Looking back at the budget

An old co-worker once told me that he never reads the newspapers as he doesn’t want to read something written with less than a days consideration. Wise man. So this is the “one week consideration” version of my views on the 2011/12 federal budget.

Budget balance

The first strange thing about this budget is that everybody is talking about the 2010/11 budget balance (-$49.4 billion) or the 2012/13 budget balance (+$3.5 billion). This is understandable for political reasons. The Coalition want to point to the big deficit and Labor wants to point to a surplus. But the 2010/11 is old news, and the 2012/13 is an unreliable forecast. The actual cash bottom line for 2011/12 (the budget year) is -$22.6 billion. Given the current state of the economy, we should have a small surplus now and not a deficit, so the government has to lose a few marks on fiscal policy.

Total government spending for 2011/12 is predicted to be $365.8 billion, of which the biggest element is welfare ($121.9 billion) followed by health ($59.9 billion), education ($29.9 billion), and defence ($21.3 billion). Total cash spending is 4.3% higher than the previous year in nominal terms.

The savings that weren’t

Two annoying budget tricks is to add up multiple years and report a four (or five) year total, and to refer to taxes as “savings”. I don’t mind that politicians and bureaucrats play these tricks… lying is effectively part of their job description. But the sad thing is that the journalists just mindlessly report it. Either the journalists want to pass on the same lies as the government, or they are just incompetent.

The headline “savings” figure is $22 billion of savings, but that is over five years. The savings in the current budget year (2011/12) are only $3.8 billion, and that includes $1.6 billion from taxes and another $1 billion that mysteriously comes from “other”. That leaves $1.2 billion of identified savings out of a budget of $365.8 billion, which is clearly not “tough”.

Whatever savings the government made were more than offset by more government spending, so that the impact of government policy over the last six months was an increase in government spending of $1.7 billion. If the government really wanted to tighten their belt then the most obvious first step is “stop spending more money”. But apparently they just can’t help themselves.

Having said all of that, the government does deserve some credit for at least trying to deal with the growing problem of middle-class family welfare. Some in the opposition have objected to the government cutting $2 billion from families, but that misses a few key points. First, we need to remember that those families never earned this money. The money was created by hard-working families and businesses that are already over-taxed, and is then handed out as welfare. Second, middle-class welfare is a wasteful policy that leads to >$150 billion of pointless tax-welfare churn, and is ultimately unsustainable. Unless we reform our welfare system (including middle-class welfare) it will send Australia broke. And finally, the actual change will save less than $0.1 billion for the budget year (out of total welfare of $121.9 billion), rising to only $0.8 billion 2014/15 (out of total welfare of $139.2 billion)… so it is not a big reform. Indeed, we will need much more welfare reform if we are to make the budget sustainable in the long-run. Back in 2009 I suggested a “tax-welfare swap” where the middle class give up $90 billion in welfare in exchange for $90 billion in income tax cuts.

Tax

The government has complained that they aren’t getting as much tax as they would like. But if you consider the fact that the government doesn’t actually *make* any money (they just take it), and their activities generally destroy wealth, then I think they should be happy with what they get. And what is that? For 2011/12 the federal government expects $342.4 billion, which is a 12.7% increase on the previous year. Not a bad pay rise for the state.

The government has found a few new ways of getting more money from the productive class in this budget. Of course, there was the flood levy… but there is also an increase in fringe benefits tax regarding cars, and a handful of other small adjustments. The government removed a few little tax expenditures, but then added a new one… so the tax system remains as complex as ever. And then there is the plan for an extra mining tax and carbon tax in the near future. Not good.

There is also a suspicious looking adjustment at the bottom of Table 5 in Budget Statement 5, where the government has shifted $0.7 billion in tax from 2011/12 into 2012/13. This probably doesn’t mean anything for the real world, but it helps to make the budget look a bit better for 2012/13, where the government wants to be able to say it is in surplus. I think we can expect more of these sort of convenient adjustments in the coming year.

The biggest tax remains income tax, which is expected to net the government $154.7 billion in 2011/12. The reported income tax tables continue to be misleading, separately reporting the base rate, medicare levy and the low-income tax offset for no reason other than to obscure the truth. The actual tax rates in Australia are:

==============================

-> $16,000              0%
-> $18,839               15%
-> $22,163               25%
-> $30,000             16.5%
-> $37,000             20.5%
-> $67,500              35.5%
-> $80,000              31.5%
-> $180,000            38.5%
> $180,000              46.5%

==============================

Of course, these tax rates make no sense. There are two places where they are regressive, and people on an average income are actually paying 35.5% when they think they are paying 30%. The government continues to hide the actual marginal rates, and so far nobody in the media has been smart enough to work out the truth (despite the actual rates being published by Policy magazine two years ago). The budget was silent on income tax reform.

Conclusion

In total, it’s a pretty boring budget. Perhaps that was the intention. I think John Howard was right to say that the budget would not occupy the national debate for long. There was one half-step in the right direction on middle-class family welfare, and then a few meandering steps backwards with more government spending in general and a couple of new taxes, while the budget continues to be in deficit when we should have a small surplus by now. In short… it lived down to my expectations.

10 thoughts on “Looking back at the budget

  1. •What economy prosperity to support an aging and growing population from now on?

    •What productive progressing building results by spent up 4% GDP ($19.49 billion) add account deficit when Labor won election 2007?

    •What creativities in supportive employment in declining agricultural &manufacture industries?

    •What impact to export/import trade balance when depleting mining industry and or commodity bubble burst?

    •How to balance education export revenue impact to housing affordability of low to middle income earners?

  2. Your co-worker is right on the money, but a bit short in the quarantine time. I find anything under 12 months still subject to the spin required to get it off the ground.

    In the same vein, any new IT device is best left for at least 2 years until the “early adopters” have found the bugs or it has been determined to be a complete failure.

    I have a great collection of Beta videos waiting to find a Beta video player.

    “Man with good collection of beta videos would like to meet woman with Beta video player, and bottle of wine. Good time assured.”.

  3. If you include the effect of Family Tax Benefits I suspect the tax rates for a lot of people look quite different. Same goes for SATO. There is not one table of “real” tax rates, there are many.

  4. When I say many I many a really huge number. To donor justice you need to include the breakdown of income between a couple. Their age and how many children they have. The permutations are large and hard to present in a mere table. I have considered writing it up but I reckon it would take a few days to pull together and I’ve never found myself with a few days to spare.

  5. Hi John.

    You say that there are two places where the tax is regressive.

    It’s semantics, but I wouldn’t say there are any places where it is regressive. Sure, you might find some people who would say a tax is regressive wherever there is a drop in marginal rates. But most definitions I’ve seen, particularly textbook definitions, require a fall in the ratio of tax to income for there to be regressivity. That never happens with the current tax rates as the dips in the marginal tax rate are too shallow.

    Cheers.

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