Contributed by Joe Montero
Governments have developed the habit of sneaking in a few nasties in the lead up to Christmas, when public attention is tuned into the holiday season. The Turnbull government proves to be no exception.
The six-monthly update of the May budget, which has just been released, shows that the government plans to impose major funding cuts to welfare, families and universities.
Two days after the Bennelong by election, it is revealed that there is a plan to withhold lump sum payments under family tax benefits for people with outstanding social security, student assistance, or paid parental leave debts from December 2018. This is a $400 million cut.
In addition, the government will also save $1 billion over four years, by tightening payments to family day care services as it transitions to the New Child Care Package that will begin on 2 July 2018.
Waiting time for family payments, including the family tax benefit, paid parental leave and carers allowance, will be extended from two to three years.
University funding will be cut by $2.1 billion.
Speaking at a press conference on Monday after the budget-update was released, Treasurer Scott Morrison said the Coalition’s plan to return the budget to surplus by 2020-21 was still on track, with Treasury estimating the deficit for 2017-18 would be $23.6bn, an improvement of $5.8bn from six months ago.
He said the government expected the deficit to decline further in 2018-19, to $20.5bn, and then to $2.6bn in 2019-20, before recording a higher-than-expected surplus of $10.2bn in 2020-21. Projections like this have the habit of not materialising. Too many factors are not taken into account. Even if it does turn out to be true, it does not necessarily mean that this is a good thing. Budgets cannot be separated from from the economy and society.
Morrison might brag that there are now fewer people on welfare than there has been for the last 25 years. The point is where they have gone to. We have a very good idea about this. Most have gone on to insecure, part time and low paid work, along with a large part of the previously properly employed workforce and have little chance of improving on this.
The government’s actions and obsession with budget surpluses and all the upbeat talk around it, flies in the face of basic economic sense. The reason being, and this is admitted in the update, projected nominal economic growth consumer spending are continuing to fall.
Further cuts to welfare and families will further increase the fall in consumer spending and this will impact negatively on economic growth. Consumer spending in July, August, and September that followed cuts to public holiday and Sunday penalty rates on 1 July, fell more than was expected.
Business owners finding falling sales, reduce their activity and in the worst cases pull out all together. And this will rebound to further increase downward pressure on wages, creating a self-feeding downward spiral that will pull down the whole economy.
In such a situation he so-called budget surplus means very little.
Depressing the income of PAYE tax payers means that real tax revenues from this source will go down. When this is added to the corporate tax evasion industry, tax revenues are affected in a big way. According to the Australian Tax Office, large corporations, defined as those with a yearly income of more than $250 million, paid $41 billion out of a gross profit of $1.5 trillion in 2014-15, an effective tax rate of 0.04 percent. However, the company tax burden is calculated on the gross profit, less all operating and non-operating expenses. This allows a great deal of scope for creative accounting. Many of these corporation do not pay any tax at all and those who do pay something pay well below the 30 percent rate.
If the loopholes were closed off, to leave only legitimate expenses, the tax obligation would increase substantially. Using the method of dividing the gross income above by an average rate of return, say 4.5 percent, would give an idea of net before tax profit. This would be around 20.25 billion a year, almost four times of what is being paid now. Reversing this and increasing PAYE tax through higher wages and social security benefits, would go a long way to ensure the government could spend within its means, without introducing spending cuts.
The explanation to why the Turnbull government can revise the surplus upward by $7.4 billion to $102 billion by 2020-21, is in part the spending cuts. There is also a projection that total tax receipts will rise by $3.6 billion in the current financial year alone. A substantial part of his is calculation is made by factoring in projected tax and royalties come via royalties from the mineral industry, which pays around $12 billion per year.
On the one hand, it is reasonable to expect this industry to pay its fair share. On the other, when the government becomes too dependent on tax revenue from this source, it works to lock the nation into ongoing dependency on this industry and insufficient economic diversification. It puts a break on other industries and increases Australia’s dependency on an unsustainable sector, particularly when it comes to fossil fuels.
Among other things, any shift away from this, without alternatives being put in place, will have a serious impact on government revenues.
It happens that the minerals industry is a major contributor to the Liberal Party and the National Party may not even exist without the dollars coming in from this source. Its peak representative body, the Minerals Council of Australia, is a leading force in the push to pull down the company tax rate and government policy is to comply. If it does lower company tax, tax revenue will decline accordingly and there will be even more spending cuts to fill the gap.
A consequence of holding down the income of most of the population has been a rapid rise in personal debt. According to the Organisation for Economic Cooperation and Development (OECD), Australia’s level of personal debt is the highest in the world. We pay nearly a quarter of our income in debt repayments. It terms of debt to assets, Australia ranks fourth highest in the world.
On top of the burden this places on individuals, for the economy, it means that consumer spending is heavily reliant on sacrificing the future to buy now. An ongoing rise in debt for consumption is unsustainable and puts the economy in a precarious position.
All this tells us that the economic policies of the Turnbull government are not only wrong. They are dangerous.
Australia needs an alternative.
In terms of the government budget, there must be a plan to raise enough revenues to carry out the responsibilities of the government. Whether one likes it or not, government is a major player in the economy and has some power to influence its future.
If, for example, two objectives are to make it fairer and environmentally sustainable, the government must take a hand in the economy. If future investment is also to consider that the economy grows in a balanced way, where its different parts rise in proper proportion to each other, where we can make things again and meet the triple bottom line of profitability, minimising environmental harm and taking care of the needs of an evolving society, government must play its part.
This puts the government surplus problem into its proper context. The issue is not over expenditure, but a shortage in revenue.
An alternative economic policy must put on its masthead the resolution of the revenue problem. The starting point is to put an end to the corporate tax avoidance industry. Other than this, the contribution to the tax burden must be based on capacity to pay. The taxation system needs to be made more progressive and this includes company tax. Rather than being cut, it should include benchmarks that ensure the greater the earnings the higher the percentage paid.
Part of the parcel is more expenditure on education, not less and universities need enough support to train the people and carry out the research, needed to meet the challenges of the new economy.
Add policy that will lead to rising wages and higher social security benefits that will enable a rise in consumer spending, as an economic engine and the means to a fairer distribution the wealth and it would contribute to reversing the level of rising personal debt.
This is not a utopian dream. It is possible. It is also a necessity if we are to avoid going from bad to worse. All it needs is the political will.
What we need to decide is whether we are going to make this a reality.