Budget 2017: A Preview

We’re less than a month out from the May budget, one of the most important in economic and political history. Prime Minister Malcolm Turnbull campaigned on a platform of jobs and growth at last year’s election, and delivered with 1.1% GDP growth in the December quarter. With the first post-election budget typically a government’s harshest, Turnbull and his Treasurer, Scott Morrison, need to ensure it isn’t harsh enough to send GDP growth tumbling. Likewise, it was Tony Abbott’s harsh first post-election budget in 2014 that signalled the downfall of his government. [1] With the Coalition having trailed Labor for ten successive polls and by ten points in the latest poll, Turnbull knows that an overly harsh budget could cause his party faithful to start questioning his leadership [2]. With the importance of May 9th in mind, now is the opportunity to peer into the crystal ball and predict the policies set to define this budget, and what their likely impact will be.

Housing Affordability
Housing affordability is an ongoing crisis in Australia, with exorbitant prices, especially in Sydney and Melbourne, pricing many out of the market and forcing them to rent or move. Morrison has already stated that this will be a key focus of the May budget, with a housing affordability package set to be included to assist both prospective homeowners and those who are forced to rent. [3] Morrison re-iterated too that this package has to assist low-income earners, a group the Coalition have been accused of neglecting. He is acutely aware of the boost in polls and popularity that could be received on the back of an inclusive housing affordability package, that shows concrete results prior to the 2019 election.

On what these policies will be exactly, the government has remained tight-lipped. The Prime Minister is considering allowing first home-buyers to use their superannuation savings to fund a housing deposit, however this could lead to a savings crisis. Labor are likewise pushing for a decrease in the capital gains tax (CGT) discount, with the government is yet to decide how this discount will be affected by the Budget. [4] A decrease would likely make the Budget appear more equitable, however would also likely alienate Turnbull’s traditional voter base who are subject to high CGT.

It has been proposed that the Budget should focus on incentivising state and local governments to increase the housing supply in order to drive housing prices down and open up the market. [5] With wage growth and interest rates much harder to control, this is a practical means of lowering housing prices, increasing aggregate supply and boosting jobs and growth, and is thus likely to be considered by Morrison before he hands down the Budget. In fact, the Treasurer is considering a tax on empty housing stock and incentives for elderly couples to downsize from their homes, both measures that would increase the housing supply and drive prices down. [6] Likewise, negative gearing will be unaffected, but it remains to be seen whether foreign property investors could face tougher regulations when purchasing Australian homes.

The Black Economy
The government recently set a ‘black economy taskforce’ to examine illegal cash payments in Australia. [7] Their interim report has been completed and it appears that the Coalition will use this information to start cracking down on these payments, rather than waiting for the final report in October. The black economy is valued at $21b, with $15b of that illegitimate – $10b in the form of unpaid tax and $5b in the form of incorrect welfare payments. [8]

Ideas suggested by the report include programs to increase education around tax obligations and fostering better co-operation between federal, state and local governments to avoid over-regulation of business. Other potential policies include capping cash payments at a certain amount and/or phasing out the $100 note. [ibid] One thing is for certain – the losses incurred by scrapping penalty rates, possibly $650m, must be recouped, and a crackdown on the black economy is a sure-fire way to do so. [9]

Melbourne Airport Rail Link
A rail line from Melbourne Airport to its CBD has long been endorsed as a potential infrastructure project for Australian governments, alongside high-speed rail and an airport in Western Sydney. However, it appears that the rail link will become a reality with the government poised to allocate $1b from the Port of Melbourne sale to Victorian infrastructure. This money will be devoted to the rail link, along with upgrades to country rail lines. [10] However, the state government may stand in the way, stating their focus is on rail projects in urban and suburban Melbourne, and placing the rail link on a 15-30 year timeline. The rail link cannot be built solely with this funding, as it could cost up to $5b, however with rumoured strong support among state and local MPs, this could be one project that is full steam ahead.

From a political standpoint too, the Coalition is aware this policy is a winner. It has long been to the chagrin of the Victorian public that there is no rail link out to Tullamarine, and thus this policy would boost state support for the government. Likewise, this could lead to a more negative perception of the state Labor government if they insist on holding off on these works, potentially garnering support for the local opposition.

Reversal of Unpopular Policies
The government’s proposed cuts to family tax benefits have been met with much opposition in parliament. Few other parties agree with the Coalition on introducing cut-off ages and phasing out end-of-year supplements, to the point where the government is now likely to scrap these cuts. This will cost the government $1.3b in expected savings, but seems necessary as the cuts have little chance of passing the senate. [11]

Likewise, the Abbott government’s cuts to higher education in the 2014 Budget have also been met with widespread opposition, both within parliament and from university vice-chancellors. In the 2016 Budget, Turnbull scrapped his predecessor’s idea of full fee deregulation, in favour of allowing universities to set higher fees for certain ‘flagship’ courses, as a form of partial fee deregulation. [12] However, senior government sources have been quoted saying that this policy will now be scrapped too, along with the proposed 20% cut to higher education funding from the 2014 Budget.

Unlikely Changes
The Department of Health has been notifying organ donors that the government’s Leave for Living Organ Donors program, which pays sick leave at the minimum wage while kidney and liver donors recuperate from their operation, will soon cease. This cessation has been met with a negative response from donor advocates and the Greens, especially as it is only likely to save up to $1.5m. In the face of this backlash, the federal health minister, Greg Hunt, seems to have changed his tone, indicating the program will either be saved or be adequately replaced. [13]

There were also suggestions that the petroleum resource rent tax could be altered, as there is a current review into it. However, the Treasurer was clear that any changes to the tax must be carefully considered and thus will not be implemented in the May budget, given the review is yet to be finalised. [14]

On a sadder note, you may have heard that famed satirist John Clarke sadly passed away last weekend whilst hiking in the Grampians. Since 1989, Clarke, along with his friend and collaborator Bryan Dawe, have performed weekly satirical mock interviews. The final Clarke and Dawe sketch features Clarke assuming the role of Treasurer Scott Morrison, and it seems only fitting to include it here for your enjoyment.

References

[1] Matthewson, P. (2017). May budget is the make-or-break moment for Turnbull & Co. The New Daily. Retrieved from http://thenewdaily.com.au/money/news-federal-budget/2017/04/07/turnbull-budget-expectation/

[2] McIlroy, T. (2017). Two years after rolling Tony Abbott, Malcolm Turnbull says bad polls not a trigger for a leadership challenge. The Sydney Morning Herald. Retrieved from http://www.smh.com.au/federal-politics/political-news/two-years-after-rolling-tony-abbott-malcolm-turnbull-says-bad-polls-not-a-trigger-for-a-leadership-challenge-20170406-gvfmsx.html

[3] Grattan, M. (2017). Scott Morrison says budget will remember the renters. The Conversation. Retrieved from https://theconversation.com/scott-morrison-says-budget-will-remember-the-renters-74041

[4] Australian Associated Press,. (2017). Housing debate to heat up on way to budget. The Australian. Retrieved from http://www.theaustralian.com.au/news/latest-news/housing-debate-to-heat-up-on-way-to-budget/news-story/bf70e52e802f2b4e68a290e9f1090f40

[5] Koukoulas, S. (2017). To tackle housing affordability Scott Morrison must get more homes built. The Guardian. Retrieved from https://www.theguardian.com/australia-news/2017/mar/08/to-tackle-housing-affordability-scott-morrison-must-get-more-homes-built

[6] Bagshaw, E. (2017). Scott Morrison: Hacking into negative gearing would be ‘cruel’. The Age. Retrieved from http://www.theage.com.au/federal-politics/political-news/scott-morrison-hacking-into-negative-gearing-would-be-cruel-20170409-gvhgi8.html

[7] Keating, E. (2017). Federal budget tipped to include measures to tackle Australia’s $21 billion “black economy”. SmartCompany. Retrieved from http://www.smartcompany.com.au/finance/federal-budget-tipped-include-measures-tackle-australias-21-billion-black-economy/

[8] Khadem, N. (2017). Federal budget to tackle Australia’s $21b ‘black economy’. The Sydney Morning Herald. Retrieved from http://www.smh.com.au/business/the-economy/federal-budget-to-tackle-illegal-cash-economy-costing-up-to-15b-in-lost-revenue-20170404-gvdfkr.html

[9] Hutchens, G. (2017). Penalty rates cut could cost budget $650m over four years, thinktank says. The Guardian. Retrieved from https://www.theguardian.com/business/2017/mar/26/penalty-rates-cut-could-cost-budget-650m-over-four-years-thinktank-says

[10] Campbell, J., Minear, T., & Harris, R. (2017). PM backs Melbourne airport rail link. Herald Sun. Retrieved from http://www.heraldsun.com.au/news/victoria/melbourne-airport-rail-link-boost-turnbull-government-to-pour-cash-into-longawaited-project/news-story/0d8425af7c85596a772cd18e618a2c89

[11] Martin, S. (2017). FTB cuts to be killed off. The Australian. Retrieved from http://www.theaustralian.com.au/national-affairs/treasury/budget-2017-ftb-cuts-to-be-killed-off-zombie-agenda-lives-on/news-story/025a6d8651c68f6052983b757b66d292

[12] Knott, M. (2017). Deregulation death knell: Turnbull government kills off plan for high fee ‘flagship’ courses. The Age. Retrieved from http://www.theage.com.au/federal-politics/political-news/deregulation-death-knell-turnbull-government-kills-off-plan-for-high-fee-flagship-courses-20170407-gvfwfe.html

[13] Gartrell, A. (2017). Fears organ donor subsidies will be cut by Turnbull government. The Sydney Morning Herald. Retrieved from http://www.smh.com.au/federal-politics/political-news/fears-organ-donor-subsidies-will-be-cut-by-turnbull-government-20170409-gvh09k.html

[14] Tingle, L. (2017). Morrison talks down PRRT changes. Financial Review. Retrieved from http://www.afr.com/news/politics/scott-morrison-talks-down-any-changes-to-the-petroleum-resource-rent-tax-20170407-gvg2kv