Treasurer Josh Frydenberg stood up in Parliament yesterday evening to deliver his maiden Budget speech as Treasurer, having inherited the job some seven months ago amidst the Liberal party in-fighting and change of leadership.
There’s a lot riding on this Budget, and it shows. In essence this Budget has one job, and one job only; to put the Coalition government in a position where it has the best chance of retaining government at the yet-to-be-called general election.
Political pundits now put the most likely date of the next election at 11 May, a mere five or so weeks away. We’ll know soon enough, as it’s expected that Prime Minister Morrison will take that drive up to Yarralumla any day now.
But back to the Budget. The Good, the Not-so-Good and the Questionable. What exactly does it contain (other than the phrase “without increasing taxes”, uttered by Treasurer Frydenberg no less than nine times during his speech)?
More importantly, how will it affect you, your nearest and dearest and your prospects for a brighter future? Read on to find out…
Surplus, Surplus – Read All About It!!
You’re going to hear a lot about the projected cash balance headline surplus for 2019/20 of $7.1 billion. Treasurer Frydenberg was at pains to point out that he has delivered the first surplus in over 12 years, and that it is the government’s prudent fiscal management that has allowed Australians to be ‘in surplus’ for the first time in over a decade.
Well, yes and no. A nation being in deficit or otherwise is not quite the same as a household or individual being up to their eyeballs in debt. I won’t bother you with the arcane economic arguments, save to say that it’s probably the global ratings agencies that will applaud this projected surplus louder than any other fiscal or monetary economists. Enough said.
I have no problem with the government running a surplus ahead of schedule, but the devil is, as is always the case, in the detail. And let’s face it, $7.1bn in the context of a $2 trillion economy (as Australia is) is, at best, a mere rounding error.
And therein lies the problem. The headline $7.1bn is a forecast number. We won’t know if it actually eventuates for years to come (and by then you’ll probably have forgotten that we were meant to be in surplus).
I am not a fan of ‘point estimates’ such as these, so I dug into the Budget papers to find the range of possible budget surplus outcomes. Here’s what I found buried deep in one of the papers:
So there it is, that first positive bar in the middle section above. That’s the $7.1bn. But note the shaded range of the so-called “Structural Budget Balance Band” and the mid-point line that is the “Structural budget balance” forecast.
As I said earlier; no fan of point estimates. Now you know why.
Some Rosy Estimates
To achieve the aforementioned projected budget surplus a whole lot of things are going to have to go in Australia’s favour in the next few years.
For starters the price our iron ore exporters receive is going to have to remain stronger for longer. That’s not something in the Treasurer’s control. Nor anyone else for that matter.
Forecasting commodity prices years into the future is an activity best left to soothsayers and Treasury boffins, and I’d back the soothsayers to get it right more often than any econometric model humming away at Treasury.
Beyond commodity prices, there are some interesting assumptions baked into the latest Budget.
I found the key estimates after some digging, and one number stood out like the proverbial dog’s cohones:
That 3 ¼ number is the forecast wage growth in the financial year 2020/21.
Wait, what? It caught my eye because private consumption still accounts for some 60 per cent of GDP in Australia. We need people earning decent and growing incomes, and spending some part of that income for shops to stay open, businesses to hire and train staff and, let’s face it, for the whole merry-go-round to keep going round.
Note how the forecast for 2019/20 is a mere 2.1 per cent, but somehow manages to scream upward to 3.25 per cent three years later. Pardon me for being so, but I’m sceptical.
I’ve seen these sorts of wage growth forecasts made, then failing to materialise, too often to take them without question. So I wanted to know when was the last time Australian workers experienced an increase in wages of 3.25 per cent or better in a financial year.
I put the question to the collective Twitter economics brains-trust, and Peter Martin, former economics editor of The Age (and now Business and Economy Editor at the ever-excellent The Conversation) came back fast as a whip:
Yup. Depressing as it is, the last time the average Australian worker experienced a wage increase of 3.25 per cent or better in a financial year was 2012/13. For those who remember, 2012 was the year ‘The Avengers’ was released.
Yeah, I know. That seems like a lifetime ago to me too.
The key thing about Peter’s contribution above is that forecasts of wage growth have consistently fallen short of the mark, so a sudden jump up to 3.25 per cent by 2020/21 (from a forecast 2.1 per cent for 2019/20) should be taken with a truck load of salt, not just a pinch.
Helping Pay Your Ginormous Electricity Bill (Kinda)
One budget item that was pre-announced and confirmed last night is a special ‘one-off’ energy assistance payment of either $75 (singles) or $125 (couples) to partially offset the skyrocketing cost of energy bills.
But there’s a catch. It is available only to some 3.9 million Australians, and chances are, you’re not one of them.
If you’re on Newstart; you’re not one of them. If you don’t receive the Age Pension, a Disability Support Pension, a Carer Payment, you’re not one of them. If you aren’t a recipient of a Parenting Payment (Single) or one of 255,000 veterans and their dependants, you’re not one of them.
In any case, just how much would $75 (or $125 for a couple) cover of your next quarterly energy bill? 25 per cent? 40 per cent? Higher? Let me know. I’d love to find out.
Tax Cuts for Everybody (Almost)
OK. So the energy assistance payment won’t rock your world and put you on easy street, but a tax cut might, right?
Great, because as it so happens the Budget contains a tax sweetner for a whole bunch of middle Australia, and by middle Australia I mean anyone earning between $48,000 and $126,000.
Under the Government’s Budget proposal (note it still needs to go through both houses of Parliament), people earning between $48,000 and $90,000 will be entitled to up to $1,080 in tax relief for singles or $2,160 for dual income families, via a Low to Middle Income Tax Offset (LMITO).
The real sugar hit comes in 2024/25 (provide of course the current Government is still in power then), when the current 32.5 per cent Marginal Tax Rate (MTR), which currently applies to taxable incomes between $37,001 and $90,000 will be reduced to 30 per cent.
If this plan does come to fruition, it is expected that some 94 per cent of taxpayers will then be on a MTR of 30 per cent or less in 2024/25.
Other Initiatives of Interest
The Budget has clearly been framed to deliver more carrots than sticks, as is normally the case with pre-election budgets. That said, there are some genuinely progressive measures in the Budget, and for that the Government must be congratulated.
The first thing that caught my eye is a proposed $737 million over 7 years to deliver more services to people living with a mental health issue.
A timely response, given some eight Australians end their lives each day, and mental health-related illness now is one of the fastest growing public health concerns. Of this amount, some $461 million will be dedicated to youth mental health and suicide prevention.
Kudos to the Government for increasing funding to this area of critical need.
Keeping with the health theme, there is also additional funding to establish a comprehensive cancer centre in Sydney ($100 million), a centre of excellence in immunotherapy in Victoria ($80 million) and a new brain and spinal ward in South Australia ($30 million).
Skills and Apprenticeships
The Government is also creating additional apprenticeship incentive payments in areas of identified need to support up to 80,000 additional apprentices over five years.
Under the scheme employers will receive up to $4,000 and apprentices up to $2,000. A great initiative to enhance vocational training, and one that should be applauded.
Summary – A Millennial Friendly Budget?
In a word – No. If you’re a hard-working 20 or 30-something striving to get ahead, save for a deposit on your own property, perhaps contemplating starting a family at some point in the next few years, this is not a Budget that is going to set your world on fire (other than the aforementioned potential tax relief from 1 July 2024 onward).
The concept of ‘intergenerational inequity’ is bandied about a lot these days, but there is something genuinely problematic in Australia’s fiscal and taxation policy settings (particularly superannuation) that pits a minority of Boomers up against the majority of Millennials.
While higher-income younger Australians face the full force of our marginal tax system, with little potential for tax relief, the lion’s share of the circa $35 billion in superannuation tax concessions each year goes to a small cohort of over 60s who have arranged their financial affairs to maximise the overly generous concessions available to them.
The refund of excess franking credits (some $5bn per annum) on franked Australian dividends; tax-free income on amounts drawn from super pensions from the age of 60 onwards; the ability to make generous contributions of private funds into superannuation (a measure that this Budget further aides). All point to an unsustainable, and ultimately self-defeating, paradigm that will place a disproportionate burden on today’s Millennials and Gen Z.
But hey, who I am to prognosticate? I’ll leave it to a genuine expert on the matter to explain it far better than I could.
So there you have it.
The Good, the Bad and the Ugly of Treasurer Josh Frydenberg’s first Budget. He’ll be hoping it won’t be his last. We’ll find out in less than seven weeks.