A political budget

by David Taylor

The Federal Budget will be handed down in parliament on the 8thof May.

The spin from Canberra would suggest that in order to hold up Australia’s reputation as one of the best performing economies in the developed world, the government needs to increase taxes, cut the deficit, and reduce its debt. This would suggest a very tight budget indeed. And of course you could argue that it’s the fiscally prudent thing to do at a time when many economies around the world are swimming in mountains of IOUs.

Even from a political standpoint, it’s very straight forward. It’s now engrained in the thinking of politicians that fiscal nirvana involves producing a budget surplus. However, while a fiscal surplus can provide a very solid objective, it’s not always warranted. Traditionally, governments are there to provide a counter-cyclical backstop for the economy - raise taxes in good times (when you have a surplus), then drop those taxes and spend that surplus in more challenging times.

When you boil it all down though, it’s clear that this year’s budget will involve a degree of income re-distribution through tax increases and new spending initiatives. There is both a political agenda to the government’s fiscal policy, and a genuine desire to redistribute income to balance the economy. You could very likely luck-out though (be worse off) if you’re not considered politically important to the government and/or you’re relatively well off.

Specifically, there are a few areas of the budget that tax enthusiasts will be particularly interested in. They include: The private health insurance rebate for extras, the education tax refund and superannuation tax concessions.

The super tax concessions are particularly noteworthy. At the moment, all Australian tax payers cough up 15 per cent tax on their super contributions. That means for those in the top income tax bracket (earning above $180,000, and paying 45 per cent tax), many can squirrel away money into super and only pay 15 per cent tax on that money - a 30 per cent concession/discount to the normal rate of 45 per cent.

If you earn $50,000, the tax concession on your super contribution would be around 15 to 20 per cent – significantly lower than a high income earner. The government doesn’t think that’s fair. It’s going to change this so that anyone earning over $300,000 (just over 1 per cent of the population) will pay 30 per cent on their super contributions – significantly reducing their tax concession and handing the government over $1 billion in the process. Workplace Relations Minister, Bill Shorten, says high income earnings will still receive an appropriate discount, but this is clearly a tax on the rich. It’s similar in its character to the tax policies around health insurance and, to a lesser extent, the carbon tax.

The Gillard Government is trying to build its economic credibility. It’s the one aspect of the Labor party that was left wanting during the Howard years. The government has promised to move the budget back into surplus, and taxing big business and high income earners is clearly the easiest way to achieve this.

Some income redistribution is appropriate, but even if it doesn’t carry political risks, it does carry economic risks. And a myopic pursuit of a budget surplus for political reasons (and misguided economic reasons) is just bad policy.

This year’s Federal Budget has the potential to be quite controversial. 

David Taylor

Disclaimer

The content in my blog is non advisory, please do not interpret this as advice in any way shape or form. These are just my thoughts and nothing I say should be acted upon.