Budget 2013: An Analysis of Labor's Budget, and of Abbott's Reply

 

above: Treasurer Wayne Swan has delivered a Budget that could have been worse; but also could have been better.

In the following article Tristan Ewins examines the pros and cons of Labor's 2013 Federal Budget. Labor's timidity in key areas of reform (eg: superannuation concessions) is confusing given its willingness to withdraw benefits from some low and middle income demographics. But there are some very good policies here as well - even though Gonski has been 'watered down'. Nonetheless, there are clear divisons between Labor and the Conservatives; and hopefully these will be cast into greate relief as the election draws nearer.

Tristan Ewins

The 2013 Federal Budget was neither what it could have been, nor what it should have been. Labor faced an unenviable task with a $60 billion revenue shortfall over four years- linked with the high dollar, declining terms of trade – and wavering business profits as a consequence. This impacted on Company Tax receipts especially. Reduced revenues from the mining and carbon taxes certainly didn’t help either; though Labor was too timid or too pragmatic to restructure and revivify either.

Labor had options – which we will discuss later – to bypass austerity entirely while actually better containing the deficit. But they chose not to go down that path for fear of ‘getting on the wrong side’ of vested interests. On the good side, Labor did decide to limit austerity. Cuts have not been so severe as to lead to a European style scenario of negative growth and mass unemployment. For this (parts of) ‘the business community’are happy: as increased consumption power is in their interests (or at least for those focusing on domestic consumer markets), even though business tends to oppose social welfare as a rule. (in order to ‘make room’ for further tax cuts that add to their bottom line) The overall dimensions of this Budget include cuts of $6 billion over four years and increased revenue of $29 billion of the same period.

First we will summarise Labor’s cuts in more detail.

Decreases in Medicare coverage will hurt some on low incomes and represent a step in the wrong direction. And while changes to superannuation will reduce concessions for the richest of all and bring in $800 million over four years – this is not anywhere near what was necessary – or what was possible if the government had targeted a broader base of genuinely wealthy Australians.

Higher Education cuts are in the vicinity of $2.3 billion. The worrisome truth, here, is that having locked itself in to a policy of small government and low taxes the Government decided to reprioritise rather than provide new money in order to fund something anything like what the Gonski review had recommended. The result of was the sacrifice of university scholarships valued at $2000 – which were transformed into ‘loans’, as well as the rescission of options to repay HECS (Higher Education Contribution Scheme) upfront at a 10 per cent discount. The latter will mainly affect reasonably secure families – as for the disadvantaged upfront payment could be unmanageable in any case. But the $900 million ‘efficiency dividend’ will put pressure on the wages of academics and other education professionals, while perhaps resulting in more course closures. There are already predictions that Sydney University will be required to slash $44-$55 million, while Wollongong University has predicted $14 million in cuts and foreshadowed further staff reductions.

Not just middle class welfare, but middle income welfare (as Tim Colebatch argues) is set to go. This is classic Labor policy–at least since the Hawke years: making do with less through extensive and narrow targeting of welfare. But some of the cuts are regressive. Here it is interesting that Labor has chosen to crack down on welfare for those on average incomes, but shied away from reducing superannuation concessions for the top 5% or 10% income demographic – which alone could have taken care of the deficit – bringing in between $10 billion and $20 billion.

So Labor has not quarantined ‘middle income Australia’ from its cuts. But by some analyses middle income is not the same as middle class. Surely more reforms aimed at recouping revenue from the top 10% income demographic would have been fairer – though the reality is that we need a broad enough tax base to bring in the necessary revenue to maintain health, education, welfare, infrastructure etc.

Family Tax Benefit A – intended to assist in child rearing - has been also targeted. The Costello-erea ‘baby bonus’ has been wound back. Low income groups who would have benefited from carbon tax compensation will also find that some of that compensation– in the form of tax cuts – has been withdrawn. (a more regressive decision) This is disappointing because regardless of the fact of a falling carbon price with moves to a ‘market carbon trading system’,progressive changes to the tax mix would have been of great benefit to workers and the poor in any case.

Notably the policy of mandatory detention of asylum seekers – supported by both the major parties – has itself resulted in a blowout of over $3 billion. But so long as Abbott plays the fear card on refugees Labor can be expected to emulate Coalition policy in order to neutralise or minimise any political benefit.

Now for a range of other policy initiatives – someof them quite welcome. Although many of them have not been taken far enough.

An increase to the amount of money that those deemed unemployed can earn in casual labour before their benefits are effected has risen by about $20 a week. This is a good initiative: but not going far enough; and not lifting the unemployed out of dire poverty. (which in principle is supported not only by welfare organisations, but even by elements of the business community.) A $50/week increase in Newstart remains an urgent priority.

There have also been boosts for cancer research and treatment, and a scheme to assist seniors to ‘downsize’ their home - moving into smaller and more “manageable’ residences is very welcome. This is welcome; but further progressive action could involve the removal of taxes such as stamp duty from low-income Australians also wanting to move in to cheaper accommodation. Stamp duty is a state tax; but the states could be encouraged to implement such a policy in return for compensation from the Commonwealth.

Labor is promising public money for transport infrastructure – but probably much of this will be in the form of Public Private Partnerships. It is likely, therefore, that some new projects will take the form of toll roads and the like. This is likely to have a regressive distributive effect.

Though hopefully the decision to invest $4.6 million in “an institute for ageing” could lead to more robust and fair aged care policies into the future.

And importantly – Labor is recouping $4.2 billion over four years by closing business tax loopholes – certainly a more welcome initiative than further austerity.

But Labor’s big policies remain disability insurance and the so-called Gonski reforms.

According to‘The Age’ (May 15^th 2013) - when fully implemented by 2019-20 disability insurance will have a price-tag of about $22 billion – covering over 450,000 disabled Australians. In order to provide funding there will be a 0.5% increase in the Medicare Levy –though arguably more robust action is necessary on the tax reform front to fund the program over the long term. These increases to the Medicare Levy are welcome, though further progressive tax mechanisms to provide funding would have been more welcome.

The government is set to provide 50% of the funding for the NDIS (renamed Disability Care Australia) – though when combined with the education reforms it is doubtful that the states can afford this without further federal grants – or further state-level ‘reforms’ – with user pays infrastructure, or increased state taxes. Disability insurance is a massive and overdue reform – providing support, amenities and services to some of those who are in the most need. But even the Liberal states had been arguing for tax reform in order to consolidate their fiscal position. (though of course they were Ideologically driven to demand a regressive increase in the scope and coverage of the GST, rather than fair reforms elsewhere in the tax mix)

The Gonski reforms have also been dramatically watered down. Though nonetheless they remain substantial. While originally the Gonski Review called for an increase in funding of $6 billion a year, the government is promising only $9.8 billion over six years. Some money will be redirected from other schemes, and again there is the expectation that the states will ‘come to the party’. When combined with projected State funding the Commonwealth expects total funding of $14.9 billion over six years – compared with the initial vision to expand education funding by more than twice that amount. The changes to the funding mix are apparently more progressive, however, with loadings targeting the inclusion of students from disadvantaged backgrounds –whether the consequence of poverty or disability.

The Abbott response

In response to the Labor Budget Abbott talked of a “Budget Crisis’ created by ‘Labor mismanagement.’ This might go down well with some people who don’t want to scratch far beneath the surface. But the reality is that the high dollar has been central to the Budget’s deteriorating position. And for Abbott’s part he shared the position of not intervening to lower the dollar in order to mitigate poor terms of trade, and the disaster for manufacturing. Arguably intervention is warranted in exceptional circumstances. And furthermore, Abbott’s opposition to a more robust mining tax deprived the government of the funds that may have been employed to effectively subsidise affected industries in manufacturing and tourism especially – keeping them viable until the end of the mining boom, and a drop in the dollar. This was important to prevent skills and capacities being lost over the long term.

Abbott and the Conservatives have also been complaining about Labor’s ‘out of control spending’. And they are talking about a ‘simpler’ tax system – which almost certainly translates into more regressive flat taxes –(eg: an expansion of the GST, and its extension to food) with a redistribution of wealth from the real ‘battlers’ to the affluent. Here, the Australian Conservatives are taking a leaf out of the extreme US Tea Party’s book. And for Abbott it is a betrayal of his Democratic Labor Party past. While the DLP sabotaged Labor for years, and were not a friend of Labor, they were not neo-liberals and believed in social welfare. But Abbott will say and do anything to get the ‘top job’. The Americanisation of Australian politics is a real threat: and the Liberals seem to see the US ‘ideal’ of harsh social stratification as something to aspire to and emulate.

Also, Abbott’s rhetoric proves to be hollow when subjected to scrutiny. As Tim Colebatch points out (The Age, May 15^th 2013) “Revenue this year is forecast to be 23 per cent of GDP, compared with the Howard Government’s post-GST average of25.4 per cent. And spending levels are pretty much identical. And amazingly - in Melbourne’s ‘Herald Sun’ Jessica Irvine was allowed to make the observation that Labor“inherited a structurally flabby Budget from the Howard Government, with too many cash handouts and unsustainable tax cuts.” And: “The Budget would be in surplus today if personal income tax rates had not been cut [under the Howard Government) eight years in a row.” (Herald-Sun, May 15^th, 2013)

Why is Costello’s record therefore not examined more rigorously? On the Howard/Costello watch the housing bubble rendered home ownership an impossible dream for many. The privatisation of Telstra left subsequent Labor governments in a position of having to ‘pick up the pieces’ and pay a high price for access to Telstra infrastructure for the NBN. The benefits of the mining boom were squandered with unnecessary middle class welfare and unsustainable tax cuts.

Abbott has also attempted to rationalise his Parental Leave for the wealthy scheme by comparing it to annual leave. There is a significant difference, however. While many Australians only get 2 weeks annual leave, Abbott’s scheme will provide SIX MONTHS leave on FULL PAY for professionals earning $150,000/year. True, Abbott is sourcing the funds from a levy on big business – But the money could be prioritised for areas of greater need. The ultimate effect is a redistribution from more vulnerable groups to the wealthy – as Abbott’s largesse with Parental Leave will be mirrored by austerity elsewhere.

Other projected Abbott policies include more punitive welfare in the form of Work for the Dole, and the removal of the Newstart (threadbare) ‘safety net’ entirely for under 30s. A layer of desperately unemployed – a ’reserve army of labour’ – will undermine workers’ organisation and bargaining power. And perhaps for the Conservatives that is the point!

We can also expect an inferior version of the National Broadband Network; as well as assaults on the rights of labour including organisational rights; cuts to welfare; and the rescission of superannuation co-contributions for low income workers.

Abbott is still maintaining a 'small target' strategy; and most of the media is providing precious little scrutiny. Should he attain government, the austerity could well extend further than even this author supposes!

Lessons for Labor

There are several areas in which Labor could have taken a proactive stance – minimising the deficit, preventing austerity and actually expanding the social wage.

A more rigorous mining tax could have brought in perhaps $6 billion. Reversion to 75% Dividend Imputation could have recouped perhaps another $6 billion – or perhaps $12 billion if reverting to 50% as once advocated by renowned Australian economist John Quiggin. Restructuring income tax should also be an option; as should a tax on inheritances over $2 million. Cutting superannuation concessions for the wealthy and the upper middle class could have captured between $10 billion and $20 billion. Talk of ‘taking pressure off public pensions’,here, is a furphy – as superannuation concessions alone are now costing more than the entire Aged Pension Budget. Again: we have a policy redistributing money from ‘battlers’ to the wealthy.

Arguably Labor’s timidity was unnecessary. The government is withdrawing payments from low to middle income groups – but somehow thinks it could not have raised further revenue from the top 5% to 10% income and wealth demographics. Why back away from such reforms when they would target only a wealthy minority; and when they would provide the scope for massive expansion of Australia’s social wage and infrastructure – the benefits of which should be plain to voters?

Also importantly– Labor could have mimicked Abbott on one crucial point: his 1.5% levy on big business. Abbott could hardly have complained given his own policy, and Labor could have directed the money into areas of much more acute human need – for instance, aged care. It is still not too late to develop just such a policy and seek a mandate for it at the coming election. Such a policy could well be very popular!

With perhaps over $30 billion from such initiatives- that is, were they all implemented to the fullest extent – a surplus may even have been achieved for the coming year. Though that would be a political objective; as in reality the precariousness of the world economy demands a more fiscally expansionist stance. Gonski could have been implemented in full. And comprehensive Aged Care insurance could have been rolled out on similar principles to Disability Care Australia. Finally, resources could have been provided for the States – maintaining health funding; maintaining equity in provision of health services; providing further resources for public transport and other infrastructure without regressive user pays mechanisms or even privatisation of roads…

Policies of‘small government’ will only lead to more Public Private Partnerships, and perhaps outright infrastructure privatisation for which consumers will pay the price.

Instead, Labor should go to the election heralding further action on the social insurance front. And while following through with its education and disability reforms, Labor must promise a multi-billion dollar annual investment (new money) for Aged Care services.

Indeed it is not too late for Labor to further re-emphasise social insurance as a central theme for the election. If Abbott could be pressed to accept disability social insurance, the right kind of articulatory strategies by Labor could drive him to accept Aged Care insurance as well. If Labor loses the election –but manages to dictate the policy agenda in such a manner – then even in electoral defeat it would comprise a kind of victory. The suffering of our aged citizens – especially those in high dependency care – is an obscenity to the extent it could be ameliorated – but is not – because of ‘other priorities’. I have argued for such action in previous articles here – and for any who have not read this material yet I urge them to read the following:

http://leftfocus.blogspot.com.au/2009/02/another-look-at-aged-care-crisis-call.html

Again: There is relief that (in Julia Gillard’s words) Labor “has not cut to the bone”. But the Budget is not all that is could have been, nor what it should have been. Failing to extensively reform superannuation concessions was the key capitulation in the face of vested interests.. Hopefully, though, Labor will press the themes of tax reform , social insurance and social wage expansion further in the following months, and seek a mandate for progressive change.

Superannuation and Dividend Imputation the Key for Delivering in the May Budget

above:  Gonski is crucial for moving closer towards educational equal opportunity

If Labor wants to win in September it needs bold new initiatives – without ‘robbing Peter to Pay Paul’.  Reforming superannuation concessions and dividend imputation may provide Labor with the ‘warchest’ it needs to ‘break through;’ to disengaged voters.   Labor also needs to deliver in the immediate term as well – as voters may be sceptical of commitments only for the ‘distant future’.

 Tristan Ewins,  March 2013

As the May Federal Budget approaches and Liberal state governments increasingly move to sabotage the Federal Government’s Gonski proposals purely for political purposes – it seems increasingly likely that if Gonski is to succeed the Federal Government must ‘pick up the entire tab’.  The National Disability Insurance Scheme (NDIS) will also involve a heavy cost, and Labor simply cannot deliver without progressive reform on the revenue side.   More unpopular austerity – as in the case of Sole Parents – which saw disgust and cynicism amongst parts of the electorate – is not a viable option. And in any case it simply should not be part of the Labor ethos –‘to take from Peter to pay Paul’ – seeking to spin these matters to create only an illusion of overall progress.

Mark Kenny, writing for the Sydney Morning Herald explains how resort to superannuation investment has become a prime means of tax avoidance for high income groups.. Hence:

“High-income earners simply have greater scope to save and thus evade the 46.5 per cent marginal tax rate on income by sending it into super. The result is that what is saved on the aged pension budget through self-funded retirement winds up being less than what the superannuation policy costs in tax revenue foregone.”

(Read more: http://www.smh.com.au/opinion/politics/for-richer-or-poorer-class-warfare-opens-on-a-new-front-20130208-2e3jp.html#ixzz2MMN0j7MX)

Richard Denniss of the Australia Institute has been one of the most determined critics of the existing system of superannuation concessions. In August last year he put the argument that while those concessions cost the public $30 billion in late 2012, they will cost $45 billion as early as 2015.  This is well in excess of the entire Aged Pension budget – which was only $25 billion in 2012.  And in 2012 $10 billion of these superannuation concessions were going only to the top 5 per cent income demographic.    Denniss has argued:  “We estimate, for high income earners, up to 60 per cent of their lump sum is actually the contribution of the taxpayer.”    http://www.abc.net.au/worldtoday/content/2012/s3568235.htm

The ACTU, meanwhile, has urged the Government to target the top 10 per cent income demographic.  And were superannuation concessions revoked for that top 10 per cent group, at an estimate it could bring in over $15 billion -  enough for the government to fund Gonski and the NDIS without having to depend upon the Conservative states.  (nb: though NDIS will cost more over the years as the full program is phased in)   http://www.theaustralian.com.au/national-affairs/treasury/wealthy-in-wayne-swans-sights-on-superannuation/story-fn59nsif-1226572182403

Yet even as Tony Abbott and the Liberal Party condemn Labor for considering revoking concessions for some of the most privileged, they are committed to withdrawing superannuation tax breaks for low paid workers. Bill Shorten has pointed out that the restoration of a 15 per cent tax rate on these Australian workers will affect 3.7 million people, including 2.1 million women.  It could cost these workers $500 a year: which is not inconsiderable for those on low incomes.  This is blatant hypocrisy from Abbott.

See:http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2013/002.htm&pageID=003&min=brs&Year=&DocType

So what should Labor do?  Gonski and NDIS are potentially landmark reforms which appeal strongly to Labor’s base. Withdrawing superannuation concessions from the top 10% income demographic would make these policies affordable regardless of the Liberal states’ spoiler tactics.  And withdrawing Labor’s unjust policies on Sole Parent payments could moderate the backlash from this callous and self-destructive decision.

But arguably Labor needs a more robust electoral war chest in order to ‘break through’ to a cynical electorate which has already ‘turned off’ in parts of the country. 

Another area of potential reform is Dividend Imputation  - which the Henry Tax Review considered axing a few years ago.  Dividend Imputation seeks to eliminate so-called “double taxation” of investments by providing credits on dividends.  This is fine for small investors – but should the wealthy be receiving a massive tax break as a consequence?   Especially when the Company Tax rate has been cut again and again for decades. 

Writing for ‘The Age’ Nicholas Gruen pointed out late in 2012 that the Dividend Imputation system costs the government in excess of $20 billion a year!  That being the case he went so far as to suggest getting rid of the entire system; demonstrating that the benefits of the system in spurring additional investment are minimal anyway. A spare $20 billion annually – on top of rescission of superannuation concessions for the wealthy – invested in health, education, aged care, welfare, infrastructure, and foreign aid – could work wonders!  It could also help Labor balance the budget over the course of the economic cycle without further callous austerity.  (indeed, quite the opposite!)  http://www.smh.com.au/business/dividend-imputation--20bn-for-the-taking-20120917-262h2.html

Even were the dividend imputation rate only incrementally reduced, an initial reversion to a 75 per cent imputation credit could bring in over another $5 billion; and a 50 per cent rate – argued for in the early 1990s by economist, John Quiggin, could bring in over an additional $10 billion.  

Finally,  the Greens have argued for lifting the Minerals Resource Rent Tax (MRRT) rate to 40 per cent, eliminating loopholes and removing “generous accelerate depreciation provisions.”   This, they argued, could raise $26 billion our four years.   http://www.theaustralian.com.au/news/breaking-news/greens-disappointed-with-mrrt-result/story-fn3dxiwe-1226573649144

‘Doing the math’ this would translate into an additional $6.5 billion a year on average.  

Nonetheless it is quite possible that Labor has ‘done a deal’ with the miners. If so it is a fundamental matter of democracy that this ought be made known to the public. The alternative is the kind of ‘Iron Law of Oligarchy’ referred to by political scientist, Robert Michels – whereby political and economic elites determine agreements ‘behind the scenes’ – cutting ordinary citizens out of the equation.  (the anathema of democracy) Yet at the same time trust is an extremely valuable thing in politics – and even if Labor has made the wrong call on any deal, it would be understandable were they to remain true to that commitment. 

The Greens are thinking of ‘holding Labor over a barrel’ over the MRRT. And ideally the tax does need to revert to its original form as intended by the Henry Tax Review.  But if this is politically impossible the Greens must co-operate with a Labor Government that makes big progressive social initiatives possible through thorough-going reform of superannuation concessions and dividend imputation.

To put all this in perspective the Australian economy today is valued at approximately $1.4 Trillion. The Gonski package – crucial for the very viability of our state school system into the future – and to the opportunities of hundreds of thousands of students - will cost about $6.5 billion a year to implement.  And the NDIS – crucial to some of our most vulnerable Australians and their families - is assumed to being going to cost at least $15 billion a year when ‘fully operational’ in 2018.  (but only phased in gradually)

See: http://www.probonoaustralia.com.au/news/2012/11/campaign-rejects-ndis-cost-%E2%80%98scaremongering%E2%80%99#

But what else can Labor do to ‘break through’ ahead of September; with the May Budget perhaps being its last opportunity to bed down such major initiatives?

For a long time this author has argued for reform of Aged Care.  It is an issue that effects many of us. Even the younger among us will have family who may need care in the future.

The unnecessary acuteness of suffering experienced by many aged Australians is a matter of national shame.

For those needing low-intensity care there must be high quality, affordable options available.  The  2012-13 Aged Care Reforms proclaimed the end of  'Living Longer. Living Better.'  This must include those with low care needs as well as those needing high level care.

Residents in high intensity care need privacy – they need their own rooms if they so desire.  They need heating and air-conditioning, dental care, facilitated interaction, quality food, and ‘changes of scenery’ - perhaps including access to gardens.  In the future some of those who remain alert and in need of mental stimulation could do with access to information technology.   There are also problems with staff to patient ratios, including a need for more registered nurses.

More generally there is a need for more robust career paths for aged care workers; with better training being complemented with better wages and conditions.  This will also improve the quality of care experienced by aged residents.

For those older Australians wanting to stay at home – and well enough to do so –  there is a also need for regular interaction to ward away the loneliness from which so many suffer. And Families and Carers also need additional support in order to make home care viable.  Staying at home is only an option for many with significant support, and the Combined Pensioners and Superannuants Association has long argued support services here are under-funded.

A minimum additional annual $5 billion devoted to Aged Care would be a start (though certainly not the ‘final word’) in working towards these ends; while also beginning a phase-out of user pays mechanisms that hit average and working class families. Working class and middle income Australians should not be forced to sell their family homes (using the equity in the home - even incrementally,) with an effective regressive ‘flat tax’ in order to secure care for their loved ones.  All the more so while there are massive tax breaks for quite wealthy Australians that go into the tens of billions

The NDIS will care for some of our most vulnerable – but not all of them.  Care for the Aged is just as crucial.

In order to ‘break through’ to cynical Australians who have ‘switched off’ from Labor, the government needs big initiatives that capture the public’s imagination. The government needs to mobilise the welfare sector, labour movement and other social movements behind it with a raft of measures unprecedented in our time.  Yet another dilemma is how to find ways of actually delivering to the public between now and September in such a way as to avoid cynicism about ‘distant’ promises. 

By withdrawing superannuation concessions for the wealthy and reducing dividend imputation Federal Labor can amass a very substantial war chest.

One thing is clear.  Without substantial reforms bringing in the revenue for the coming May Federal Budget Labor will be left with very limited options.  ‘Business as usual’ will not win Labor the election.

The Policy of the Combined Pensioners and Superannuants Association can be found via the URL below;  They generally lead the way in campaigning for the rights of aged Australians, including those in need of care:

http://www.cpsa.org.au/index.php?option=com_content&view=article&id=41&Itemid=82