23
May
2014

Explaining the Budget

The excellent article below by Judith Sloan contains the kind of explanations and rationale for (most of) the budget measures which should have been provided by the Coalition. But, as indicated by the editorial in The Australian below, this has not been done and Labor is being allowed to get away with (for example) referring to reductions in health and education grants to the states as if they were in the budget when they were part of the unsustainable post-budget legacy left by Labor.

The “solution” proffered by the editorial is to bring additional ministers into the budget defence force. But explanations by ministers are unlikely to be sufficient. What is needed is a brief document that provides the rationale along similar lines to those used by Sloan. Such a document might also reiterate the pre-budget comment that the review of expenditure is far from complete.

Such a document could also demonstrate the incorrectness of the analysis which purports to show that those on low incomes are bearing the whole burden of the expenditure reduction measures. This analysis, which was detailed in an Age article  in yesterday’s message, has received wide publicity. An AFR article below  by John Roskam of the IPA points out some of the serious deficiencies with the analysis. One other important omission is that it takes no account of the effect of higher income taxes paid by those with higher incomes from bracket creep.

The opportunity might also be taken to refer to the scope available to the states to increase payroll tax. When in Treasury I was closely involved in helping persuade then Prime Minister McMahon that the Commonwealth should hand over payroll tax to the states in response to their request for more tax powers.

This handover has been an abysmal failure, partly because the states have incorporated all kinds of exemptions and partly because it is widely portrayed as a tax on labour. But in reality it is similar to a consumption tax and could be increased with little or no direct effect on the demand for labour (the current Treasury Secretary pointed last week to the potential for states to raise revenue from this sources).