When the 2016-17 Budget was announced in May last year it dampened consumer sentiment mostly because it was a robbing Peter to pay Paul affair aimed at reducing the budget deficit and capping government debt over time. Changes to tax concessions relating to superannuation was a major element of the robbing Peter part of the Budget last year, but there were many others too. The main beneficiaries in the Budget last year were businesses through reduced tax plus increased funding for infrastructure. Taken as a whole, the Federal Government’s net spending contribution to economic growth in 2016-17 was mildly contractionary as the forecast underlying Budget Deficit of $37.1 billion was not much less than the estimated deficit of 39.9 billion for 2015-16. It just appeared more contractionary than that because of the range of people impacted by planned reduction in tax concessions, even though some of the cut-backs made sense on the fairness criteria that wealthy retirees should not receive essentially uncapped tax free income.
The 2017-18 Budget will be announced on Tuesday evening and it seems highly likely that the Treasurer has framed it with a firm eye on not repeating the perceived mistakes of the 2016-17 Budget. The first point is that the Government will not want a repeat of the last year’s Budget causing consumers to become gloomier. Gloomy consumers are perhaps the biggest potential risk to an otherwise relatively bright economic growth outlook for 2017-18. Australian households have built up record debt to household income and have done it while household income growth has been unusually weak and labour market conditions quite fragile. Australian households may be close to a point of trying to retrench spending because of pressures from high household debt. A perceived bad Federal Budget experience could be the straw that breaks the camel’s back but one the Government is unlikely to provide wittingly.
Instead the Government is likely to do everything it can in the Budget – barring providing income tax cuts that it cannot afford – to be palatable to most households. The Budget probably will contain initiatives to address housing affordability – possibly boosting spending on social housing, providing tax exemption on first-home buyers’ income placed in home-buying savings accounts and encouraging down-sizing by older Australians. However, none of these measures are likely to really boost housing supply or limit housing demand. They will not flatten or reduce house prices almost a pre-requisite to start addressing housing affordability. Instead, the ghost of Budget 2016-17 with its legion of disgruntled superannuants will almost certainly prevent the Government from placing any limit on negative gearing tax benefits or change in capital gains tax arrangements relating to housing and risk a legion of disgruntled residential property investors.
On a similar imperative to prevent a grumpy reaction from households, the inevitable robbing of Peter to pay Paul in this budget will focus on the taking from the less visible in terms of households to give to those who are highly visible. Proposed less spending on tertiary education in favour of Gonski mark 2.0 funding for primary and secondary education falls in this category. Increased spending on Veteran’s Welfare and National Security at the expense of less on foreign aid fit the same bill too.
This Budget also has two more opportunities to go beyond rebalancing which Peter is robbed to pay which Paul. The first opportunity comes from a bigger lift in terms of trade (export prices relative to import prices) and company tax than was forecast in the Budget last year. The second opportunity arises from nuancing the Government’s message about capping government debt outstanding to a message that there are essentially two parts of government debt, one part that needs to be capped so as not to burden future generations but another part that funds capital works and represents net benefit rather than burden to future generations.
The relatively stronger than expected lift in terms of trade and company tax is essentially a temporary revenue windfall and would compromise sensible budget deficit reduction plans if applied for example to permanent income tax cuts. The small windfall could be used, however, to fund one-time payments to some households, such as the assistance payment to pensioners for higher energy costs this year, and without compromising medium-term budget deficit reduction plans.
Splitting government debt according to purpose – funding the recurrent budget and the capital works budget – could provide the Government with an opportunity to lift spending on much needed infrastructure projects. There are some signs that the Government may be considering this opportunity with an eye to funding an inland rail freight corridor as well as the second Sydney Airport and much more. If this change occurs it will be very important that projects are assessed in terms of their net economic and social return and its excess over funding costs. Projects that fail the funding test should not be funded by additional government debt otherwise the distinction is hard to maintain between debt to fund re-current government spending that needs capping and reducing, and debt used to fund worthwhile infrastructure that can be allowed to grow safely.
What is clear is that the 2017-18 Budget presents several opportunities for the Government to contribute to economic growth. It should at the very least feel a better Budget to the household sector than was the case for the Budget last year which felt to many such a mean-spirited affair, losing its laudable intention to make taxation of superannuation fairer.