It is only a week since the Federal Budget was tabled, but it seems like an eternity. Already important matters going to the heart of our economic prosperity have been pushed aside amid puerile debates over how long it takes to charge your electric vehicle. If you must charge at home because charging stations are non-existent, your meter will be spinning like a top and the grid will be so unstable that your neighbour cannot use his toaster. Tech billionaires are chiming in to “say it ain’t so”.

Sometimes it seems Australia is developing an economic death wish. The budget itself was well accepted and at least it did outline stark points of difference between the Coalition and Labor. The main point of difference is the Coalition has budgeted for a surplus, the first in 12 years. It has done so without any new taxes and will cut income tax rates in the middle brackets and the company rate. Beneficiaries here are aspirational people in middle Australia including rural and regional Australia.

Labor on the other hand also promises a surplus but only on the back of over $200 billion in new taxes over the next 10 years. The Magic Pudding economics of Labor are on show with the “tax and spend” approach. These new taxes target retirees, investors, farmers, businesses using trust structures and high-income earners. Beneficiaries of Labor are city dwellers, unionised workers, low income and welfare recipients, and public sector employees. Draw your own conclusions about where the battle lines are being formed.

Rather than focus on specific budget measures (which are well covered elsewhere), the Stump is more interested in overall trends as an indication of where the country is heading. What should be the basic principal of the budget?

The Stump says that a government should collect in tax what it needs to spend. The only reason for a surplus should be to pay off debt accumulated by past poor budgeting. Otherwise excess receipts should remain with the taxpayers to spend or invest as they see fit. What happens now (and both sides do it), is they work out what they would like to spend (mainly to win votes) and then figure out how to raise the taxes to pay for it. What we saw in the last 12 years was these spending dreams getting so out of hand that even strong revenue growth was not enough to cover costs.  Hence the $600 billion in Federal debt we now carry. Not only is the debt ruinous, but we build a bloated public service to administer it staffed by the best paid public servants in the world. They are not advocating for small government, whoever is in power.

 

Budget Overview

We are told the budget is headed to surplus. Consider the core budget figures:

$Billion 2018 2019 2020 2021 2022 2023
Revenue 447 485 505 522 551 567
Spending 453 483 493 511 533 558
Cash Balance -6 2 12 11 18 9

Source: 2019 Budget papers, cash basis excluding future fund.

 

Revenue – Key Points

Revenue has increased by 27% over the period and spending by 23%.  Yet as a percentage of GDP both are stable which indicates just how much the budget depends on GDP growth.  The percentage of revenue to GDP is about 23.3%.  Real GDP itself is forecast to rise 2.8% this year and 3% in the latter years.  It is an old trick but a good one to top up the forecasts in the latter years. If GDP stalled or even fell, the budget would be blown out of the water. There is no sign of expenditure restraint here. Revenue increases are budgeted for and so are future spending increases, all on the assumption of continued economic growth. If repayment of government debt was a priority (which it does not seem to be) these numbers would need to be repeated for the next 60 years; it’s just not going to happen. So, the surplus is revenue driven, and most of this is from tax paid by individuals which still comprises almost 50% of all government revenue. Over the budget period tax collected from individuals rises from $206 Billion to $264 Billion. Who is paying that tax? The last data issued by the ATO is from 2016/7.  Let’s see how this has changed over time

2012/3 2016/7
Individual Returns Lodged 12.7 M 13.87 M
Personal Tax Paid $155 Billion $194 Billion
Taxpayers with income under $37,000

 

5.6 M 5.77 M
Tax Paid by them $4.8 Billion $4.66 Billion
Average tax paid per taxpayer < $37,000 income $860 $810
Taxpayers with income over $37,000 7.1 M 8.1 M
Tax Paid by them $149.4 Billion $189.34 Billion
 

Average tax Paid per taxpayer > $37,000 income

 

$21,050 $23,380

Source: ATO Tax Facts 2016/7

 

Even though the total tax paid per head of population is steady at about $15,000 per person, the tax paid per person has increased in the bracket above $37,000 and decreased in the bracket below. A large part of this is due to more generous offsets at the lower end, and the effect of bracket creep at the higher end. The point here is; do not get carried away by any tax cut on offer, they are just giving you back part of the money they have already taken away.

The other point to note is that we remain over reliant on personal income tax, not having had any real tax reform for 20 years. Both over reliant generally and over reliant specifically on a smaller cohort of taxpayers paying a larger share of tax each year. Do not be fooled by statistics such as tax as a percentage of GDP, or tax per head of population that cover up this key fact. The Stump is also of the view that the current debate about stagnant wages growth, the basis on which the ACTU is whipping up a frenzy, is misplaced. Nominal wages growth has slowed, but Australia remains a high wage country. If wages are pushed up, then this will only exacerbate the problem of bracket creep.

This is particularly the case under Labor where the cuts are at the low end, where minimal tax is paid. At least the Coalition has targeted their cuts in the middle band. The Stump says that real reform of personal tax is the better way to go, and part of that is lower and flatter rates at the middle and top end. This has the advantage of putting money in people’s pocket without increasing costs to business and threatening jobs. That job would be easier if spending increases were not baked into the budget as well.

Expenditure – Key Points

At the risk of stating the obvious, expenditure keeps rising. As for the revenue side, spending tends to be measured as a percentage of GDP. In this case about 24.6% of GDP.  If this number remains constant, then there is said to restraint. It’s rubbish really, because commitments are locked in on the expectation that money will be there to pay for them. The biggest spending is in social welfare, schools and health which account for around 60% of outlays. As outlays go up, these allocations go up along with them. Unless you can break this relationship with GDP growth and support spending on its merits then nothing will change. Whilst the big-ticket items need to be tackled to have any impact, an important message can be sent by what happens in the minor categories.  Adam Creighton in The Australian the other day outlined a series of obscure grants and programs, none of which are significant of themselves, but together add up to hundreds of millions of dollars.  Throwing money around like that is just a bad look.

In Summary

As the Federal election has now been called for 18th of May, two different visions are on offer. The Coalition offers a degree of prudence in fiscal policy but remains wedded to big government and pins its hopes on continued economic growth. Labor takes it to another level with its massive tax and spend approach. There is nothing to suggest that they have learned a thing from Wayne Swan who spent his extra revenue before he collected it. At least they have given us the chance to consider their plans. With the Labor tax policies, note that most of the revenue (from negative gearing, CGT changes etc), will come from individuals. This will only make the problems outlined above even worse – a cynic would say that is not an unintended consequence.  More personal tax means more bracket creep and a greater push for wages rises, the costs of which are largely transferred to the private sector. The other element, which needs to be the subject of a separate article, is the Labor policy on emissions and renewables including electric vehicles; these have not been costed or analysed at all. The Stump sees these as more akin to tax policies than environmental ones and believes they should be dragged out into the full light of day.

Until next time…

 

Jim Wheeler