Divining the federal budget

Some of you may question the purpose of trying to divine what will be in the May 3 federal budget when the Turnbull Ship of State seems to be all at sea, wallowing towards an unknown destination, facing strong headwinds, its sails flapping, its hull leaking, with a dithering Captain at the helm, a loquacious and at times incoherent First Mate insisting he knows where he’s going, and a motley crew.

In these days of social media diversity though, there is the opportunity for average punters to express opinions, to have them read, and to expect them to evoke responses from others. So here goes.

What will be in the budget, as distinct from what will not, remains a mystery. Although in only a few days Treasurer Scott Morrison will stand up in the House at 7.30 pm on May 3 to tell us all, we have heard very little from him or PM Malcolm Turnbull. It is now usual, days before a budget is delivered, for advance notice to be given about the good news, and some of the bad, as we have seen recently with the Victorian state budget delivered on 27 April. What have we heard from the LNP?

Have we seen an economic narrative, apart from the Turnbull admonition that we must personally, and as a nation, be agile, innovative and creative? In his first statement after his election to prime ministership, he said that his government would be “...focused on ensuring that in the years ahead as the world becomes more and more competitive and greater opportunities arise, we are able to take advantage of that…We can’t be defensive, we can’t future-proof ourselves…We have to recognise that the disruption that we see driven by technology, the volatility in change is our friend if we are agile and smart enough to take advantage of it.” Since then, that narrative has all but evaporated. The three-word slogan: ‘agile, innovative and creative’, has become meaningless in the absence of practical applications of those ideals.

Niki Savva summed up the situation in her opinion piece in The Australian on 28 April: Budget 2016: Morrison has one chance, yet he’s up against it: “There is so much riding on Tuesday’s budget, for the Treasurer personally and government generally, it is hard to pinpoint another time when there has been so much pressure on a treasurer… So little time, so little money, so few options. Everything about this budget promises to be modest, except what it is expected to achieve.”

Against that background let’s divine what might be in the budget and what will not.

There are some inviolate LNP principles that can guide us:

First, don’t upset LNP supporters:
  • voters in LNP electorates, especially those held marginally;
  • those enjoying the liberal tax concessions of negative gearing, capital gains and superannuation;
  • big business and the top end of town;
  • bankers;
  • coal miners and coal seam gas extractors;
  • small business and ‘Mum and Dad’ investors;
  • climate change skeptics;
  • those who share the LNP attitude to asylum seekers;
  • the right wing conservatives in the LNP, the Nationals, opponents of marriage equality, and the Australian Christian Lobby;
Next, adhere to the economic principles espoused by recent LNP treasurers and prime ministers:
  • 'we don’t have a revenue problem; we have a spending problem';
  • 'we must live within our means', an appealing metaphor for household finance that is inappropriate for national finance;
  • reduce and eliminate the budget deficit;
  • reward Joe Hockey's ‘lifters’ and penalise the ‘leaners’ who sponge on the welfare system;
  • reward those at the top and benefit will trickle down to those at the bottom;
  • reduce taxes; avoid raising taxes; avoid removing tax concessions;
  • focus on ‘jobs and growth’, a three-word slogan we hear day after day, week after week. It sounds good but when do we ever hear how ‘jobs and growth’ are to be achieved? It’s a meaningless mantra when devoid of a plan, but no doubt credible to the unthinking who avoid asking: "How?”
  • despite all of the above, Turnbull, with Morrison echoing sotto voce, will insist that the budget will be ‘fair'. But any attempt to reduce inequality will likely be minimal, despite the fact that inequality will be a hot button election issue because the electorate is becoming increasingly incensed by the unfairness and inequality it sees every day.
The difficulties in framing a budget in such difficult fiscal times have been well summarized by Niki Savva:
“It is impossible to see how he [Morrison] can meet the expectations or satisfy the demands of the voters, the ratings agencies, the media (social and traditional), lobby groups, think tanks and his colleagues. Expect any sensible debate to be drowned out by the whinger class united and assorted merchants of gloom from Left and Right.

“The budget has to provide the foundations and framework for the government’s economic narrative, which centres on jobs and growth in the new economy. It has to fulfil the Liberal credo of lowering spending, lowering taxes and lowering or eliminating the deficit; it has to be economically credible and politically appealing; it has to relaunch the government’s political fortunes and cement the Coalition’s standing as superior economic managers.

“All that as more people say they want the money spent on paying down debt, just so long as someone else – say the multinationals, or anyone on a higher salary than theirs – does the paying.”
Savva continues:
”There is always pressure on treasurers to produce budgets that refloat the government or sink the opposition, but it is much more intense this time because of the proximity of the election, combined with the newness of the government. It is the first Morrison budget, even though it will carry the full imprint of Malcolm Turnbull, and it will come a mere 60 days before the election.

“Although that sounds like a long campaign, there is not enough space between the budget and the expected July 2 election for a misfire to be forgotten. There is no margin for error. If Morrison mishandles it, it could well be his last major economic statement, and a serious setback for what had once seemed a clear path to leadership. If budget measures or projections collapse under scrutiny, if his speech is a flop, if he pays too much attention to the politics rather than the policy, if he makes a mistake in the selling of a document that he should, by now, know backwards, it could spell the beginning of the end of the Turnbull government.”
Against that realistic backdrop, let’s look at what might be in the budget, or perhaps more sensibly look at what won’t be in the budget: Policy wise there will be:
  • no Royal Commission into banking, despite all the evidence of unfair practices, dishonesty and fraud;
  • further attempts to introduce changes to Medicare, the Pharmaceutical Benefits Scheme, and imaging and pathology rebates to reduce health costs;
  • further attempts to restrict the costs of the National Disability Insurance Scheme;
  • further attempts to effect changes to university funding towards a ‘user pays’ arrangement;
  • further attempts to avoid the cost of the Gonski schools reforms in years five and six;
  • further attempts to rationalize the LNP’s approach to the NBN, in which costs are blowing out, implementation is slowing, and speeds are poor;
  • further attempts to rationalize and sell its Direct Action Plan for climate change to a skeptical audience of economists and environmentalists and a suspicious public, who ask what is causing the unusually severe drought and the coral bleaching, and what is the LNP doing about them;
  • further attempts to justify its ‘border protection’ policy, and the slow receipt of refugees from Syria.
No doubt there will be some surprises, maybe a few bits of good news, and likely some flimsily disguised bits of bad news that will be painted as necessary, even good for us. After all, we have ‘to live within our means’ and we can’t spend more than we collect in revenue, like Labor always does.

There will be an abundance of hesitant, unconvincing spin from Malcolm Turnbull, lots of econobabble from Scott Morrison’s motor mouth, lots of backing up from dalek Mathias Cormann, who will repeat his lines tediously, repeatedly, endlessly, with Kelly O’Dwyer bringing up the rear in her own inimitable style.

Whatever is in the budget, it would be impossible to satisfy all, or even a fraction of the stakeholders. There will be lots of commentary from experts and amateurs alike, many confrontations in the media between them and the politicians, and hesitant and unconvincing responses from them.

We will hear endlessly that the budget is all about ‘jobs and growth’, lavishly embroidered with the LNP’s favourite mantras. We will go to sleep murmuring ‘jobs and growth’, ‘jobs and growth’, ‘jobs and growth’ until men in white coats take us off to receive therapy for obsessive compulsive disorder. At least it will be peaceful there!

What do you think?
We are looking for your comments.

What do you think the May 3 Budget will include?

Do you believe that Morrison and Turnbull have got the message about the need for more revenue?
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So we do have a revenue problem after all – now Moody’s says so

Who could ever forget Scott Morrison’s astonishing statement when he became our nation’s treasurer: Australia doesn’t have a revenue problem; we have a spending problem!

Balanced economists were aghast. Any analysis of our balance sheet left no doubt that we needed more revenue to enable the government to provide the services the people need: quality healthcare for the aged, the disabled and all; excellent education at all levels; a welfare safety net for those who need it; infrastructure; and all the other services people are entitled to expect in this prosperous country where we are privileged to live.

This piece, written just two months ago, needs updating. Morrison persists with his aversion to raising revenue, but is now under the hammer from a different direction. Moody’s credit rating agency, has questioned the government’s strategy to fix the budget and warned that continued increases in national debt would risk the nation’s AAA credit ­rating. Moody’s went onto say that the Turnbull government must raise taxes [to increase revenue] as well as cut spending to reduce the budget deficit.

Confronting this warning, Morrison’s retort was that “‘of course’ there will be revenue measures in the budget” on May 3, despite previously declaring Australia had a ‘spending problem, not a revenue problem’.

Seemingly realising the contradiction in his position over time, he went on to qualify himself by saying that “…overall, the budget would continue to focus on reducing the government spending as a share of the economy”. He insisted that by reducing the tax burden in other parts of the economy the overall tax burden would be no greater than it is.

For years, sensible economists have accepted that we have a revenue problem, but they also acknowledge we have a spending problem. Reducing government waste and more prudent spending of taxpayers’ money should always be a fiscal objective. That has never been disputed, but it seems mysterious that the government has consistently placed so much emphasis on the expenditure side of the budget, while ignoring the need for more revenue. The only plausible explanation seems to be the way the government frames its fiscal policy.

Harking back to the Howard era, Costello’s boast was always: “We are a low taxing government – we want to give money back to the people, not take it away.” How many times did you hear him say that?

Morrison echoed Costello. To Morrison, increasing revenue equates with increasing taxes, which is anathema to him. It seemed too that in Morrison’s mind removing concessions from superannuation, negative gearing and capital gains was tantamount to increasing taxes. So all he could suggest to balance our national budget was to cut expenditure. He was no better than his failed predecessor; we knew that his expenditure cuts would hit the poorest in our community just as they did in Hockey’s 2014 Budget. He was bereft.

He seemed to be channeling his ‘Stop the boats’ rhetoric into ‘Stop the revenue’ so as to ‘Stop the taxes’. In fact he went the other way, the Costello way, towards reducing personal and corporate taxes. His approach is ideologically driven; it is shored up by the discredited concept of ‘trickle-down economics’, which posits that supporting the top end of town creates prosperity that eventually trickles down to those at the bottom of the pile. A more colourful descriptor is ‘horse and sparrow’ economics – feed the horse enough oats and the sparrow will get his share in the manure. In recent weeks Morrison has backed away from personal tax cuts but is still entertaining a corporate tax cut, which Arthur Sinodinos assures us will benefit workers. Trickle down all over again!

Morrison seems to have now almost come to his senses, perhaps he’s listened to the sagacious economists who have not only insisted that we have a revenue problem, but have pointed to where it might be addressed now that a rise in GST has been ruled out by all parties.

The contemporary debate about negative gearing, prompted by the recent release of Labor’s policy, has focussed attention on revenue raising by reducing the present concessions which allow the well off to benefit substantially by acquiring multiple properties. We all know that negative gearing applies also to equities and other assets, but it is when it’s applied to housing that the concessions have the most impact.

On AM on 16 February, in introducing Ben Oquist, executive director of The Australia Institute, Michael Brissendon began:
"New research shows young Australians are receiving little benefit from three of the biggest, most expensive tax concessions.

“The modelling, commissioned by think tank The Australia Institute, shows Australians aged under 30 receive only 6 per cent of the combined tax concessions on superannuation, the capital gains tax discount and negative gearing. The concessions are worth more than $37 billion in total, yet young Australians only receive a share of around $2 billion.

Is it such a surprise that young people are missing out on the benefits of tax concessions? After all, they earn less and pay less tax."
Ben Oquist replied: 
"I think it's a surprise the extent of it. It's worse when it comes to the capital gains discount and negative gearing in particular.

You mention that overall it's 6 per cent of those tax breaks combined but when it comes to negative gearing and the capital gains tax, it's 1 and 1.7 per cent respectively of tax breaks that are growing all the time.

The capital gains discount in particular is projected to be at seven or eight billion in the next few years and it's that discount in particular that I think is unfair.

It's widely known that 73 per cent of that tax break goes to the top 10 per cent, but it isn't as widely known that only less than 1 per cent of it goes to young people.”
Later Oquist, referring to this debate, said:
"I guess overall that's the good thing that's happened…we are slowly accepting that we have a revenue problem…that's the big shift from 2014 to this year's budget. We're debating tax reform and it's been accepted that we have a revenue problem.

“Now, we don't have to increase tax rates to solve that revenue problem, we can address tax concessions, loopholes. If you like we can broaden the base. And in that way you raise the revenue and you don't have to compensate people…With the GST being taken off the table it's actually allowing us to look at the smorgasbord of options that we've got for increasing revenue without having to compensate people and having that churn.”
The fact that we have a revenue problem has been publicized long enough for Morrison to hear. Why did he take so long?

So exasperated was South Australian premier Jay Weatherill that he took a swipe at the treasurer for not telling the truth about Australia’s revenue problem:
“Scott Morrison is perpetrating the same deceit on the Australian people as his predecessor Joe Hockey…Prime Minister Malcolm Turnbull promised a new government, but they perpetrate the same lies to the Australian people that we have a spending problem and not a revenue problem”
Around the same time, John Menadue, businessman, public commentator, and formerly a senior public servant and diplomat, wrote on his blog:
"In a submission to a Senate Select Committee into the Abbott Government’s Commission of Audit, Jennifer Dogged, Ian McAuley and I contend that the problem is not that government expenditures or that the public sector is large in Australia compared with other countries. We contend that the problem is a short-fall of revenue and that on international comparison, our tax revenues are low.”
In their summary to the Committee they say:
"The Commission of Audit’s brief is based on assumptions that Australia is burdened with “big government” and that taxes are an impediment to business investment and workforce participation.

“There is no evidence for either assumption. The trend in Commonwealth expenditure has been downwards since the mid 1980s, falling from a peak of around 28 percent of GDP to a range of 24 to 26 percent of GDP in recent years. In comparison with similar prosperous countries Australia has one of the smallest public sectors.”

In May of last year The Australia Institute published a paper titled It’s the revenue stupid. It’s worth a read.

I could cite many others who are saying the same thing: Australia has a revenue problem. Thankfully, it seems that at last our treasurer has heard this strident oft-repeated message. His, and Malcolm Turnbull’s prime criticism of Labor’s policy on negative gearing, is not that it generates revenue that we don’t need, but that it does not generate enough revenue fast enough! In launching Labor’s policy Bill Shorten said it was a long term measure which would start modestly but generate substantial revenue over the long term, but it seems the government is intent on raising revenue urgently! Perhaps we now have a ‘revenue emergency’. Await their policy with open-mouthed anticipation!

What this updated piece contends is that hog-tied with an ideological rope, our treasurer has been far too slow to concede what has been obvious for so long: Australia has a revenue problem, and now one of the world’s rating agencies, Moody’s, says so.

Instead of Morrison’s loudmouthed rhetoric about 'Labor taxing only to spend', what is now needed is a serious debate, uncontaminated by ideological or political overtones, about how to raise this revenue now that the level and scope of the GST is not to be changed, and other avenues have seemingly been discarded or put in the ‘too hard’ basket. Pegging back concessions that are enjoyed mostly by the well off in the areas of superannuation, negative gearing and capital gains tax, is an obvious place to start, but the Coalition is terrified of upsetting its benefactors. Fairness must be at the heart of any revenue-raising moves, but does the Coalition know what ‘fairness’ is?

It is encouraging to see this debate gathering the force of a flash flood. Hopefully it will sweep Turnbull and Morrison along arms flailing until they come up with some practical ways of addressing Australia’s revenue problem. Predictably, the property rent seekers and Turnbull’s ideologically driven, top-end-of-town fawning backbenchers are out peddling their ‘wouldn’t it be awful’ scenarios. For their own electoral safety, in the face of falling poll ratings, he and Morrison had better ignore them. Maybe Morrison’s concession that ‘of course’ there will be revenue measures in the budget marks a tentative admission of the bleeding obvious, and that the May 3 budget will include revenue measures, which of course our Treasurer will assure us will not increase the overall tax burden. May 3 promises to be an entertaining event!

What do you think?
We are looking for your comments.

Do you believe Australia has a revenue problem as well as a spending problem?

What revenue sources do you believe the government should explore?

Do you believe that at last Morrison and Turnbull have got the message about the need for more revenue?

What do you think the May 3 Budget will include?

Recent Posts
What can we expect in the coming election?
Ken Wolff, 17 April 2016
Apart from the obvious statements, we can also tell there is an election in the air as, after six months of inactivity, the Turnbull government has engaged in a flurry of policy announcements — or in some cases what should be termed policy ‘thought bubbles’.
Inequality will be a hot button election issue
Ad astra, 13 April 2016
Who could ever forget Scott Morrisonís astonishing statement when he became our nationís treasurer: Australia doesnít have a revenue problem; we have a spending problem! Balanced economists were aghast.
Perceptions of corruption
2353NM, 13 April 2016
During March, in what strategists at the time claimed was a masterstroke, Prime Minister Turnbull recalled the Parliament from April 18 primarily to consider the reintroduction of the ABCC legislation by the Senate.

Perceptions of corruption

During March, in what strategists at the time claimed was a masterstroke, Prime Minister Turnbull recalled the Parliament from April 18 primarily to consider the reintroduction of the ABCC legislation by the Senate.  Turnbull also advised that if the ABCC legislation was rejected in it’s current form the response would be a double dissolution election.  Others questioned why there was a ‘demonstrated’ need for an anti-corruption body responsible for the building industry and not other areas of Federal Government influence. 

The ABC News website has a ‘explainer’ about the two pieces of legislation that Turnbull wants passed.  Suffice to say here that both pieces of legislation aim to reinstate a so called ‘corruption watchdog’ that monitor the building industry as well as ensuring union leaders have the same responsibilities as company directors.

Recently we discussed how well the plan had been executed so far when ‘Continuity and Change’ was published on The Political Sword .  In short; we concluded it hadn’t gone well and if anything, since then it hasn’t got any better.  Lets just say perception is everything.

While Heydon’s Royal Commission did uncover some dodgy (if not corrupt) practice, a number of the cross-bench Senators want the legislation to set up a federal ‘ICAC style” watchdog.  Turnbull and his Employment Minister Senator Cash have rejected the proposal.  Cash said

the government would negotiate in good faith in relation to proposed amendments but they could not "compromise the integrity of the bills".

"The government is committed to passing the bills in either the same or substantially the same form,"

The Victorian Liberal Party is shutting the stable door after the horse has bolted by introducing ‘reforms’ to protect its finances from fraud – after a former state director admitted to embezzlement of $1.5 million.

A few days after Turnbull effectively called the election, it was reported that the NSW Electoral Commission is withholding $4.4 million in public funding until the party can identify who donated some $700,000 which arrived in the party’s bank accounts via a Canberra based Trust Account called the Free Enterprise Foundation.

A couple of days later, the Australian Securities and Investments Commission (ASIC) announced they were taking Westpac to the Federal Court over claims of rigging interest rates.  Westpac aren’t alone, ASIC took similar action against ANZ last month.

ASIC produce regular information bulletins, the most recent one is here.  The ‘highlights are the 105 investigations commenced, $149 million in compensation and remediation and close to $1 million in infringement notices that were paid (obviously not in dispute) in the six months leading up to March 2016.

Opposition Leader Bill Shorten has promised a Royal Commission into the banking and finance industry if elected to government later this year.  While some Coalition party members have agreed that the commission is warranted, Treasurer Morrison and the Australian Bankers Association have decried the move.

In the past week, the world has seen the release of the ‘Panama Papers’ , an electronic dump of the files of an organisation that ‘facilitated’ the movement of funds around the world in part to avoid taxation.  Apart from anything else, the quantity of data now available makes the scale of the data held by the US Government leaked by Edward Snowden look small by comparison. 

The Panama Papers revolve around a firm of lawyers used by the super rich to avoid currency movements, tax payments and so on.  So far, the Prime Minister of Iceland has resigned, the Prime Minister of Great Britain is facing some increasingly difficult questions (apparently he and his family had an involvement with the legal firm).  They aren’t the only ones, ‘the ruling class’ of countries from Azerbaijan to Zimbabwe are currently facing questions.  Putin in Russia is claiming that while those close to him are implicated, he isn’t, China is literally censoring the topic out of existence and Panama is claiming the link between the leaked papers and their country is unwarranted!  The Australian Taxation Office is commencing investigations around the taxation affairs of the 800 Australians who were named in the leaked documents

As Lenore Taylor, writing on The Guardian’s website , points out while no one is accusing any Australian politician of being identified in the release of the Panama Papers, it makes Turnbull’s argument that there is no need for a federal corruption watchdog difficult to prosecute (when each state already has a similar body).  In contrast it makes Shorten’s argument around a Royal Commission into banking really logical.

Perception is everything. 

What do you think?

Malcolm's Magic Pudding

Around 100 years ago, Norman Lindsay wrote what certainly has to be one of the classic Australian Children’s books ‘The Magic Pudding’.  The story revolves around the owners of a pudding that automatically regenerates after a slice is cut being chased by dastardly ‘puddin thieves’ who in the end get their comeuppance.  As an aside, it’s well worth a read if you have never done so.

Prime Minister Turnbull’s latest venture into the tax discussion has a similar concept.  From what has been publically released, Turnbull is suggesting that if the states and territories receive a proportion of the income tax take, they will be able to fund their hospitals and schools to a level greater than that they are currently receiving in tied grants from the federal government.  So that Australian’s are not paying more tax, the federal government will reduce their own share of the pudding, collect the states’ share and pass it on without delay or deduction.

Let’s start with the politics. 

Turnbull and Morrison have been faffing around preaching their contribution to the golden future of the Australian nation and all that sail in her will be taxation reform.  First of all, everything was on the table, then when someone challenged the proposal for increasing the GST to 15% with a broadened base; that part was quietly taken down the dark alley and strangled.  Then income tax was considered, then taken down the dark alley and strangled.  Others suggested negative gearing and capital gains should be looked at.  Turnbull wasn’t having any of that, and if it was possible, he was less enamoured with a suggestion to look at Company Tax.

The only arrow left in Turnbull’s bow apparently is an idea that for the past 70 years has been classed as unworkable.  While that in itself is not a reason to look at it, there is a huge potential for some vague plan such as this to be suggested in the lead up to an election then changed significantly (to make it workable) over the election period.  When the plan is eventually converted to a practical policy by the time the election has passed, the government has been re-elected and claim they discussed it prior to the election so they have a ‘mandate’ to implement.  The problem with the ‘mandate’ is that the policy bears at best a passing resemblance to the original plan.

Then there is the logic.

If the income tax take in Australia is $100billion, it is $100billion regardless of who gets the cash.  Unlike the magic pudding, if the states get 10% of the $100billion pudding, it doesn’t increase the total available for distribution; it just means that the federal government has to live with the remaining $90billion.  Sooner or later the state and federal revenue requirements will rise causing income tax rates to go up (potentially by different amounts in different states) causing the flaws of a scheme Bernie Madoff would have been proud of to be realised, despite the concept being ‘withdrawn; at the COAG meeting held on April 1.

Given even government departments charge surcharges for payments by credit cards, how long do you think it would be before some bright spark in Treasury came up with the idea of introducing the inevitable ‘postage and handling fee’?

In addition it is clearly more difficult to operate a health and school network where there are smaller groups of people or they are located a greater distance apart.  Coincidentally, the states and territories that face these problems are smaller in population or earn less so if the income tax is distributed according to the ratio of tax received – those states and territories have to provide more with less.

Turnbull claims that the smaller and more decentralised states will be looked after.  Does this mean there will be some adjustments made to the ratio used to pay out the states proportion of income tax?  If so, other states might again be held hostage by one state using the argument for special distribution of the income tax revenue - in a similar way to that attempted by Western Australia (under threat of leaving the federation) in regard to GST when the mining boom petered out.

It would seem that most of the state Premiers are not as gullible as Turnbull hoped, as they are resisting the concept plan.  There is a delicious irony that Turnbull’s Coalition Government is now having to have the difficult conversations caused by Howard and Costello’s penchant for propping up middle class welfare using the proceeds of the mining boom and Abbott’s scrapping of both the Mining Tax and the Carbon Pollution Reduction strategy; both of which were capable of producing income for the federal government.

As for us – we have a choice.  Do we vote for the party that increased health funding and introduced the Gonski reforms to educational funding (to create a fairer society with greater equality), or the one that has ripped $80billion from health and education over the next decade and is now proposing not to fund public schooling (but happy to continue to fund schools that charge tens of thousands a year)?

What do you think?