NATSEM BUDGET ANALYSIS 2016: An Enterprise Budget in Times of Mistrust

Mark Evans

Professor Evans is the Director of the Institute for Governance and Policy Analysis, University of Canberra

Jinjing Li

Jinjing Li is an Associate Professor at the Institute for Governance and Policy Analysis, University of Canberra.

A precarious context

What has been genuinely exciting about this budget is that it has been launched in such a precarious context. The Australian economy is presently characterised by a modest growth rate of 2.5% (below initial expectation), falling business and consumer confidence, a cooling housing market and an increasing budget deficit (estimated at $39 billion for 2015-16 according to the Budget Papers). In combination, this adds up to the emergence of worrying deflationary pressures and concern is rising over whether Australia’s AAA international credit rating could be at risk (see: http://www.theaustralian.com.au/budget-2016/budget-2016-inflation-and-dollars-rise-drive-rba-cut/news-story/05d4319ab47ac01d34157598c858a5bd).

Moreover, the prospects of these pressures easing over the year are unlikely given that global markets continue to be unnerved by the longer-term prospects (however imponderable) of a British exit from the European Union and a Trump Presidency. Against all of this, satisfaction with democracy in Australia is now at its lowest level since 1996. Only 42% of Australians are satisfied with the way democracy works. 60% of citizens describe the standards of honesty and integrity in Australia as low. Trust in politicians and the political process are at their lowest level. Only 25% of citizens trust ministers and remarkably Grey Australians are amongst the most disaffected! (see: https://theconversation.com/now-for-the-big-question-who-do-you-trust-to-run-the-country-58723). While the Howard years provide evidence of a culture of contentment, since 2007 we have experienced a period of democratic decline featured by profound citizen discontent with governments and politicians across the political spectrum.

In sum, these are capricious times for delivering a budget that will launch an election.

 

Big ideas – the enterprise budget

The big ideas underpinning Budget 2016 have oscillated between narratives on whether the budget will “repair” the economy, help Australia to avoid “recession”, “renew” the economy or whether it is “fair”.  This is crystallized in George Megalogenis’s recent clarion call for the Turnbull government to achieve a “balancing act” between staving off recession and affecting a new politics of change and renewal. So how has the Turnbull government responded to this challenge? Budget 2016 is presented as an Economic Plan for Jobs and Growth. It introduces a series of measures outlined in a ‘Ten Year Enterprise Tax Plan’. Four themes are emphasized: 1) renewal through enterprise; 2) perceived improvements to the tax system to increase revenue; 3) fiscal consolidation; and; 4), fiscal stimulus. A classic cocktail for an enterprise budget aimed at fuelling what the Economist J.K. Galbraith has termed elsewhere the ‘culture of contentment’.

The first theme refers to measures focusing on building an enterprise economy or what the Prime Minister Malcolm Turnbull has referred to “as responding to the challenges of the new economy” to ensure that the “spark of enterprise keeps burning and every policy of my Government is determined to encourage it” (https://twitter.com/TurnbullMalcolm/status/723408274171650048)The spark of enterprise keeps burning and every policy of my Government is determined to encourage it The spark of enterprise keeps burning and every policy of my Government is determined to encourage it. These are measures geared towards boosting the enterprise economy and include a range of tax concessions and other enterprise incentives and supports for corporates, start-ups and a more inclusive categorisation of “small business”.

The second theme reflects the Treasurer’s ambition to introduce a range of measures to improve the tax system to “make sustainable changes…so it can support the needs that are there in the future.” This has included changes to superannuation, a modest tax cut for mid-high income earners, the prevention of bracket creep for middle-income earners and attempts to tackle tax avoidance by multi-national corporations.

The third theme expands on the fiscal consolidation measures initiated in the previous budget through additional cuts to the Australian public service (referred to as a “$1.4 billion efficiency dividend”), the termination of certain programs and delays in the inception of other programs.

And, the fourth theme involves significant spending measures in defence, education, and infrastructure to further stimulate job creation.

NATSEM’s Preliminary Budget Analysis provides a detailed analysis of the implications of some of the “Big ticket” items including superannuation, income tax and tobacco (see: http://www.ausbudget.org/) but here I will focus on the broader question of whether the Budget strikes a balance in Megalogenis’s terms between staving off recession and affecting renewal. And an assessment of whether the Budget is fair?

Typically elections are won by political parties that can demonstrate their capacity to manage the economy hence budget time provides government and opposition with an opportunity to pilot their key campaign messages and prove their credentials as the best managers of the Australian economy. The Morrison-Turnbull budget has certainly displayed a degree of fiscal responsibility and balance but without engaging in the radical adjustments required to transform Australia’s economy. There was much kite flying of new policy in the run-up to budget and it is now clear that the Government decided to leave out the tough decisions that would require significant negotiation, particularly around what can be termed the devolution reforms – the series of reforms necessary to get federalism working in the national interest – City deals, tax reform powers for the states, as well as populist issues such as higher education deregulation.

So we end up with a professional budget but one that does not meet the Prime Minister’s own insight that “In this new economy we need Australians to be more innovative, more entrepreneurial and government should be the catalyst…this requires government to transform how it does its business”. Unfortunately, for this budget read “business as usual”.

 

Is the budget fair?

It’s generally fairer; but it depends on whose seat you’re sitting in. Unsurprisingly given the ideological complexion of the Coalition the budget still overloads opportunity towards the top end of town. Although our analysis shows that in contrast with the last budget the combined effects from both the superannuation and the income tax system change translate to a minor reduction of tax for some households but the highest income group will experience an increased tax due to the reduced concessional super contribution limit.

At the family level, most families will experience a small tax cut, but households with the highest 20% equivalised disposable income[1] can expect a small increase in the total tax payable on average. It should be noted, that the budget measures this year tend to affect very high income earners more, and the differences within the top 20% can be large. The deficit repair levy does not affect this particular analysis as it will not be removed until 1 July 2017.

Moreover, Turnbull and Morrison have learned from the Abbott-Hockey budgets and have introduced no punitive measures that scapegoat particular groups in Australian society with the exception of what has been termed the “Google crackdown” on multi-national companies and smokers.

The budget measure of raising tax will adversely affect 1 in 5 households in Australia who consume tobacco, and have a median weekly expenditure of around $60 on tobacco products. These measures will likely affect poorer households more than the top earning ones as the prevalence rate of smoking is higher compared with the richer households.

It is also unsurprising, given that there is an election on the horizon, that there are few big losers from this budget (with the evident example once again of the Australian Public Service and by implication Canberra) at least when compared with the last budget. However, the government’s contention that they’re not increasing tax is a difficult one to square with the evidence.

 

Who do you trust to run the country?

So when the budget reckoning is over and Australian households have made marginal adjustments to their spending plans, one fundamental question will remain – who do you trust to run the country? Is this the right budget for uncertain times? Will Australians trust the government’s narrative that this is an economic plan for jobs and growth when the budget will continue to be in deficit for the next four years? Will it trust some of the more contestable assumptions underpinning the government’s growth forecasts? Crucially – given what I said at the outset – are there sufficient trust building measures in this budget to reconnect government and the citizen and make them care once more? Or can the opposition win the war of ideas on economic matters – a significant challenge given its track record since 2007? We will see on July 2.


References

  • Megalogenis, G. (2016), Balancing Act. Australia between recession and renewal. Quarterly Essay, 61, pp. 1-77.
  • Evans, M., Stoker, G. & Nasir, J. (2013), How do Australians imagine their democracy? Australian Survey of Political Engagement 2013. Canberra, IGPA. Available online at:
  • http://www.governanceinstitute.edu.au/magma/media/upload/ckeditor/files/DEMOCRACY%20REPORT-%20final(1).pdf.
  • Evans, M., Stoker, G. & Halupka, M. (2015), Power, powerlessness and Australian democracy, Museum of Australian Democracy/IGPA. Available online at:
  • http://www.governanceinstitute.edu.au/magma/media/upload/ckeditor/files/The%20Power%20of%20One%20Voice-V%209-print%20version(1).pdf.
  • Evans, M. and Stoker, G. (2016), ‘Political participation in Australia: Contingency in the behaviour and attitudes of citizens’, Australian Journal of Political Science, DOI: 10.1080/10361146.2015.1123672.
  • Stoker, G. and Evans, M. (2014), The “Democracy-Politics Paradox”: The Dynamics of Political Alienation. Democratic Theory, 1, 2, pp. 26-36.

[1] OECD-modified equivalence scale is used where household head has a weight of 1, each additional person 15 years or older has a weight of 0.5, and 0.3 for each child under 15 years.

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