome by those engaging in class warfare. Family Tax Benefit payments are designed to adjust family’s net share of tax responsibility, taking into account the number and age of their children.

    Shouldn’t a couple with two teenage children pay less tax than a couple with no children? Most people would say yes. John Howard recognised some of the deficiencies in our tax system and introduced Family Tax Benefit payments to rectify these.

    Now, it can be argued that there are better ways of doing this. For example, we could have introduced a complex calculation for the tax free threshold (so that it changes based upon the make-up of your family). But this would cause a lot of payroll problems. Alternatively, we could have introduced “family” tax returns where any tax offsets were calculated at the end of the year, but this has cashflow and timing problems.

    Besides, there is also the political advantage to consider. The psychology of tax cuts is interesting. Taxpayers seem to have short term memories and quickly forget any reduction in tax rates. However, if they are receiving a regular fortnightly payment from the government, they don’t forget. And the government hopes that a little goodwill will rub off on them.

    Labor’s changes only affect “working families” (ie those of us who work and generate all of the income). These were the same people hit with the Trust changes, FBT changes, removal of the entrepreneurs tax offset, making it harder to get the small business CGT concessions, removing the ability to claim deductions against government payments, and the removal of the dependant spouse offset. Labor’s budget is the biggest tax grab in recent memory.

    I won’t argue that the Family Tax Benefit system is perfect. It’s not. But its objective of lowering the tax burden on families is worthwhile. I hope that the more sensible forces in parliament block Labor’s proposed changes.

    “Worst budget ever by the worst government ever” is probably a bit of an overstatement. But I can’t see to many positives in the governments actions.

  2. May 13, 2011 at 2:11 am

    Hi Dan. I’ve heard those apologies for middle-class welfare before, and I can understand the motive behind them. But I disagree. First, I think calling family payments “middle-class welfare” is very accurate, given that most of it goes to the middle-class and it is welfare.

    Second, I do *not* agree that “society” should be forced to pay for other people’s children… especially the children of middle-class families. I don’t believe this collectivist hand-out mentality is good for society, and I think parents (like everybody else) need to re-learn those magical words “personal responsibility”.

    Third, if you want to bias the tax/welfare system against childless people, the better way to do it is through the tax system. One suggestion is to make tax-free thresholds (TFT) transferable, and allow parents to use the TFT of their child.

    Forth, the welfare system is unsustainable. Even if we all agreed that a giant welfare state and no personal responsibility was the best way forward, the simple truth is that we won’t be able to afford it in 30-40 years, and so the responsible thing to do is to reform the system now. Otherwise we will be burdening the next generation with debt and unsustainable spending.

    The conservative side of politics is good at calling for smaller government and spending cuts, but many people seem to run away from actual examples of smaller government and spending cuts. Out of a welfare budget of $140 billion, trimming $0.8 billion from people who aren’t poor is not “too harsh”. If anything, it’s not harsh enough.

    Finally — I agree with you that there is a political advantage from taking people’s money, wasting billions on administration & compliance, and then giving it back to them in cash and inefficient services, while undermining personal responsibility and work incentives. Politics is often the enemy of good policy.

  3. Dan Hillier
    May 13, 2011 at 5:13 am

    If we were talking about the baby bonus, susbsidised child care and paid maternity leave, you would have a point and I would support your view 100%. But in relation to Family Tax Benefit, we might have to agree to disagree. The orginal objective and actual outcomes achieved by FTB is to adjust the tax burden on families. That’s why it is called a “Tax Benefit”. An income earner making $100,000pa who is supporting a spouse and two children pays approximately $9,000 more tax (and therefore has $9,000 less spending money to support their family) then a couple earning an average income of $50,000 each with no children.

    The sole income earner might receive about $5600 in FTB. But the family is still $4,000 worse off overall then the childless couple.

    Given that the family with two children pays more tax than the childless family, I wouldn’t really consider it welfare. I also wouldn’t consider myself as paying for someone else’s lifestyle choices.

    Making the tax free threshold transferable is a good option. But minors only have a $416 tax free threshold. And given that the government has just announced that they are removing the low income offset for minors on unearned income (interest, trust distributions etc), it is clear that there is no political will for any changes.

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