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Forget the rhetoric - how does the Budget fare on policy?

David Bassanese
10 May 2017

By David Bassanese

At face value, the latest Turnbull Federal Budget represents a breathtakingly shameless shift in political principal – toward the centre - in a bid by the Prime Minister to finally call the bluff of right-wing rivals in his own party and co-opt the policies of his left-wing rivals over in the Labor Opposition.

After all, having once declared Australia did not have a revenue problem, Treasurer Scott Morrison has now announced new tax measures amounting to $20 billion over the four-year forward estimates.

He has also embraced the big spending packages in health and education it once derided and Labor had championed.

So much for the politics, but what about the public policy merits of the Budget? To my mind, they are not that bad, though the idealist in me would have preferred a more fairer and efficient targeting of the extra money being thrown into health and education.  

Cutting through all the rhetoric, however, it’s worth noting there was effectively no new net recurrent spending announced in the Budget. The Government has effectively raised $20 billion in new taxes over the next four years – through the higher Medicare levy and the new slug on banks – plus gained a fortuitous $8 billion reduction in net-spending over this period due to “parameter changes” such as through lower-than-expected spending on disability payments and private health insurance rebates. 

This $28 billion in turn, has allowed the Government to effectively give up on expecting the extra net $14 billion in “zombie” saving measures long stalled in the Senate, plus reduce expected Budget deficits over the next four years by $11 billion – even while also having to reduce expected revenues by $3 billion due to an expected shift in the composition of national income growth from more highly taxed wage income to lower taxed mining sector profits.  

Seen this way, all the new spending on health and education is fully funded by cuts elsewhere – such as slugging universities, reduced family tax benefits and (of course) yet another purge of alleged welfare cheats. Note also, seen in this way, it’s simply not true the increase in the Medicare levy is being used to fully fund the NDIS – as should be apparent from the fact the Budget was still projected to return to surplus with the NDIS even before this Budget.

Contrary to some wild claims, moreover, it’s also not true the Budget is puffed up by wildly optimistic forecasts. The Government’s growth forecasts are not materially different from those in the mid-year review last December, and in fact, a touch conservative compared to those released by the Reserve Bank last week. As for the “technical assumption” of above-trend growth in the following 5-year projection period – so as to reduce lingering spare capacity in the labour market – this has been assumed for several Budget rounds now. That’s as good a guess as any and is nothing new. 

All up, the net improvement in the Budget outlook - despite some new spending and conservative economic forecasts - suggests the AAA credit rating should not be put at risk. 

As for specific recurrent measures, I’d regard the housing affordability package as useful at the margin (such as encouraging the supply of cheaper rental properties) - but most other token measures - such as small saving incentives for first home buyers - won’t materially affect housing costs either way for most Australians. 

Last but not least is the Government’s extra $14 billion for new infrastructure projects over the next few years – such as the second Sydney airport and Brisbane-Melbourne Inland rail line - and its new focus on distinguishing capital versus recurrent spending. As I’ve long advocated such an approach, there are few complaints from me, especially if it allows the Government to take a more creative and pro-active approach in getting worthwhile infrastructure projects off the ground.

Through various means, the Government is now helping to generate around $75 billion in road and rail projects over the next decade, and is responsible for around $50 billion in capital spending at the State and Federal level next financial year.  

Indeed, with the mining boom over and the housing boom soon to end, public infrastructure might be an important growth support in the next few years, especially if the Australian dollar remains uncomfortably high. Of course, the usual provisos apply – in that we can only hope these projects pass rigorous cost-benefit tests and are not just directed at marginal electorates. 

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