CIS wrap: Budget 2017

Simon Cowan, Robert Carling, Michael Potter, Blaise Joseph, Jeremy Sammut, Sara Hudson, Charles Jacobs

10 May 2017

Budget 2017 entrenches big government

Simon Cowan 

In this budget the government has surrendered to the special interest groups and revenue-istas.

Having maintained for years that the problem was excessive spending, the government has not only abandoned attempts to find efficiencies in wasteful expenditures but instead chosen to substantially increase spending in health, education and welfare.

To pay for this extravagance, taxes will increase much faster than inflation, population growth or the economy. To say this is disappointing is an understatement. The evidence that our budget problems have largely been caused by increases in recurrent expenditure is overwhelming. That much of this expenditure delivers little or no value for money for taxpayers is indisputable. To be told the fair way to deal with this is to increase taxes on business and income is intolerable. And incorrect.

This is a budget that entrenches big government. On that score alone it is a big failure.

 *****

No credibility on tax

Robert Carling

This budget destroys any credibility that remained in the Coalition’s claim to be a government of low taxation.

It introduces not one, not two, but three new taxes: an annual levy on major banks’ liabilities; an annual impost of at least $5,000 on foreign-owned residential properties deemed to be ‘vacant’ for 6 months out of the year; and new taxes on employers bringing in workers from overseas of either $1,200 to $1,800 a year for temporary work visas or a one off charge of $3,000 to $5,000 for permanent skilled visas. In addition the Medicare levy is to rise yet again, by 0.5 per cent in 2019. These measures will be adding more than $7 billion to tax revenue by 2020-21.

The new taxes are opportunistic appeals to populist sentiment. None of them deserves a place in a tax system based on principles of sound and sensible taxation.

The discretionary tax increases are on top of automatic growth in revenue from economic growth and inflation. All up, and if the underlying assumptions of the budget are to be believed, tax revenue grows by 31% in the next four years and as a share of GDP comes close to the record levels seen in the resources boom fuelled budgets of 2003-2008.

 *****

Major bank levy a revenue grab

Robert Carling

The new levy on selected liabilities of selected banks is a major and unexpected revenue grab from one segment of corporate Australia.

It will apply mainly to the borrowings and non-guaranteed deposits of the big four banks and Macquarie. The rate of 0.06 per cent may sound miniscule, but the base it applies to is so large that it will raise at least $1.5 billion a year.

In 2010 the International Monetary Fund suggested such a tax in the wake of costly bank bailouts in the US and Europe. Fourteen European countries took up the idea.

The Australian context is totally different. The budget papers do not even try hard to justify it – because the government knows banks are unpopular and that alone is the justification. We are told simply that it ‘represents a fair additional contribution from our major banks and will assist with budget repair’.

This is a serious new tax that has not gone through the public exposure and consultation processes that such a proposal would normally warrant. It has never been proposed by any review of the Australian tax system.

Once the levy becomes embedded, it will be extremely difficult to remove, and is likely to grow. The UK levy, for example, was increased nine times before it was scaled back in favour of a new income tax surcharge on bank profits.

*****

Budget squibs housing affordability

Michael Potter

The government set up high expectations that the budget would address housing affordability and has failed to meet these expectations. There is one beneficial measure, the Commonwealth will add conditions to the $1.3 billion a year provided to the States for affordability housing to encourage state planning reforms and supply targets, though this is overshadowed by other unnecessary or harmful policies.

The Budget contradicts itself on affordable housing. It increases the capital gains tax discount to 60% and reduces the regulatory burden for investments in affordable housing.

However, these changes completely conflict with other policies that impose higher taxes and tighter regulations on housing. Tax deductions for travel relating to investor housing and investment in housing plant and equipment are being cut, while foreign investment in housing is being further restricted and subject to higher taxes. These tax and regulatory imposts will probably feed into higher rents.

As expected the government has introduced the Housing Finance and Investment Corporation (HFIC) which will encourage investment into social housing, however it won’t address the deep-seated issues facing the sector.

Moreover if the HFIC provides government subsidised borrowing, it will discourage necessary social housing reform, decrease transparency (compared to direct government support), and increase financial market risks.

A few first homeowners will find it easier to enter the market with the government proposing to allow them additional voluntary super contributions of up to $30,000 that can be used for first home deposits. In addition downsizers can make additional non-concessional super contributions of up to $300,000 from the sale of their primary residence, which will marginally help with affordability. However these superannuation changes will add to the already excessive burden of super regulation.

And the government’s $1 billion National Housing Infrastructure Facility that funds ‘micro’ city deals to improve infrastructure necessary to develop new homes is unnecessary as this is a state responsibility.

These mixed messages and failure to meet expectations mean the Budget has squibbed the opportunity to address housing affordability.

*****

More unfunded education promises

Blaise Joseph

The budget has confirmed most of the federal government’s promised additional spending on schools is unfunded.

The government will spend an additional $18.6 billion over the next 10 years. Of the total $18.6 billion, just $2.2 billion is funded over the next 4 years within the forward estimates-averaging $550 million per year-leaving the other $16.4 billion for the last 6 years beyond the forward estimates-averaging $2.7 billion per year.

In other words, 88% of the additional school funding promised by the government has been earmarked for beyond the forward estimates and remains unfunded.

The government will also grow total annual school funding from $17.5 billion in 2017 to $30.6 billion in 2027, but the average growth in funding is much faster for the last 6 years ($1.5 billion per year) compared to the first 4 years ($875 million per year).

While the government should be commended for having the courage to end school funding inconsistencies and special deals, it should not have done so by making unfunded education promises.

 *****

Levy hike a centrepiece of ‘tax and spend’ Budget

Jeremy Sammut

The 2017 Budget has launched a new raid on the hip pockets of taxpayers who in reality are effectively paying almost seven times the official Levy rate to pay for Medicare.

The Medicare levy will rise by an additional 0.5% from July 2019, though the real rate of the levy far exceeds the headline 2.5% rate. It will actually push the real levy rate to beyond the rate of the 10% GST, because to raise the full amount required to fund all the doctor visits, medications, and public hospital care paid for under Medicare, the ‘real’ Medicare Levy rate will now be over 11%.

The complete health policy announced in the Budget — a $10 billion package that includes $1.2 billion in additions to the Pharmaceutical Benefits Scheme, a push towards generic medicines to cut medicine prices and reduce out-of-pocket expenses, and a $2.8 billion increase in hospital funding — is a political bribe designed to counteract Labor’s ‘Mediscare’ that is funded by reaching even deeper into taxpayer’s pockets.

Raising the levy to pour even more taxpayer’s money into health – especially by unfreezing the indexation of Medicare rebates — shows the Turnbull Government has given up the fight for economic reform.

Conservative estimates suggest that 11% of the total national health spend is wasted every year.

Failing to stand up to the AMA — and stare down the ‘Mediscare’ — also means that the new Medicare Guarantee Fund may become a scared cash cow that underwrites the inefficient business models of the medical profession.

 *****

Indigenous initiatives a positive sign

Charles Jacobs and Sara Hudson

The restructuring of the much-maligned Indigenous Business Australia (IBA) continues with $146.9 million over four years being redirected from IBA to the Department of Prime Minister and Cabinet to “assist and enhance Aboriginal and Torres Strait Islander self-management and economic self-sufficiency.”

This is a positive sign that the government is looking at resolving some of issues linked to the Indigenous Procurement Policy (IPP). A review of IBA found it has not been supporting Indigenous businesses effectively and many of the contracts for the IPP are going to just a few, already established Indigenous businesses who arguably do not need support.

Other Indigenous Budget announcements include:

  • $55.7 million over five years to help improve job prospects for Indigenous Australians
  • $3.6 billion over four years to the  Indigenous Australians’ Health Programme
  • 40 million over four years to improve the evaluation of Indigenous programs. However, given that the average cost of an evaluation is $382,000 this is unlikely to go far
  • Extension and expansion of the cashless debit card trials, with two new locations to be trialled from 1 September 2017
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