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Relying on the poor to fix the budget is not much of a plan

Between the May budget and the actual outcome for the 2017-18 financial year less than two months later, “personal benefits expense”, read welfare spending, fell short of estimates by $345 million.

The actual spend on assistance to the aged was $80 million lower than forecast by Scott Morrison seven weeks earlier, assistance to veterans and dependents was $99 million lower, assistance to people with disabilities was $95 million lower, and student assistance was $101 million lower.

Contrary to the narrative about record job creation, assistance to the unemployed was $52 million higher than the Treasurer estimated.  New jobs are barely keeping up with population increase.

Spending on unemployment benefits remains low in comparison to other welfare outlays at about one quarter of assistance to the aged, one third the assistance to families with children and less than one half of disability assistance.

Spending over the year on vocational and industry training was a paltry $25 million, which was $4 million less than quoted in the budget.  It appears the states are bearing the brunt of retraining their workforces.

For those who are lucky enough to be employed, a recent paper by the Parliamentary Budget Office shows that the government is relying on people in the middle quintile, averaging $46,000 taxable income a year, to help them reach surplus.

“This group of taxpayers is projected to face an increase in their average tax rate of 3.2 percentage points by 2021–22, as a higher proportion of their income is taxed at the 32.5 per cent rate. Their average tax rate is expected to increase from 14.9 per cent to 18.2 per cent.”

A longer-term perspective shows that, for all but the lowest quintile, the increases in average tax rates since 2009–10 are offsetting reductions in average tax rates that occurred during the 2000s.

The reason that people in the lowest quintile are largely escaping the increasing impost is because most of their income remains below the effective tax-free threshold which Labor, under Julia Gillard, more than trebled from $6000 to $18,200.

In order to distract from his appalling judgement elsewhere, Malcolm Turnbull made a vague promise to think about maybe reducing income tax rates for some people some time or other.

This is going to be a very interesting discussion, if it ever happens, because, at the same time, Turnbull is increasing everyone’s taxes through an increased Medicare levy from 2% to 2.5%.  Labor wants this to only apply to those on over $87,000.

Labor also wants to reimpose the 2% deficit levy on high-income earners meaning those on incomes of more than $180,000 would pay a 49.5% marginal tax rate.

Whilst increasing taxes for most individuals through the Medicare levy, Turnbull and Morrison want to slash company tax rates for big business by 5%.  This will also result in higher personal income tax for investors because, the less the company pays, the less the franked dividends that domestic shareholders receive.  Foreign shareholders will be the beneficiary of this change.

As the government tries to sell the idea that they are the party of lower taxes, it always amazes me that no-one mentions the GST which increased the price of almost everything by 10% and which is often mooted as increasing – something the Labor party also opposes.  They also never mention the significant increase to the tax-free threshold under Labor which saved someone earning $18,200 pa $1,830 in tax.

Under the stewardship of the Coalition, net debt has risen from $161 billion in August 2013 to over $346 billion by the end of October 2017 without the excuse of a global financial crisis.

I have no problem with debt per se if it was being invested in productivity enhancing activities which improved our standard of living but committing to $400 billion capital expenditure on war toys over the next twenty years, on top of the already very generous and ever-increasing defence and national security budget, seems outrageous and not in keeping with economic strategy elsewhere.  The idea that giving foreign armaments suppliers hundreds of billions of dollars will create jobs in Australia is akin to relying on Adani and their possible Chinese partners to solve our unemployment and energy supply situations.

Anyone looking for a cohesive strategy or long-term plan from this government would be sadly disappointed.  We bounce from one ideological thought bubble or populist announceable to the next, none of them informed by thoughtful analysis, expert advice, credible modelling of alternatives or the future best interests of the nation..

Most, if not all, of this government’s ideas are to shore up their own power by appeasing their donors, an increasingly fractious Coalition partner, and an unrepresentative membership base.

Meanwhile, the country waits for a leader.


27 comments

  1. Freethinker

    If we agree that the government is achieving what their ideology and social class expect we have to agree that they are doing a good job and Malcolm have managed to entertain the electorate with his “charisma”
    The only failure so far is reducing the taxes for the business and upper class people that Mathias said that they are working on it.
    What this government is doing it is the same as the one in England, the Republicans in USA, the right in Argentina, Brasil and other countries.
    Have a look at Hammond’s budget (https://www.theguardian.com/business/2017/nov/23/uk-no-earnings-growth-budget-brexit-productivity-ifs) and it is in the same lines as the budget of Hockey and Morrison.
    The Brazilian it is even worse.
    The interesting point is that people vote for these “Masters in Macroeconomics” here and over seas.
    IMHO, we can protest all what we like in excellent sites like this but we will not achieve much because nearly 100% of the readers are in agreement and political educated to know that this government it is hopeless.
    We have to educate the others, the ones that look at One Nation or micro parties for solutions, we have to let the ALP know that we will not tolerate any more neoliberalism economics and further more that we expect that if they are in power to reverse many of the policies implemented by this government.
    We have to remember back in 2001 when Beazley’s refusal to commit a Labor government to reversing any of the government’s policies, this cannot happen again, we need a change.

  2. win jeavons

    Capitalism is rotting from the top down. Time to start to think again, not swallow nonsense. Yes, it’s time!

  3. pierre wilkinson

    Record declines in wage growth, massive rise in the wealth gap, a government with IPA policies, cuts to penalty rates, less full time, more part time employment, the social sector at poverty rates or below…
    and the retail sector wonder why sales are down…
    thanks Kaye Lee, love the depth of research you are prepared to go to, to make your point so convincing. I would have hated debating you in school, hahahaha.

  4. Kaye Lee

    I was a PITA at high school. I remember my father saying to me around age 16, “You don’t always have to tell people when they are wrong”. It was timely advice but it still rankles when I hear people saying things I know are crap. I am slightly better at knowing when to bite my tongue nowadays but politicians are fair game for fact checking.

  5. Peter F

    As Philip Adams often says ; Don’t hold back, Kaye. Keep up the good work. If you are ever wrong there will be many to enlighten you, never fear.

  6. Kaye Lee

    I have been wrong before and will be again. When I am, I would really prefer to know. As I always said to my maths classes, you learn from your mistakes.

    (Harquebus, please disregard above comment)

  7. Matters Not

    re – Meanwhile, the country waits for a leader .

    Nope. What is needed is leadership. Time we moved beyond the concept of a designated leader who knows all.

    Shorten, for example, lacks the wit and wisdom to be our saviour. Not that there’s anything wrong with that. Neither did Whitlam.

    It’s the cult of the individual that masks how and why successful governments operate. It’s leadership we need.

  8. Kaye Lee

    I agree MN. Leadership would have been a far better way to put it.

  9. Matters Not

    KL, seems to me that the current Labor Team has much to offer. Whether it be Wong, Bowen, Dreyfus, Burke, Leigh, Butler, et al – there’s plenty of talent that can provide leadership when it comes to policy formulation. (You might note that I have left out Plibersek, because I am so disappointed in her when it comes to policy as oppose to the politics.)

    Tania missed so many opportunities when it same to Gonski – preferring to concentrate on ‘base’ politics. A real shame. From a hero to a zero.

  10. PK1765

    The issue with the discussion on tax is that everyone seems to forget what the purpose of taxation actually is…. and it is not revenue raising as taxation does not fund Federal Government spending…Tax is a fiscal management tool and in effect extinguishes money that the Federal Government as the sole creator and issuer had spent into existence in the first instance. Basic accountancy taxation is on the other side of the General Journal Ledger to the Federal Government creation and issuing of money onto the economy by spending it into existence.

    Federal taxes function, first and foremost, to create aggregate demand for the intrinsically worthless currency.

    After that, federal spending, “adds” net financial assets to the private sector, and federal taxes “subtract” net financial assets from the private sector.

    Tax is a fiscal management tool used to control inflation and stablize the market by taking “money” out of the economy… that is to stop it from overheating… we don’t have an inflation problem.

    The other purpose of tax is to be a behaviour modifier… excise on alcohol and cigarettes. To a lesser extent it reduces inequality by reducing the financial assets of the wealthy.

    Federal spending and federal taxes are fiscal management tools. Nothing more… but while everyone continues this false rhetoric nothing will change and the poor and disadvantaged are the ones that suffer!!

    The Operational Reason Why Federal Taxes Are Not Revenue For The Federal Government

    Operationally, it is impossible for the federal government to spend the proceeds of tax collections. Since this is a major topic of interest for laypersons, I’m going to explain operationally why your dollars paid in federal taxes are not spent by the federal government on anything.

    http://www.realprogressivesusa.com/news/economic-issues/2017-06-29-the-operational-reason-why-federal-taxes-are-not-revenue-for-the-federal-government

  11. Matters Not

    PK1765, yes I’ve heard it all before. Again and again. The political problem is that the vast majority of voters don’t accept your construction of reality. So what should we do about that?

    How can we ‘convert’ them? That’s the political problem that’s not being addressed. Is it not?

    Perhaps a crusade?

  12. Harquebus

    Kaye Lee
    I won’t disregard your comment but, I won’t respond to it either. It is such a great article. You are at your best with this one.
    In regards to your article though, for me, it is just more of as expected. Symptoms of that which I keep harping on about which, on this occasion I won’t do.
    I always like to say, the more that you know, the more that you realize what you don’t know.

    “A person who never made a mistake never tried anything new.” — Albert Einstein

    There are no talented politicians in our parliaments. All have ideologies that are set in concrete and all are determined to keep us on our current trajectory. Jobs ‘n’ growth. The QLD election has been about creating nothing else when, we should be abandoning both.

  13. Kyran

    “Sometimes the poor are praised for being thrifty. But to recommend thrift to the poor is both grotesque and insulting. It is like advising a man who is starving to eat less.” Oscar Wilde
    That increase in the tax free threshold was good, but didn’t go far enough. There is some discussion on the merits of a ‘universal basic income’, which is seen as a guaranteed minimum income for all Australians. This is seen as a ‘political’ impossibility, ie, the existing parties don’t have the guts to give it a go.
    Why not start a ‘transition’ process by increasing the tax free threshold to $40 or $50k?
    The use of New Start, the DSP, the age pension, would be far more flexible and adjusted with quicker impact than the existing framework if that base was altered.
    With regard to the company tax cuts, this government is no different to any other government as it continues to rely on comparing apples with oranges.
    Mr Verrender wrote a month ago about this.
    “The problem is that comparing top line corporate tax rates is an exercise not so much in simplicity, but duplicity.
    There are so many variations unique to each jurisdiction that comparing the statutory rate alone is all but meaningless.”

    “Here is the real story. Our statutory rate may be 30 per cent, but even on that measure, we rank in the middle of the field.
    Our average corporate tax rate, however, is just 17 per cent, and when it comes to effective corporate taxes, companies in Australia pay just 10.4 per cent.
    The discrepancy relates to a range of things, including how quickly firms can write down or depreciate the value of their investments or where they have sourced their finance.”

    “It’s an odd strategy. Charge less so you don’t lose as much through deceit.
    As we’ve seen time and again, big corporations with the aid of the Big Four accounting firms, look for the lowest rate of tax globally, domicile themselves there, and shuffle their profits through those countries.”

    http://www.abc.net.au/news/2017-10-16/verrender-corporate-tax-cuts-who-wins/9052600

    Here’s a thought. Just get the bastards to pay what they should. To do business in Australia, you have to create an Australian company with an Australian address. If they really want to get ‘fair dinkum’, they can limit CEO salaries to ten times their average worker’s pay.
    With regard to vocational and industry training, and notwithstanding the abuse of the ‘workers visa’ system, that’s a no brainer. The ‘transition’ pathways from years 10 to 12 were working. Bring them back. As for University education, there appears to have been very little wrong with free merit based education, except for the dullards that currently occupy the rarefied space in Canberra. They say the exception proves the rule.
    There was a quote accredited to an 8 year old girl, Khet Khet, fleeing Myanmar.
    “If I cannot go to school, I cannot be a teacher. I will have to be a servant and do what others ask of me.”
    As for the war toys, they could at least bring back a tendering process and some pretence of oversight. Until then, it can only be seen as a very expensive collection of grubby little deals done with grubby little companies and grubby little countries (not that we can lecture anyone at the moment).
    The Foreign Policy Whitepaper is yet another failure of this government and ties in with the ‘war toys’ narrative.
    “While the White Paper sends a clear message Australia will pursue its own sovereign interests, it cannot afford to sit on the fence if the worlds’ two most powerful nations are in conflict.
    And one of the defining points of difference between them is adherence to the rules-based system. That makes our diplomatic efforts, as articulated in the White Paper, to promote and spread those principles even more urgent.”

    http://www.abc.net.au/news/2017-11-24/foreign-policy-white-paper-analysis/9186234

    Our government wants to talk about a ‘rules based system’, whilst unashamedly ignoring the rules we have already signed to. To underscore this, they have pledged a spending increase to 2% of GDP on toys, whilst cutting back on foreign aid. Foreign aid has, historically, proved a far more productive vehicle for regional influence than threats. Particularly when the toys we are buying seem to have little prospect of working.

    “Anyone looking for a cohesive strategy or long-term plan from this government would be sadly disappointed.”
    Thank you Ms Lee and commenters. Take care

  14. wam

    Kaye, all students can be taught some of the topic some most of the topic and a few, at worst, just need a hint.
    The test for maths has 3 levels: on topic, extension and only for the best. ie 70% 25% 5%. Eventually the maths teacher has cowed the 70% and many of the 25% and, knowing that they can never get full marks they have switched off
    The hansonites and rabbottians are concentrating on the majority’s level of understanding but labor’s got the 30% and hopes for a drip down effect to pick up enough of the majority. That only occurs when an exceptional leader turns up. Gough, hawke and the lemon fit the bill but not bill?

    M not
    no no no parking in the top field is the level of torpid tania and little billy. The former has occasionally splashed into power since the posters but the latter has not beaconsfield left

  15. Harry

    PK1765 and Freethinker: you are “on the money” with your contributions, in my opinion.

    I would add that who to tax and how much is THE question. It is CRUCIAL that we try to understand how the economy functions in reality as opposed to all the propaganda that compares the federal government to a household. Once we understand that it is NOTHING like a household the scales should fall from our eyes. I have to admit that its quite counter-intuitive at first !

    Federal taxes DO NOT FUND federal spending. (though all the rhetoric from both politicians and most business economists and various the smokescreens obscure this reality, esp the fiscal statement known as the federal budget), the focus should shift to one of the key functions of taxes. I quote from an excellent short explainer linked to below:

    “So, why do we pay taxes? There are many distributional, or microeconomic, functions which the tax system fulfils. However, at the macroeconomic level, the purpose of taxation is very simple. It is necessary for people to pay taxes to destroy (to use a provocative word) some private sector spending power, to make room within the economy for the government to conduct its desired spending on public goods and services, without pushing total spending in the economy beyond the productive capacity of the economy and causing inflation. Taxes limit inflation, helping us to maintain the spending power of money, so that people maintain their confidence in the value of money”.

    This means that all the BS about “debt and deficits” can be disregarded as self-serving nonsense or simple ignorance.

    The Coalition prefers to tax its ideological bedfellows the most lightly (eg business and “lifters) as in their thinking these people contribute the most. Also they have their sacred cows and preferred spending favourites as Kaye Lee has made clear, ie the military, security, border control, law and order, roads over public transport, subsidizing private health and education, private-public partnerships, privatisations etc. The bonus is their mates get to profit from it.

    https://era-blog.com/2016/12/05/paying-for-public-services-in-a-monetary-sovereign-state/

  16. MikeW

    Beginning to wonder what planet this government is on. Tax breaks for business’s, have a look at the ATO website you’ll be scrolling down a long way before you find a business that actually pays any tax and then even that is a joke.
    Most government revenue comes from PAYE workers, yet this bunch of clowns want stagnant wage growth and peoples penalty rates taken away lowering income, spending, resulting in a fall in revenue.
    As for their unemployment figures Roy Morgan research figures are more accurate at 9.5%.
    The only increase in jobs has been for casual and voluntary workers, one day a week and your not unemployed.
    This government isn’t a joke it’s a disaster.

  17. Harry

    @ Matters Not: I agree that voters do not understand how “the system” actually works as opposed to all the BS that serves the very well-off to the detriment of the majority. But even on this site, where people are quite politically switched on there is still evidence of unhelpful neoliberal conceptions. Many simply “do not get it”, judging by their comments but I do not blame them.

    Until recently voters have accepted Coalition and business economists warnings that the budget deficit and ballooning “debt” require hard but unavoidable public spending cuts. The problem for the Coalition is that they have undermined their own argument by substantially increasing the “debt” via spending on their preferred programs and by largely ignoring tax avoidance. They have also dialled down Abbott’s scare campaign that resonated with voters.

    Voters seem to realise there is something rotten but can’t quite identify what. In the meantime, low wage growth and job insecurity is being expressed in both high support for One Nation and other right wing parties.

    I think it’s clear that a majority of voters are prepared to vote the Coalition out but it’s not clear how much of an improvement Labor will be. Labor SHOULD spend more on education and health and other public programs such as infrastructure, possibly have the government act as employer as last resort to mop up most unemployment.

    Unemployment is always a political choice! Not an economic one.

    It should also reverse most of the Coalition’s cuts and make it very clear to voters that it will go after the sort of blatant tax avoidance we have seen and that has caused so much voter anger.

    They will have to counter the Coalition’s inevitable attempts to scare voters back with usual claims that Labor “will spend like drunken sailors”, “class warfare” etc.

  18. diannaart

    Kyran

    “Sometimes the poor are praised for being thrifty. But to recommend thrift to the poor is both grotesque and insulting. It is like advising a man who is starving to eat less.” Oscar Wilde

    No fooling Oscar Wilde – who would, no doubt, have been able to recognise hypocritical superiority by a the mere twinge of an upper lip.

    Labor giveth (a little) when in power.

    LNP taketh (more than a little). Which is why we are steadily declining as an egalitarian society.

    I am so utterly tired of this broken record.

  19. totaram

    Matters Not: As Harry and I have discussed previously, voters don’t need to accept our “alternate construction of reality” (as you put it). They only need to understand the 3 sector financial identity of macro economics, which is completely non-controversial, unless you dispute arithmetic. That will show them that “bringing the budget back to surplus” and other such mantras are a BAD idea unless the nation has a massive trade surplus.

    Once that is understood, other matters can be explored and they can find out which “construction of reality” is the real one and which is myth.
    By the way, according to your preferred construction of reality, increasing govt deficits lead to increasing interest rates “as the bond traders demand greater returns”. The reality in the last 4 or five years has been the exact opposite – increasing govt. deficits and reducing interest rates. Any explanation from the preferred construction of reality?

  20. Matters Not

    totaram re:

    voters don’t need to accept our “alternate construction of reality”

    Really? Apparently all they need to understand is:

    the 3 sector financial identity of macro economics, which is completely non-controversial

    Yes the 3 sector financial identity of macro economics is widely understood by all and sundry and is completely non-controversial. LOL. Give me a break. The concepts you us to construct your reality are not widely shared. Indeed, in my every day dealings, I am yet to meet anyone who utilises those concepts – let alone anyone who (apart from MMT adherents) who have any idea as to the meaning that might be given.

    totaram, we all use concepts to (intellectually) construct reality. But perhaps you have other explanations?

  21. Harry

    Matters not:

    Could you share with us your economic concepts of reality? I am trying to understand where you are coming from.

  22. totaram

    MattersNot: I did not claim that the 3-sector financial identity is widely understood. Please read my post again and verify. I did claim it is non-controversial because the only “concepts” it uses are those of arithmetic. Perhaps you claim arithmetic is not widely accepted and the “concepts” by which most people “construct their reality” does not include arithmetic? I think that would be news to most people.

  23. Kaye Lee

    Harry or totaram,

    Perhaps you can explain the effect on exchange rates of a floating currency when public spending is only restricted by productive capacity.

    You argue that the purpose of taxes is to give a currency value but surely the ability to pay down private debt does the same thing.

    I also have real issues with the conflating of the government with the RBA. They are not the same thing.

  24. totaram

    “Perhaps you can explain the effect on exchange rates of a floating currency when public spending is only restricted by productive capacity.”

    In short, no direct effect as far as I understand.

    Indirectly it may lead to a higher AUD because if the money is wisely spent by the govt., the economy will do better, interest rates may be higher and foreigners may be more inclined to invest in Australia, thus increasing demand for the AUD. Recall, that the AUD was higher than the USD after the GFC simply because stimulus spending ensured no recession in Australia while the rest of the world was struggling.

    “You argue that the purpose of taxes is to give a currency value but surely the ability to pay down private debt does the same thing.”

    I am unable to make sense of this sentence. Please elaborate.

    As far as I know MMT does not argue that the purpose of taxes is to give value to the currency. Taxes have two functions:
    1. to ensure the fiat currency is used if that is the only currency in which taxes can be paid.
    2. to remove demand from the economy, thus providing more “fiscal space” for govt. spending.

  25. Harry

    Hi Kaye Lee,

    The RBA is a body corporate wholly owned by the Commonwealth of Australia.

    https://www.rba.gov.au/qa/

    The federal Treasurer appoints the governor.

    “The Reserve Bank governor is appointed to a term of up to seven years by the Treasurer”

    https://en.wikipedia.org/wiki/Reserve_Bank_of_Australia

    “Under the neo-liberal policy regime, central banks have, increasingly, been given the responsibility by government for managing the price level. In conducting monetary policy to fulfill their major economic objectives, central banks manipulate the interest rate and attempt to manage the state of inflation expectations”.

    https://modernmoney.wordpress.com/2011/05/02/controlling-inflation/

    and see this article. Please note the links between Treasury and the Central Bank (RBA)

    https://modernmoney.wordpress.com/2010/08/09/deficit-spending-101-%E2%80%93%C2%A0part%C2%A01/

  26. totaram

    Kaye Lee: Of course your question about exchange rates is not answered in simple 3 word slogans so beloved by the neoliberals, but there are further nuances.

    The RBA can intervene in the exchange markets if the AUD is doing things they don’t like. If it goes too high , thus hurting exports, they can “print” AUD and sell them on the exchange markets, thus bringing the AUD down.
    If some entity is trying to crash the AUD, they can buy them up using their reserves of other currencies, but they don’t have to do this because there is no rate that they have to “defend”. That is a relic of the “gold standard” and the Bretton woods regime. A low AUD will make exports highly competitive, imports more expensive and the problem will sort itself out as the economy adjusts. A low AUD favours local production and exports and is generally welcome by locals, except those taking holidays overseas, but holidays in Australia become much more affordable. In case you have some doubts about these issues:

    Is exchange rate depreciation inflationary?

    http://bilbo.economicoutlook.net/blog/?p=32922

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