BUDGET Better than nothing isn’t great
Changes to the tax thresholds and Working for Families are overdue
It is the better than nothing Budget. Steven Joyce has hardly thrown fiscal caution to the winds. It would have been intolerable for the Government to crow about how well the economy is doing and project ever fatter surpluses and falling debtto-GDP ratios while doing nothing about the pressure on the finances of lower- and middle-income families.
Both the increases to the income tax thresholds and the changes to Working for Families tax credits are overdue.
The income tax scale was last adjusted in 2010. So we have had seven years of fiscal drag, or bracket creep, where as income rises, more and more of it will be in the taxpayer’s marginal tax bracket, delivering a slow but relentless increase in the average tax paid on every dollar earned.
But the increase in the second threshold — from $48,000 to $52,000 — is less than would be needed to compensate for inflation since 2010.
The maximum tax cut under the new scale would be just over $1000 a year.
The changes to Working for Families are a case of good news and bad news. The value of the family tax credit has been raised, but so has the rate at which it gets whittled down once family income rises above a pretty modest $35,000.
That abatement rate will add 25 percentage points to the effective marginal tax rates of those receiving the tax credit, up from an already high 22.5 per cent now. Someone on the average wage and eligible for Working for Families would now lose 55c in every additional dollar earned.
The fiscal cost of Working for Families has been steadily falling. In 2010-11, the four tax credits cost the revenue $2.8 billion. Five years later it had fallen to $2.4b. That is a 14 per cent decline in dollar terms and an even steeper decline in real terms. The proposed changes would claw back most, but not all, of that.
The changes foreshadowed yesterday widen the two lowest tax brackets, benefiting all taxpayers; it is only in percentage terms that the cuts are lower for those on higher incomes. Those in the $70,000-plus bracket represent just under one in five taxpayers but collectively they contribute 62 per cent of the income tax take.
The Government also proposes raising the accommodation supplement by the best part of $400 million a year. In a tight housing market, that is effectively a transfer from taxpayers to landlords.
These changes cannot take place until after the election, so there is an element of political incentive in them. It remains to be seen how Labour and the Greens will respond.
The broader context is that household finances are under pressure.
The dire state of the housing market in many parts of the country
We are at a stage in the economic cycle . . . where it is about as good as it gets
has pushed household debt, relative to incomes, to a very high level by historic standards.
The cost of servicing that debt is rising too. Mortgage rates have been rising for a year and are liable to continue to do so as global interest rates begin to normalise, given how much of the money the banks lend here has to be imported.
Meanwhile, we have seen the bottom of the inflation cycle, the most recent read for the annual rate being 2.2 per cent. And income growth is sluggish. In the year ended last March, average weekly earnings for wage and salary earners did not increase at all, when adjusted for inflation over the same period.
In these circumstances, for the Budget to have entrenched yet another year of fiscal drag and continued the squeeze on Working for Families would have been a hard sell.
Because we are at a stage in the economic cycle — more of a hump than a peak — where it is about as good as it gets.
The Treasury is forecasting the real economy to expand by a cumulative 10 per cent over the next three years.
When the effect of price changes is factored in, nominal gross domestic product — a rough proxy for the tax base — is expected to rise 15 per cent.
But two of the factors which have been boosting the tax take — strong population growth and more inflation than we have seen for years — also affect the spending side of the Government’s accounts.
The three big-ticket items, health, education and superannuation, mop up the lion’s share of the increase in Government spending in the coming year, which at $3b is barely enough to keep it from shrinking in real per capita terms.
The Budget reaffirms the Government’s determination to reduce its debt relative to the size of the economy. This year it is 23.2 per cent, an extremely low level by rich country standards; the average, according to the International Monetary Fund, is 71 per cent.
Even with a hefty increase in capital expenditure, the Government is on track to meeting its target of reducing that to 20 per cent of GDP over the next three years.
And it yesterday confirmed a target of further reduction, to between 10 and 15 per cent of GDP by the middle of the 2020s.
In round numbers, every 1 per cent of GDP represents around $3b which the Government would otherwise have available to spend. The opportunity cost of the debt objective, in other words, is significantly greater than the cost of the families income package announced yesterday.
Shock-proofing the Crown’s balance sheet in this way is a useful thing to do. But it does not come cheap.