Budget hangover we had to have

The budget aftermath can be compared to a hangover.

The topic I was given was simply: Budget 2018, The Aftermath.

I asked myself what is the aftermath for a budget? For journalists, the aftermath is typically a bad hangover. And that’s not an entirely dissimilar experience for the nation as a whole.

Extra spending must ulti­mately be paid for, through taxes, so to the extent taxes damage the economy we all in a sense suffer a hangover on budget morning.

Budgets have become political more than economic documents and as such they entail announcement of new spending.

The lock-up in Canberra was a design of Paul Keating as treasurer, a way to bring the more important journalists to Canberra as a captured audience.

This was my sixth budget as a journalist for The Australian. In that period annual federal government spending has increased 31 per cent, from $367 billion to $484bn. Note that over that period our population has increased by 9.7 per cent to just under 25 million.

Over those six years the stock of government debt has more than doubled from $257.4bn to $561bn next year. The government’s interest bill has increased from $11.8bn a year to an estimated $18.7bn next financial year.

So, was the budget a success? The budget is about getting a bounce in the polls, which depending on which poll you look at, seems to have occurred. The atmospherics of the budget have been good: back to surplus sooner, paying off debt, tax cuts etc.

One measure for judging a budget is how much the government chose to spend. In technical speak this is a question of “policy decisions”, which are conscious, versus “parameter variations”, which broadly aren’t. Let’s have a look at the impact of these deliberate “policy” decisions in each of the past five budgets. In 14-15 the budget planned a net cut of $14bn over the budget period; in 15-16 an increase of $10.1bn; 16-17, a cut of $3bn; 17-18, an increase of $14bn; and 18-19, a cut of $404m.

That’s not too bad given this is likely an election budget.

I want to contrast the spin and reality of the budget. The government made a lot of its restraint and rectitude but reality is somewhat different. Consider the real growth in government spending. In 2014-15 it was 0.3 per cent negative. That was the first full year of Coalition government. The next year it was 1.3 per cent, then 2 per cent in 16-17 and then 2.7 for 17-18.

Next year, 18-19, real growth in spending will be 3.1 per cent, among the fastest in recent years. So, the growth in spending has accelerated every year of the Coalition.

Where does all this restraint come from? Well after next year, of course! Real spending growth crashes to 0.2 per cent in 19-20 and then remains around 1.1 per cent for the following two years of the budget estimates. Impressive!

What about all the talk of a budget surplus? There’s a small surplus pencilled in now for 19-20 of $2.2bn (a year earlier than expected) but on a different measure there’s a deficit of $8bn in that year. As economist Saul Eslake has remarked, it’s a bit odd the “headline balance” doesn’t make the headlines more.

This year the deficit is expected to be $18bn. But if you look at the headline balance it’s a $37bn deficit. Next year’s official deficit is $14bn, but on the headline measure it’s $28bn.

The headline balance includes a much bigger range of government incomings and outgoings. Think of the debt and equity investments in NBN, Western Sydney Airport, the Melbourne to Brisbane railway and Snowy 2.0.

What about paying down debt? Indeed, for the first time since the financial crisis, the government has pencilled in a fall in the dollar value of total debt, which is now expected to stand at $558bn by 2028 rather than the $684bn projected as recently as December. But this is 10 years away.

The forecasts these expectations are built on are looking a little dated already. The budget anticipates wage growth rising to 2.25 per cent this financial year, which would require the quarterly rate of growth to surge to more than 0.7 per cent — a level not seen for four years — over the final three months of 2017-18. Wage growth is then expected to rise to 3.25 per cent by financial year 2020. But the crucial annual measure of private sector wage growth is just 1.9 per cent.

What about “tax reform”? Well there was some attempt at it — although we have to wait seven years. For the first four years workers earning between $48,000 and $90,000 will receive a $530 tax offset, which isn’t really reform. If you earn more than $90,000 you have a $2.70 tax cut to look forward to.

Don’t be fooled by the talk of a flat tax. In the final two years, the second top bracket will be removed, leaving workers earning between $90,000 and $200,000 facing a 34.5 per cent marginal tax rate. But the government’s plan would lift the number of effective tax brackets from eight to 10.

There’s an argument that the government’s tax plan, worth $140bn over a decade, is tilted towards the rich. But the share of taxpayers in the top tax bracket, which is a better measure of progressivity, would increase from 4 per cent in 2016 to 6 per cent by 2024, an increase of almost 400,000 workers.

Consider this: the top two income tax thresholds were set at $80,000 and $180,000 in 2008. If they’d kept pace with prices they’d be $98,400 and $221,400 now.

Much more needs to be done: Even after scrapping the 0.5 percentage point increase in the Medicare levy, previously slated to kick in from July next year, middle-income workers still face a seven percentage point increase in their average tax rate by 2021 compared with 2009: for a worker on $75,000 a year, that’s $101 a week in additional tax. Certainly a lot more than the $10 a week they have to look forward to if the government’s plan passes the parliament.

No wonder some are grumpy about prioritising tax cuts for companies, which, facing a flat rate of tax, don’t encounter any bracket creep.

* This is an abridged version of remarks delivered at The Sydney Institute on May 21.