Tuesday, May 03, 2016

This budget calls for an act of faith

In the words of pop music legend George Michael: "You've got to have faith."

Both the Treasury and the Reserve Bank are more gloomy than they were a year ago. They say the economy will grow by only 2.5 per cent in the coming financial year, down from 3.25 expected last budget. Over four years, the budget outlook will be $22 billion worse.

So what are Scott Morrison and Malcolm Turnbull going to do? Scarcely anything when their measures are taken together. This financial year their revenue decisions (mainly tax cuts) have swelled the deficit by $1.7 billion. Their spending decisions have swelled it by a further $1.4 billion. That's $3.1 billion added to the deficit as a result of decisions made in the six months since the December budget update.

Over time they say the build-up of measures such as attacks >on tax avoidance and tougher rules for superannuation will move things in the other direction. Over the four years to 2019-20 they say their measures will have shrunk the deficit by $1.7 billion, which is the equivalent of nothing much in the context of $44 billion of deficits.

But we've got to have faith. The new "Ten Year Enterprise plan" of immediate tax cuts for small businesses, followed by cuts for big businesses that eventually deliver a uniform tax rate of 25 per cent, along with very modest cuts for high earners will "boost new investment, create and support jobs and increase real wages".

It's the sort of thing an advertising agency would say. It's exactly what the advertising agency that prepared a series of leaked scripts did say: the budget will promote jobs and growth, and there's Treasury modelling to prove it.

The budget papers say the modelling finds the measures will "permanently increase the size of the economy by just over one 1 per cent in the long term". It doesn't sound like much, and it's not. Treasury defines the long-term as two decades. That's a boost to the economy of less than 0.05 per cent per a year, if the modelling is credible.

It's hard to tell. Bizarrely, the government directed Treasury not to release the modelling during the budget lock-up where it could be examined along with the other budget documents. It'll be released instead on the Treasury website later Tuesday night, meaning it'll be examined the day after the budget rather than on budget day itself.

Most of the boost is said to come from the cut in the standard company tax rate from 30 to 25 per cent. When the Centre for Policy Studies at Victoria University modelled the effects earlier this year, it found that while it would boost economic growth, it would cut national income, a more important measure. Many Australian companies don't really pay corporate tax anyway. Their shareholders get back the tax they've paid through dividend imputation.

The main beneficiaries of the company tax cut will be overseas-owned companies, and not all of them will increase their investment as a result. Some will simply pocket the gift. Those that are already here will get a reward for something they were going to do anyway. The government will have to make up the lost tax by collecting more from other people, or so the argument goes.

It'll be economic models at 50 paces. There are reasons for thinking we won't have faith. Two years ago, Morrison's predecessor claimed victory at the G20 leaders meeting in Brisbane when he got his counterparts to agree to measures that would boost the global economy by 2 per cent. Since then global growth has shrunk. Modelling is inherently unreliable. It doesn't inspire faith.

Kevin Rudd and Wayne Swan learnt two big lessons from their failed attempt to sell the mining tax in 2010. One was that modelling isn't enough. The other was that success depends on the persuasiveness of the seller. Neither Swan nor Morrison is particularly persuasive.

Morrison now presides over the highest budget deficit of any Coalition treasurer, both in absolute terms ($37.1 billion over the year ahead) and as a proportion of GDP. 

It's happening because his government is cautious, both because of the upcoming election and because of the still fragile state of the Australian economy.

To their enormous credit, they haven't been cautious about superannuation. They're going to raise an extra $2.6 billion from Australia's highest earners (the top 4 per cent), give some of it back in super payments to the lowest earners (the bottom 28 per cent) and still come out in front. While they've only cut the threshold for paying the 30 per cent contributions tax from $300,000 to $250,000, the change will hit many more people than is widely realised.

It'll cut in not at $250,000 as it appears to, but at a figure of $250,000 calculated by lumping in salary with super contributions (typically 9.5 per cent of salary) and negating tax deductions including negative gearing. Yes, the Coalition supports negative gearing, but not when it is used by high earners to escape paying its extended super surtax. Some will be asking why.

Morrison and Turnbull have delivered something of a Labor budget. There's a Labor-style tax on tobacco, there's a (small) move against negative gearing, and an attack on super tax concessions for the rich. The biggest spending initiatives are measures that unwind parts of earlier Joe Hockey budgets – those that cut back projected payments to the states for hospitals and schools and restored funding to the Clean Energy Finance Corporate and the Australian Renewable Energy Authority.

If it all turns out like they think, we'll be grateful, but for now we'll need faith that the iron ore price will stay at or around $US55 a tonne for years to come. A few months ago it clipped $US38. We'll need faith that this time multinational technology giants will start paying tax, and we'll need faith that the Reserve Bank will keep cutting rates. The budget's factored that in.

In The Age and Sydney Morning Herald