Budget 2016: Treasurer’s paradox on cuts, sweeteners

This is a “trust us, vote now” budget with Scott Morrison battling to reconcile two conflicting positions — he offers modest election-eve tax cuts while posing as an agent of living-within-our-means restraint as the necessary election virtue.

Malcolm Turnbull and Morrison have learnt from the Abbott-Hockey 2014 miscalculation. They are now apostles of punishing the rich, nailing tax-dodging multinationals, offering bracket creep sympathy for the middle class, super gains for low-income women and staging a series of job-boosting company tax cuts.

It is a budget for the times — a long, hard slog. Everything is gradual, progress is incremental, election giveaways are limited and the task is to manage multiple risks at home and globally. There are few losers, but winners will measure their gains in the years. Indeed, Morrison formalises this by branding it a 10-year plan.

The budget gives the government an election manifesto. It signals its belief in fiscal discipline, corporate tax breaks for jobs, recognising fairness and restraint in spending agendas. It offers little for interest groups, social media or talkback radio. By any test, it is a highly responsible pre-election document that will produce grumbling from virtually every populist quarter.

The sheer modesty of the July 1 income tax cut from a government that believes in income tax cuts — about $315 annually on average or a bit less than $6 a week at the $80,000 threshold — testifies to the nation’s fiscal dilemmas. It mocks the election budget orthodoxy.

If giveaways are the test then Morrison loses. There is no income tax relief for workers below $80,000. But the aim is to create a generation of Turnbull’s tradies and truckies by cutting the small business tax to 27.5 per cent from July 1 and lifting the turnover threshold to $10 million. Eventually all businesses will pay 25 per cent in 2026-27, the end of the ­decade.

The political trade-off or fairness quota for the job-creation corporate relief is the crackdown on super tax concessions at the top end. While 96 per cent of super participants are unaffected, the big shock, undoing the Howard-Costello-Abbott system, is a cap of $1.6m on the tax-free retirement phase. Above this, tax is paid at 15 per cent tax.

Morrison has followed Labor on super policy. This is a fundamental change in Liberal thinking and reveals Turnbull and Morrison as flexible pragmatists. Morrison’s concessional change on contributions is the same as Labor’s (the 30 per cent contribution tax applying to incomes at $250,000) and his move against tax free retirement policy reflects the same principle but different details from Labor.

The two great risks to the budget strategy are Senate sabotage yet again and over-optimism about China yet again. The risks to the world economy are pervasive and highlighted. Year after year the budget estimates have proved to be too optimistic and Morrison has no guarantee he can avoid the same fate.

The dividend from the “growth and jobs” strategy off the back of infrastructure and tax initiatives is that unemployment is forecast to fall to 5.5 per cent. But the great risk to the political strategy is that the public might reject its premise and prefer the Labor alternative: funding new social spending by increasing taxes.

The budget forecasts modest, steady growth of 2.5 per cent for the next two years but deficit reduction is a slow grim task. The budget deficit for the coming 2016-17 year is $37.1bn compared with $25.8bn forecast in last year’s budget for the same year. Structural problems beset the budget and cripple the politics. Revenues have been eroded yet again.

Morrison is trapped carrying the Gillard big spending burdens. The deficit is forecast to fall to $6bn at the end of four years and the budget return to surplus by 2020-21 to the extent these ­estimates have much meaning these days.

The total impact of new policy measures over the forward estimates is a saving of only $1.7bn. Over this period the main deficit reduction comes from higher taxes rather than restraint spending.

There will be extreme political contention about the two major saving areas — a welfare crackdown that funds the NDIS and a proposed new higher education model that scales back full fee deregulation but still aims to achieve major savings by asking students to take a greater share of the cost of their education.

In the end, Turnbull and Morrison must rely upon trust. That means persuading the public its expectations have been too high for too long and that, as Morrison says “it is no easy task to secure jobs and growth in a highly competitive, volatile and uncertain global economy”.