Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

The new welfare state leviathan

Robert Carling

17 February 2017 | Ideas@TheCentre

RC NDIS disability wheelchair 1The National Disability Insurance Scheme (NDIS) was described in a CIS report five years ago as “the new leviathan”; “in budgetary terms, another Medicare”; and “a monster of a government program.” This has been confirmed in spades, and it is hardly surprising that paying for the $22 billion monster has become a contentious issue.

The scheme’s most ardent advocates insist it is fully funded because various revenue and expense offsets were announced when it was launched. This is just so much sophistry.

The offsets were never enough, and in any case were not put into a jam jar labelled ‘NDIS’. That is not how the budget works. As long as there is a deficit, nothing the government does can be said to be fully funded by current revenue, and all spending programs and all revenue sources are subject to scrutiny for ways out of the deficit hole.

The real issue is the NDIS has attracted such political support that even at birth it is a sacred cow of public policy. It has become politically incorrect to be critical of it or anything connected to it. The former CEO of Myer learned that when he dared state the truth — that increasing the Medicare levy to help pay for the NDIS would be bad for retail sales.

Ideally, the scheme would have been deferred until it could be afforded, but that opportunity has gone. Still, the NDIS cannot defy budget arithmetic: it has to be paid for, and doing so as it ramps up over the next three years makes balancing the budget so much harder. To state — as various ministers have this week — that this means spending less elsewhere and/or raising more revenue is to state the incontrovertible.

It is to be hoped the government is not softening us up for another hike in the Medicare levy. This is just an increase in income tax by another name, and would make a mockery of this government’s rhetoric in favour of lower income tax. If the NDIS is sacred, then the way to make room for it in the budget is to squeeze other programs.

Closing the Gap Report -- F for failure

Sara Hudson

17 February 2017 | Ideas@TheCentre

SH turnbull indigenous closing the gap speechIf the Closing the Gap Report was a school report, the government would get an F.

Of the seven targets, only one is on track to be met — year 12 attainment. And this is primarily because the rates for non-Indigenous attainment have not changed significantly… hardly a good news story for government.

The other six targets not on track are:

  • Close the life expectancy gap within a generation (by 2031).
  • Halve the gap in mortality rates for Indigenous children under five within a decade (by 2018) — although there was a 33% decline in child mortality rates between 1998 and 2015, this downward trend has plateaued.
  • Close the gap in school attendance by the end of 2018 (new target set in 2014) — attendance has stagnated at 83% for Indigenous students since this target was introduced.
  • Halve the gap in reading, writing and numeracy achievements for children within a decade (by 2018) — only Year 9 numeracy is on track.
  • Halve the gap in employment outcomes within a decade (by 2018) — rates of ‘recorded’ employment declined after 2008 when CDEP participants ceased being classified as employees by the Australian Bureau of Statistics.
  • Ensure access to early childhood education for all Indigenous four year old’s in remote communities within five years (by 2013, revised in 2015).

When the early childhood target for all remote Indigenous four year old’s was missed, the government revised the target instead of accounting for the failure. Rather than ensuring access to early childhood education in remote communities, the government set a new target for 95% of all Indigenous four-year-old’s to be enrolled in early childhood education by 2025.

But the statistics show the gap is in the Northern Territory and remote areas, with only 73% of Indigenous children in the Northern Territory attending preschool in the year prior to school, compared to 92% of Indigenous children nationally and 96% of non-Indigenous children nationally.

There are two possible conclusions from all these failings — the government’s policy approach to ameliorate Indigenous disadvantage is deeply flawed and/or the Closing the Gap policy is a mistake.

However, what’s the bet that come 2018, rather than abolishing the policy, the government simply revises the targets again?

Serial attacks on tax cuts

Michael Potter

17 February 2017 | Ideas@TheCentre

MP business 1Company tax reductions are under constant attack, often caught up in the standard belief of the left that big business is bad. The latest argument is that the largest 15 Australian businesses will receive one third of the ‘benefit’ of the tax cut, and these companies are unlikely to increase investment in response.

However, it is wrong to use the market strength of those 15 companies to argue against reducing company tax.  A proper analysis of the data provides significant support for the cut.

First, the report claims big businesses aren’t investing,  a statement with some foundation: overall business investment levels are plummeting. But this is an argument in favour of — not against — the tax cut; big business may be avoiding investment because the tax on investment is too high.

Second, several studies argue the harmful effect of corporate tax is actually larger, not smaller, when business has market power, and the adverse effect on wages is larger.

Third, the report makes a substantial error in calculating this supposed benefit, because it fails to account for imputation, which completely offsets company tax cuts on distributed profits (dividends). This slashes the report’s estimated ‘benefit’ from $6.7bn to $2.2bn, if large businesses continue current payout ratios of 67%, as the tax cut only affects retained profits. This adjustment would be consistent with previous arguments by the same author that analysis of company tax should incorporate imputation. In any case, this supposed benefit is ephemeral: the tax cut is phased in so that many business assets bought at the higher tax rate will be mostly depreciated by the time the lower tax rate is in place.

Finally, the increasing reliance of tax revenue on a small number of large businesses is actually exposing the government to increasing risks. For example, BHP’s tax payments plummeted by $2.2 billion over one year (2013–14 to 2014–15) with the end of the mining boom. Australia is also more exposed to the possible risk of big businesses moving offshore, something that has been happening in the US.