Devils in budget detail

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Ah yes, it's that time of the year again — where consulting firms dust off their trusty budget models and everyone has a laugh at budget surplus projections at the expense of poor Treasury analysts (forecasting revenues is hard work, so I'm told).

Piggy bankLet's also consider for a second how at this time of the year, numbers seem to lose some of their weight, becoming important only relative to the spending on things we care about. But I digress.

It's hard to make anyone care about budgets, and this one is no different, but bear with me and together we'll wade through the details on the government's (likely) final budget before the election.

The highlight was the tax cuts, and I suspect that we'll be talking about them for a while, partly because the government might not be able to pass the legislation. The government's personal income tax plan, like most wellness programs, is a three-step process.

The first step is tax relief to low and middle-income earners through the low and middle income tax offset (in addition to the existing low income tax offset). The offset will benefit households earning $37,000 or less a year by up to $200, and up to $530 for those earning between $37,000 and $48,000. For those earning between 48,000 and 90,000, there's a maximum of $530 on the table — about 147 coffees at a mid-priced cafe in Melbourne.

Addressing the frequently lamented issue of bracket creep — where increases to wages through inflation pushes people into higher tax brackets — the government will increase the top of the 32.5 per cent threshold from $87,000 to $90,000 from July 2018. Changes to the low income tax offset from July 2022 will also ensure that those earning between $37,000 and $67,000 will see their take home pay increase.

As for step three, the government is opting for a flatter system of personal income taxation whereby they will be removing the 37 per cent bracket, so those whose earnings exceed $120,000 and earn up to $200,000 face a marginal tax bracket of 32.5 per cent. These measures are expected to cost the government budget about $13.4 billion over the forward estimates.

 

"It won't actually save accountholders that much in terms of fees — but it is good optics for the government."

 

Analysts generally don't pay much attention to figures shown beyond the forward estimates (the next four financial years), as there are too many unknowns. While in the first few years, low and middle income earners will benefit most, modelling from NATSEM has shown that high income earners (those earning twice the average full time salary) will be the key beneficiaries, receiving an extra $13,000 in 2024-25.

The budget reply from the opposition one-upped the tax cuts from the Coalition government, with leader Bill Shorten promising tax cuts of up to $928 a year for approximately four million taxpayers earning between $48,000 and $90,000.

There's not a lot in this budget for young people. Rather surprisingly, given the focus on higher education in previous budgets, not much was announced besides some administrative levies on higher education providers. Definitely not the kind of cuts that the sector has become accustomed to over the last few years.

And despite housing affordability being a key concern of many Australians, housing did not get much of a mention in this year's budget. Quite a shame really. The budget reply from the opposition, by contrast, was replete with a home affordability strategy, which included tackling negative gearing and capital gains tax concessions.

Then there were the stories that didn't get much of a mention in the mainstream press but will net large welfare gains for young people and new entrants to the labour market. Under the budget measure, inactive super accounts with balances of less than $6000 will have a three per cent cap on fees to be charged. This measure has been introduced to ensure that low-balance super accounts are not wiped by fees — a common occurrence particularly among young people.

However, investigating the numbers a bit more, I found that, as with most policy, the devil is in the detail. The government's three per cent cap comes in well above the rate of drawdown in terms of administration and management fees on existing superannuation accounts. This means that the ceiling that the government has imposed on the fees that can be charged is inadequate for accounts that are over $3000 (but under $6000)*. It won't actually save accountholders that much in terms of fees — but it is good optics for the government.

The policy that will help with low super accounts is the government's proposal to make income insurance opt-in only. This is great news for young people who, when they start out in the workforce, are often unaware of the insurance that is available to them** through their superannuation accounts, and end up paying for a product they didn't even know they had access to!

Over the last couple of years, commentary has lamented the lack of discernible differences between the two major parties, with these criticisms reaching a crescendo late last year when the government announced it would be commissioning another Gonski review. Through this last pre-election budget, it is clear now that there are policy differences between the two parties, and what they stand for. Bring on the election.

*Assuming industry super level of admin and management fees, and lost super for three years.

**Income insurance in super is priced according to the age group of the accountholder — the higher the age, and the reservation wage chosen by the accountholder, the more that is paid towards insurance.

 

 

Gabriela D'SouzaGabriela D'Souza is an economist based in Melbourne.

Topic tags: Gabriela D'Souza, Budget 2018, superannuation, tax cuts

 

 

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Existing comments

Thanks Gabriella for your analysis of the budget. One aspect of allocating our tax dollars that has largely been absent from any public scrutiny is military spending- we know $200B has been earmarked for purchasing of subs planes and other materiel but where is this debated? Defence analyst Mike Gilligan challenges the need to purchase 12 subs and 75 F35 fighter jets where the bulk of that spending is going- any thoughts?
Annette Brownlie | 18 May 2018


When will economists realise that macroeconomic reality means that taxes don't fund commonwealth expenditure when the government issues the currency under a free floating exchange rate. Lets stop the myth and tell ordinary Australians the truth. Modern Monetary Theory (MMT) has proven this to be empirically true.
Wayne McMillan | 27 June 2018


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