Tuesday, April 29, 2008

Tuesday Column: Rudd's really dud Budget promise

By all accounts Wayne Swan's first Budget, due in a fortnight, will be a shocker. And not only for people from the ACT. But there will be generosity amidst its meanness - a surprising amount of it reserved for those of us who are already very well off.

Want evidence?

Consider Labor's plan for First Home Saver Accounts, cobbled together a few weeks before the election and so poorly designed that after the election the Treasury told Labor it was unworkable.

The redesigned scheme, due to come into effect on July 1, works like this: Every dollar that first home savers put into an account - up to a maximum of $5,000 - will be matched by a government contribution of 15 cents.

Except for Australians earning more than $80,000 per annum. They will get a government co-contribution of 25 cents for every dollar they invest. Really. ...

Unless they earn more than $180,000 per annum in which case they will be blessed with a government contribution of 30 cents per dollar they invest.

That's right.

The Labor government has come up with a scheme that would grant Lauchlan Murdoch – the richest young person at last week's 2020 Summit – twice as much as the ACT's Sid Chakrabarti, one of the poorest.

Wayne Swan's announcement, in February this year, included a table to make the disparity clear. It says that a low to middle income earner putting aside $5,000 each year would get $750 from the government; a high income earner $1,500.

The Treasurer put the design up for discussion on the Treasury website and received more than 100 submissions. But curiously the Treasury hasn't made them public, although it said that it would and although it would be required to if asked under the Freedom of Information Act.

Its website now says it will release the submissions “following the Government’s announcement of its final policy decisions”, which probably means on Budget night when they will be beside the point.

Here's how the consumer organisation Choice delicately phrased its criticism in its submission: “We cannot see a clear policy rationale for the proposal to provide higher contributions to higher income earners.”

It added, either with tongue in cheek or to spell it out in case the Treasury officers were really dumb, “we are unaware of any evidence to suggest that sufficient savings are more difficult to achieve for higher income earners.”

What on earth could have possessed the Treasurer to come up with such an obviously bad policy, and why on earth did the Cabinet endorse it for delivery in the May Budget?

It is fairly clear why the Cabinet endorsed it. It it is a deliverable version of an undeliverable election promise. And the Prime Minister believes in delivering his election promises.

As Mr Rudd said last just week, “we went to the election committed to implementing this. We intend to proceed”.

Asked whether whether he agreed that the scheme gave the most money to the applicants on the highest incomes, the Prime Minister replied, “there would be some people who would argue that, but the reason we've called for submissions is to get the public's input into this.”

What possessed the Treasurer to come up with it? The consultation paper released by the Treasury in February gives the game away.

“First Home Saver Accounts will reflect the arrangements for superannuation,” it says. “The government contributions will vary from 15 per cent to 30 per cent depending on the account holder's marginal income tax rate.”

That is indeed how support for superannuation contributions works.

The government taxes those contributions at 15 per cent instead of the taxpayer's marginal income tax rate. That gives low income earners already paying 15 per cent no benefit, middle income earners paying 30 per cent a 15 per cent benefit, and high income earners paying 45 per cent rung a big 30 per cent benefit.

It isn't fair, and it was Labor that introduced it when it was last in office.

But the unfairness of that superannuation concession was disguised by the way in which it was it presented – as a 15 per cent flat tax.

The tax was flat, but the benefit was skewed to high income earners.

Wayne Swan attempted the same presentational trick when he announced his plan for First Home Saver Accounts just weeks before the November election. He said savers using the accounts would be eligible for a low tax rate of 15 per cent “rather than the ordinary tax rate they would pay”.

But by telling him after the election that his plan wouldn't work in that form and that he could achieve an identical result by paying money directly into the accounts of savers, the Treasury has made plain the ridiculous nature of what he proposed.

It is said by those who still defend the scheme that it won't favour the rich that much in practice, because they don't need to save to buy houses.

The counter argument, undeniably true, is that it won't favour the really poor at all because they can't afford to save to buy houses.

There's a chance that the design of the scheme will be modified before budget night, and newspaper articles like this one will help, along with the torrent of (presumably negative) submissions to the Treasury.

But that the idea got as far as it did says a lot about Labor's attention to detail as it was drawing up its election policies and the paucity of advice available to Treasurers in Opposition.

Its not the only dud policy about to be inflicted on us with the Budget.

The government has promised to lend up to $10,000 at a zero real rate of interest on a first-come first-served basis to a limited number of families who install solar panels on their roofs. The millionaires will get in first. As Kevin Rudd predicted when announcing the policy, it will “increase the value of their homes”.

And parents in receipt of Family Tax Benefits who spend money on books or computers in their home will get a tax refund of up to $750 per child to help with the expense. But not those parents who can't afford computers or books for their children. They'll miss out.

We will learn a lot about Wayne Swan and the Rudd Labor government on Budget night by examining exactly who they are generous to.

It'll be instructive.

HT: Jessica Irvine

See also Tuesday Column, Savings incentives don't boost savings, February 12, 2008


WT said...

Sure does seem pretty bizarre, I can only assume they are counting the fact that most people earning over 80k or 180k won't be buying their first piece of real estate.

Peter said...

But why do it?

J23 said...

Yes, the gloss is wearing off. They are making some really dumb decisions now. Why do they feel they must stick to commitments, that most people don't even know about let alone care about, made in the heat of a campaign? It's so stupid. Look at this crazy citizenship test policy.

The scheme itself is a silly idea. That it isn't favouring the poor even worse. Perhaps there is a chance that wealthier people will use it to invest in rental properties. That's the only possible positive outcome I can think of.

Anonymous said...

What stupid policy! I'd like to hear the pollies actually try and justify it.

Peter, can you think of any benefits to having a flat tax on superannuation?


Anonymous said...

This piece of Labor policy so closely resembles what I would expect of the tax-breaks-r-us brigage of the right wing of the Liberal party.

Giving the larger benefits in the First Home Saver Account scheme to the more well-off in the community is a sign of either incompetence, selfishness or insanity.

Who is in control of the Labor decision making process on this item? Turnbull or Howard?

Peter said...

Dear Al,

The answer is none. I can think of no benefits to having a flat tax on superannuation - unless you don't want to assist low income Australians.

Trade union officials, who like to present themselves as the defenders of low income Australians, didn't question this or any aspect of compulsion.

And then got themselves positions on the boards of the super funds that were created as a result.

Anonymous said...

Let me get this straight: for battlers on $50K, saving 10% of it earns them $750, while for a $180k winner, saving 5/180 of their salary earns $1500?

That's a 3.6 fold greater reward for the well-off in terms of percentage-of-income opportunity cost isn't it?. Compounded by a 2 fold greater payout, the well-off a get a 7.2 fold greater reward.

Now that's progressive. And disgraceful.

But in reality, what's 5K to a 50K family paying around $20k rent before they eat, drive, educate, cloth, etc, let alone have any recreation or holiday? Almost impossible I'd say. What's 5k to their $180k betters? A fair bit of their frequent flyer points?

It'll be interesting to see, (as if we ever will), how much of the total pool actually goes to each bracket.

Incredulous of Nundah.

Letter said...

Letter to Editor, May 3, 2008

Debt financing

Your economics editor, Peter Martin, is right in criticising Labor's plan for First Home Saver Accounts (''Budget to make rich richer'', April 29, p11).

The problem besetting Australia is that we have excessive debt financing of housing land.

When the Reserve Bank tries to control the economy using interest rates, the burden falls unevenly, largely on variable rate mortgagees.

The incentive for excessive debt-financing is exacerbated by Governmentsubsidisation via such accounts of buyers of an asset (land) that has limited supply.

The subsidy effectively bids up the price and buyers, as a whole, are no better off.

The underlying problem is caused by our tax system, which treats the house as the same kind of asset as the land.

Land is a fixed quantity asset.Barring exceptional circumstances, it rises in value as the population grows.

Taxation incentives to buy housing land are unnecessary.

The exemption of one ''home'' block from capital gains tax favours that investment over all other. It should be removed.

If we wish to encourage the constructionof housing (a social good), the mechanism should be transparent so that distortions which favour one sector over another are less likely and simple so that the transaction costs of the subsidy are limited.

I propose that a proportion of the interest cost of financing a house (not including the land), capped at a dollar figure, become tax-deductible.

The rate and cap limit could be set annually to balance the estimated total additional capital gains tax collection.

Most first-home buyers would prefertaxation relief now, rather than later speculative untaxed land sale windfalls.

Sean McGinn, Kioloa, NSW

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