I have to say last week’s media coverage of the Budget was at least sycophantic, at worst deceptive. Take the Tele’s working class plan headline. The coverage missed the point, and in fact the short term-cash splash – aka bribe will soon be totally consumed, and people will generally be worse off.
There were a couple of high points in the online media though which go to the heart of the story. This from Alan Kohler in the New Daily, focussing on the strategic errors which were made in 2020, thus creating a higher than needed debt burden for the country.
And this from Michael West Media, By Callum Foote arguing that Frydenberg hides $30 a week tax increase for most Australians.
Treasurer Frydenberg announced a number of cost-of-living measures in his budget speech.
These include a one-off $250 cost of living tax offset for more than 10 million low and middle-income earners, a boost to people receiving the low and middle-income tax offset by $420 for the 2021-22 financial year as well as halving the fuel excise for six months.
What the Treasurer didn’t say is that the additional $420 tax offset for low and middle-income earners he mentioned will stop entirely at the end of this financial year, on June 30.
The extra cash bumps the tax offset up to $1500 this year which ends on June 30.
This means that despite the extra cash given to them this year, those on this tax offset will be $1500, or almost $30 per week, worse off.
Finally some of the commentators are seeing though the Government spin to the underlying ideology, and are highlighting the weaknesses and risks in the massive proposed spending. And it’s not so much the quantum, as the direction of fire…
We look at today’s data, the Fed cut, the repo issue, and locally the
engineered balanced budget and higher unemployment. Many echos of a
decade back, is history repeating?
The Treasurer Josh Frydenberg has given his budget speech tonight, and he said that for the first time in 12 years the federal budget has returned to surplus.
His first budget includes billions of dollars for tax cuts, major road upgrades and health care. But actually, it is due to return to surplus in the NEXT financial year, and project small surpluses in subsequent years.
He is also spending big ahead of the election, so yes this is political (and in some regards intimating Labor’s policies in places) . This is a “boots and all” approach to try and gain election ground. Reminds me of Howard and Costello!
Net debt is forecast to be $360 billion next financial year, but the Coalition is promising to eliminate it by 2030 if it retains government (if the aggressive assumptions and no slow-down occurs in that time).
But it forecasts lower wages growth, then a jump back to higher rates (why?) and the same is true of economic growth at 2.75% next year, then higher later. Plus a promise for another 1.25 million jobs in the next 5 years (what type of jobs?).
“The budget is back in the black and Australia is back on track,” the treasurer said, announcing that the coalition delivered a $7.1 billion surplus
The Budget forecasts surpluses in each year over the forward estimates, reaching as high as $17.8 billion in 2012-22.
But the budget recognizes a number of risks locally and internationally and is under-funding the NDIS by $3 billion in the next two years.
“The residential housing market has cooled, credit growth has eased and we are yet to see the full impact of flood and drought on the economy.”
The mantra though the speech was that the budget would restore the nation’s finances without raising taxes.
“We are reducing the debt and this interest bill, not by higher taxes, but by good financial management and growing the economy.”
The truth is the budget may go into surplus next year thanks to very high iron ore export prices to China. This was lucky, and is explained by supply disruption from other sources lifting prices.
He makes the point that Australia has a significant national debt which is currently costing $18 billion, and this with interest rates ultra low!
Last year the coalition had announced plans to reduce income taxes for Australians by $144 billion. Now the Treasurer said the government would deliver more than $150 billion in income tax cuts.
From 1 July 2024 taxes will be reduced from 32.5 per cent to 30 per cent for those earning between $45,000 and $200,000.
“Taxes
will always be lower under the coalition,” Mr Frydenberg said, adding
that small businesses will also get tax relief from the 2019 budget.
“Small
business taxes have been reduced to 25 per cent and the instant asset
write-off will be increased from $25,000 to $30,000 and can be used
every time and asset under that amount is purchased.
“The instant asset write-off will also be expanded to businesses with a maximum turnover of $50 million.”
The coalition will also boost infrastructure spending to $100 billion over the next ten years.
Finally, the Government has matched Labor’s commitment to end a freeze on the Medicare rebate for GP visits from the first of July, as part of a $1.1 billion primary healthcare plan.
The budget has been gifted much higher revenues from corporate income
taxes, almost entirely driven by mining companies selling more than
they expected (at higher prices than they expected) to China.
A stronger than expected domestic economy has also helped, producing
small upside surprises in various other taxes and cutting the need for
government spending.
In the past six months the stars have aligned to hand the government a virtual war chest with which to fight the election.
A full MYEFO, then an election budget
Prime Minister Scott Morrison has laid out the timetable.
MYEFO is due on Monday December 17 and an early Budget will be handed
down on Tuesday April 2, days before the government is expected to call
the May election.
This tells us two things, firstly, that he has zero interest in
bringing that surplus forecast forward to the current financial year,
2018-19; and second, that that surplus is unlikely to be materially
different from what Morrison previously forecast (as treasurer) in May.
That will give him room to make some very expensive announcements.
With as much as (or more than) an extra A$10 billion per year to play
with, Morrison’s ministers will be rubbing their hands together working
out how to get the most electoral bang for the bucks.
Endangering the budget long term
This does not bode well for government finances beyond the next few years.
Highly targeted spending measures aimed at improving election prospects are rarely the best use of public funds.
New spending commitments in the just past few months are set to cost
the budget just under A$500 million this year, rising to almost A$1.5
billion next year.
Spending all or most of the extra money that’s pouring into the
Treasury coffers risks creating a budget black hole if the sources of
that revenue prove to be temporary.
A slowdown in Australia or a drop in China’s demand for raw materials could take a big chunk out of the budget.
The damage to the government’s finances after the global financial
crisis was only partly the result of spending aimed at averting a
recession.
We now know a big part of the surge in revenues in the years before the crisis were temporary.
The increased spending and repeated lower taxes they funded were
permanent, creating a structural budget deficit that has taken a decade
to repair.
As mentioned, the latest upside surprises on revenue are largely due
to strong commodity prices and a rising tax take from mining companies.
They might vanish as quickly as they appeared.
Commodity prices are notoriously volatile and almost entirely dependent on what is happening in China.
Problem: China
Perversely, China is buying more of our commodities because it has
upped spending on infrastructure to boost a slowing economy under threat
of trade war.
The boost in infrastructure spending won’t last.
Eventually we will see a shift in the drivers of Chinese growth
towards domestic consumption and business investment and away from
metal-intensive infrastructure spending.
It will curtail the growth of our exports and weaken our corporate income tax take.
Dark clouds are forming at home as well.
Problem: Australia
Bank profitability has stopped growing, and the indications from the
Hayne Royal Commission are that bank profits will be challenged over the
next few years as remediation costs rise and lending slows.
And then there is housing.
While not a direct source of revenue for the federal government, the
fall in house prices could start to bite into economic activity as early
as next year.
While consumers have so far looked past the lower house values, that is likely to change in 2019 if prices continue to fall.
It’d be wise to hang on to the extra billions
The best economic approach would be for this government to save money
and leave it for the next government to use them prudently as needed.
It’s certainly not going to happen.
Centre right governments tend to characterise unexpected bumps in revenue as belonging to the citizenry and to be given back.
They usually do it in the form of income tax cuts. We should prepare
for substantial fresh income tax cuts, from as soon as July 1, 2019.
Control of the Treasury is one of the most important weapons available to a political party contesting an election.
Having a prime minister who spent several years as treasurer only enhances the weapon.
The government’s timeline for MYEFO and the April budget suggests they fully intend to use it.
Bloated by nearly $10 billion in stamp duty from the hot Sydney property market and asset sales, the New South Wales state budget delivered on Tuesday looks like a political winner for the Gladys Berejiklian government.
While the state enjoys the nation’s lowest unemployment rate at 4.8 per cent, 3.5 per cent local economic growth and negligible net debt, new Treasurer Dominic Perrottet reported a 2016-17 surplus of $4.5 billion from total revenues of $78 billion.
“We are the envy of the Western world,” Mr Perrottet told the budget lock-up media briefing.
The results were boosted by stamp duty receipts of half a billion dollars from the recent sale of the state’s electricity poles and wires and the demand-driven astronomical prices of Sydney property now at $7.2 billion in 2017-18.
While former federal treasury head Dr Ken Henry once described state property transfer taxes as a distorting influence on the efficient use of land, NSW and other mainland states have become addicted to it.
Stamp duty on a $2 million house in NSW currently costs the buyer $95,763, a big windfall for the state.
Also addictive is the state’s dependence on payroll tax, currently at $8.6 billion rising to just on $10 billion a year by 2021.
Payroll tax, easy to collect, nevertheless has been described by economists as a tax on jobs.
NSW also mainlines on gambling for its big revenues, collecting $800 million from club poker machines, $766 million from pub pokies, $111 million from racing, $363 million from lotteries and $278 million from Star Casino.
Grand total from gambling: $2.3 billion.
Mr Perrottet, a proclaimed Christian and father of four, says he supports a national approach to the anti-social impacts of gambling.
The Turnbull government and federal Treasurer Scott Morrison are unlikely to have any sympathy for Mr Perrottet’s complaint that NSW is being short-changed on GST distribution by $15 billion over the next four years.
“Right now GST from NSW taxpayers is subsidising inefficient Labor states, some of whom seem more interested in increasing the size of their bureaucracies, rather than undertaking reform,” Mr Perrottet said in his ‘bearpit’ budget speech.
Housing in NSW ‘still unaffordable’
While Premier Berejiklian promised a game changer on housing affordability, her government’s budget does not deliver systemic change.
Instead, it offers a planning red tape-cutting blitz to boost supply and “a fair go for first home buyers” in the form of stamp duty exemptions from July 1 for new and existing properties up to $650,000, with discounts up to $800,000.
Following the recent federal budget lead, foreign investors have been constrained with an investor transfer duty surcharge increase.
While welcoming the state budget’s bias to local first home buyers, property affordability analysts say low interest rates and relentless demand pressure from population growth will continue to drive Sydney’s sky high property prices.
Infrastructure ‘equivalent to 124 Harbour Bridges’
With the NSW population projected to increase to 11 million by 2056, the state’s already congested city road systems are now a big political problem.
Through its asset recycling program, property sales and privatisations, the state’s ‘Restart NSW’ fund is bankrolling $73 billion in capital works over four years, including the contentious Westconnex toll road now cutting through suburban houses in western Sydney and the stand-alone privately operated Sydney Metro fully automated commuter train with the track now under construction from Sydney’s north west, under Sydney harbour and through the CBD to the south west.
Mr Perrottet made this declaration about the infrastructure spend: “That’s equivalent to building 124 Harbour Bridges – a once-in-a-generation investment that will transform our state forever.”
The capital works include already announced new schools and hospital upgrades, but announced on Tuesday was a $720 million upgrade for the Prince of Wales Randwick hospital in Sydney’s eastern suburbs.
While wage growth in Australia has been flatlining in recent years with a depressive impact on economic growth, the NSW government is insisting on maintaining its 2.5 per cent cap on public sector wages.
With the Reserve Bank governor Dr Philip Lowe this week saying employee demands for higher wages were now justified, Mr Perrottet would not be moved, also insisting that departmental efficiency dividends would continue to be imposed.
In a blatant move for political popularity the state will now fund a non-means tested $100 per child payment for sporting activity, said to be justified by the obesity epidemic.
Significantly for a state budget, this one is presented with an “outcomes” template for the first time, similar to Oklahoma in the US.
NSW Treasury secretary Rob Whitfield, a former banker, says benchmarking performance alongside the budget numbers will help to change the state’s political culture to accountability for its primary function – service delivery.
The government’s plans to allow first home buyers to salary sacrifice up to $30,000 into superannuation accounts looks set to do little to make houses more affordable.
“Under this plan, most first home savers will be able to accelerate their savings by at least 30 per cent,” Treasurer Scott Morrison said in his budget speech.
From July 1, 2017, people can contribute up to $15,000 a year, taxed at 15 per cent, into their superannuation accounts for a home deposit.
Withdrawals will be allowed from July 1, 2018, and will be taxed at marginal tax rates minus 30 percentage points.
Dr Sam Tsiaplias, economist at Melbourne University, said the measure would not improve housing affordability “in any substantive way” because it favoured the well-off.
“Most of the people who might take this up will be able to afford a deposit anyway,” he told The New Daily.
“If the objective is to help a relatively small number of households save faster it probably can do that.”
Because the money will be deposited in Australians’ super funds, it has been suggested the funds would need to adjust their programs. But Dr Tsiaplias said the accounts would probably be so unpopular that they wouldn’t affect the super funds “in any way”.
Superfund Partners director Mark Beveridge said the government’s “30 per cent” sales pitch would simply leave super funds offside trying to accommodate the new funding arrangements.
The new schemes do not rely on Australians to open new bank accounts. Instead, the government will allow deposit savers to salary sacrifice into their superannuation accounts.
Bill Watson, CEO of First Super, said people who use the new scheme need to be wary of the risks that come with investments.
“There’s a risk that what you think is a saving is exposed to losses in the market. What a person would need to do is put it into a cash investment, but you get pretty much the same return as a bank deposit.”
Saving schemes like this have been tried in the past. The first Rudd government introduced First Home Saver Accounts in 2007. Savers were taxed at 15 per cent on the first $5000 they deposited each year, while interest was taxed at 15 per cent. The government also kicked in a 17 per cent contribution a year on the first $6000.
However, Labor’s scheme saw little uptake. Only 48,000 accounts were opened, compared to the projected 730,000. It was abolished in 2015 under the Abbott government.
Wayne Swan, treasurer during the first Rudd government, speaking on CNBC on Wednesday, said his scheme would have shown its impact if it had not been abolished.
“It was a far more generous proposal than the one they announced last night,” Mr Swan said.
“[This is] just window dressing because they’re ideologically opposed and won’t touch the negative gearing provision which is the key to solving this problem.”
First Home Buyers Australia co-founder Daniel Cohen said he supported the scheme, but wanted more to be done to address affordability.
“It doesn’t single handily solve the property crisis,” he said.
“We also wanted to see measures that decreased the amount of investor activity in the market, we were also disappointed that there weren’t more cuts to tax incentives given to investors.”
Negative gearing came in for only minor changes in the budget, with some tightening around travel expenses and depreciation deductions.
The government expects its home buyers grant to cost $250 million and its changes to negative gearing to save $540 million over the next four years.
The government has announced initiatives to increase competition in Australia’s fintech sector, increasing access to capital for small businesses and expanding the AFSL exemption for start-ups.
As part of the federal budget handed down this evening, the government and Australian Prudential Regulation Authority (APRA) announced there will be a reduction in barriers for new banks and a focus on increasing competition to drive lower prices and a better service for consumers.
The government will look to relax the legislative 15 per cent ownership cap for innovative new entrants, and will also lift the prohibition on the use of the term ‘bank’ by Authorised Deposit-taking Institutions (ADIs) with less than $50 million in capital.
This will allow smaller ADIs to benefit from the reputational advantages of being called a ‘bank’. Over time, these changes are expected to improve competition by encouraging new entrants, the government said.
As well as committing to increasing competition in the fintech sector, the government has released draft legislation that will make it easier for start-ups and innovative small businesses to raise capital.
The draft legislation looks to extend crowd-sourced equity funding (CSEF) to proprietary companies. This will open up crowd-sourced equity funding for a wider range of businesses and provide additional sources of capital, the government said.
Proprietary companies using CSEF will be able to have an unlimited number of CSEF shareholders.
The government will also be introducing a “world-leading” legislative financial services regulatory sandbox, according to the budget.
This will enable more businesses to test a wider range of new financial products and services without a licence which will reduce regulatory hurdles that have traditionally suffocated new businesses trying to develop new financial solutions, and has caused Australian talent go offshore, the government said.
Robust consumer protections and disclosure requirements will be in place to protect customers, however.
Further, the government is removing the double taxation of digital currency to make it easier for new innovative digital currency businesses to operate in Australia.
From 1 July 2017, purchases of digital currency will no longer be subject to the GST.
This will allow digital currencies to be treated just like money for GST purposes. Currently, consumers who use digital currencies can effectively bear GST twice: once on the purchase of the digital currency and once again on its use in exchange for other goods and services subject to the GST.
The government has also commissioned Innovation and Science Australia to develop a 2030 Strategic Plan for Australia’s Innovation, Science and Research (ISR) System. The plan will outline what the nation’s ISR system should look like into the future and ensure that Australia is positioned as a world leader in innovation, the government said.
Fintech Australia chief executive Danielle Szetho warmly welcomed the measures, describing the budget as a “boost” for the emerging sector.
“We welcome these initiatives – they’re a huge step forward when it comes to growing a globally competitive Australian fintech industry, that will also deliver greater choice and improved financial outcomes for consumers,” Ms Szetho said.
“We’re also proud that many of these initiatives have come about through the strong and detailed advocacy work undertaken by FinTech Australia and its members.”
