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"Intelligent Insight"
A quick summary of the budget from last night, with a focus on the assumptions and overall projections ahead. All up, it is an improvement from the previous budget, but still contains some pretty heroic assumptions. Includes some content from The Conversation.
Sir Humphrey would be proud!
Today’s post is brought to you by Ribbon Property Consultants.
Josh Frydenberg’s March 29 budget — his fourth as Treasurer — is expected to reveal a big deficit for 2022-23. In December, it was estimated it would be just under $99 billion, but the updated figure is expected to have tumbled by tens of billions of dollars. That said, we still have a structural deficit of close to $1 trillion dollars, and the costs of that debt will rise, as interest rates rise, so that’s a problem. And the structural deficit will continue, that’s to large spending on programmes like NDIS, Centrelink Payments, Medicare, and Defence.
And although the current year deficit will fall from $99 billion as predicted, it is worth remembering that to date the Government has promised to spend some additional $70 billion over a number of years on a range of programmes, some with frankly dodgy motivations (some might think pork-barrelling was a better term).
There will be some short-term relief, to assist with the cost-of living pressures, which according to recent surveys are driving household confidence lower. But the whole exercise is political.
The Government will of course go on talking about the $250 billion savings households are sitting on, thanks to COVID and Government payments over the past couple of years, but as I have shown before this is not equally spread across the population and taking in general terms about “household balance sheets are in good shape” belays the truth that averages mask, and many households are really up against it as costs of living rise, and with the prospect of higher interest rates ahead.
Go to the Walk The World Universe at https://walktheworld.com.au/
A deep look at the framing of the upcoming budget – if well-being is central, then significant sectors will need support.
Go to the Walk The World Universe at https://walktheworld.com.au/
The latest edition of our finance and property news digest with a distinctively Australian flavour.
0:00 Start
0:15 Introduction
0:30 US Markets
1:25 US Retail Sales
4:44 Yield Curve Control
15:38 Crypto Recovery?
6:50 We Are Stuck In A Gilded Cage
14:50 AAA Credit Rating Warning
18:40 Net Debt Rises to 40.9%
20:30 GFG Alliance Steel Collapse?
27:00 Australian Market Update
30:00 Conclusion In The Twilight Zone
Go to the Walk The World Universe at https://walktheworld.com.au/
A quick look at the meaning last night’s budget, which was long on politics ahead of the upcoming election but short on strategy. We were not impressed!
Go to the Walk The World Universe at https://walktheworld.com.au/
Finally some of the commentators are seeing though the Government spin to the underlying ideology, and are highlighting the weaknesses and risks in the massive proposed spending. And it’s not so much the quantum, as the direction of fire…
I discuss the budget outcomes with journalist Tarric Brooker. He is @Avidcommentator on Twitter.
Economist John Adams and Analyst Martin North review the budget statement and unpack the true motivations behind it. Its not pretty!
If you read these headlines you might think we finally have proof that cutting company taxes will boost employment and investment:
These stories are based on analysis of the 2015 company tax cut by consultants AlphaBeta. But the study, as well as some of the media coverage of it, show a worrying misunderstanding of how company tax cuts work.
Simply comparing companies that receive a tax cut with those that don’t isn’t the right methodology to conclude that the 2015 tax cuts created more employment or higher wages.
Cutting taxes lets companies keep more of their profits, allowing them to invest in new equipment and premises for example. The company then needs to hire more workers to work with these new assets. The newly created jobs require businesses to compete for workers and this increased demand pushes up wages across the entire economy.
Suppose a retail company gets a tax cut and opens a new store. It advertises for workers, many of whom are already employed by a rival store that didn’t get the tax cut. The first company will need to offer the workers higher wages to entice them away. The rival store will need to consider matching the wages in order to keep the workers.
In other words, even workers in companies that don’t receive the tax cut should see a wage rise.
In 2015, the federal government cut the tax rate from 30% to 28.5% for businesses with less than A$2 million in revenue. Eligible businesses saved around A$2,940 on average because of the tax cut.
AlphaBeta used transaction data from 70,000 businesses to compare businesses just below the A$2 million threshold to companies that were just above it.
The analysis looked at the differences between the two groups of firms in terms of whether they hired new workers, invested in their businesses, increased worker wages, or kept some of the cash as a reserve.
AlphaBeta chalked any differences between companies that received the tax cut and those that didn’t to the company tax cuts.
As reported in The Australian, AlphaBeta found that companies that received the tax cut increased their employee headcount by 2.6%. The companies that didn’t receive the cut increased employment by just 2.1%.
This difference turned out to be “statistically significant”, meaning it is very unlikely to be the result of random chance.
As the Sydney Morning Herald pointed out, AlphaBeta also concluded that 51% of the tax cut was kept as cash, 27% went towards new investment, but only 3% was paid to workers in higher wages.
In other words, wages increased by just A$1.44 per week. This is not only a small amount, it was also found to be not statistically significant.
The main issue with this study’s methodology is actually noted by AlphaBeta in the report itself (and echoed in the coverage by the ABC and Sydney Morning Herald).
The problem is that we cannot draw any conclusions about the effect of company tax cuts on jobs or wages by studying a bunch of firms that received them and another bunch that did not, even if the firms are only slightly different.
This is because, as noted above, the effect of company tax cuts on jobs and wages take place in the entire labour market. An increase in demand for labour flows through to all business, and therefore, so do higher wages.
So we should not expect to see wages rising only in those businesses that receive the tax cuts. The finding that an increase in wages is small and insignificant is exactly what we would expect to see from this study.
Another problem is that we do not know whether the characteristics of the companies in AlphaBeta’s sample. Were some industries with particularly pronounced employment or wage increases over represented in one group but not the other, for instance?
Studying the effect of company tax cuts on employment and wages also requires a longer time period – sometimes years – and careful control of other factors affecting jobs and wages in some firms relative to others.
The analysis in this review is generally fair and reaches a sound conclusion regarding the AlphaBeta report. However, the logic behind company tax cut raising wages is somewhat simplified.
A cut in company tax lowers the costs of production and can flow to labour, capital (including equipment and buildings) and consumers. Economics tells us that who actually benefits from a tax cut depends on what is more responsive to the tax – labour, capital or output.
The lower production costs from a company tax cut can lead to greater output and lower prices as consumers buy more goods and services. This depends, of course, on how responsive consumers are to changes in price.
In the short-run labour is more mobile than capital, which is usually regarded as fixed. Therefore, in the short-run most of the benefit is borne by owners of capital (the companies) in the form of higher after-tax profits.
However, over the longer term, companies invest their after-tax profits in the business. So most of the benefit of the tax cut goes to workers though higher wages as the increased “capital stock” (such as equipment) makes labour more productive.
It follows that there is no reason to expect a significant increase in wages over a period of one or two years (as the AlphaBeta report covers). Indeed, such a result would be somewhat surprising. – Phil Lewis
Author: Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University
Reviewer: Phil Lewis, Professor of Economics, University of Canberra
In the federal budget, Treasurer Scott Morrison promised tax cuts to all working Australians in the form of an offset and changes to tax income thresholds. But our analysis of Treasury data shows that while the government advertised these as payments to low and middle income Australians, most of the benefits would flow through to high income earners in future years.
If all of the stages of the tax plan passed parliament, there would be a sharp increase in benefits for people earning above A$180,000, due to the reduction of their marginal tax rate from 45% to 32.5%.
Taxes in most countries are progressive. This means that the more you earn, the higher your marginal rate (the additional amount you pay for each dollar earned).
There are good reasons for this – progressive tax systems mean those on a lower income pay a lower average tax rate, while those on higher incomes pay a higher average tax rate. This reduces income inequality – as you earn more, for each dollar you earn, you will pay more in tax than someone on a lower income.
With the 2018-19 budget, the proposal is for a “simpler” tax system from 2024-25. This means a reduced number of tax brackets, and a lower rate of 32.5% to those earning between A$87,001 and A$200,000.
Treasurer Scott Morrison said following the budget:
Well, you’ve still got a progressive tax system. That hasn’t changed. In fact, the percentage of people at the end of this plan, who are on the top marginal tax rate is actually slightly higher than what it is today.However this new tax system from 2024-25 is less progressive than the current system. It means higher income inequality – the rich get more of the tax cuts than the poor.
As part of the new proposal, low and middle income earners get a tax offset in 2018-19, with high income earners getting very little. This part of the plan is progressive – more money goes to lower income earners.
However, by 2024-25, the tax cuts means high income earners gain A$7,225 per year, while those earning A$50,000 to A$90,000 gain A$540 per year, and those earning A$30,000 gain A$200 per year.
Of course, another factor of tax cuts is that they only benefit those who are employed. Tax cuts don’t benefit people like the unemployed, pensioners, students (usually young people) and those on disability support pensions.
The conversation Australians need to have is how we should be spending the revenue boost we are seeing over the next few years. We can either spend this windfall gain on benefits to high income earners, in the hope that this will flow through spending to everyone else; or maybe we should encourage young people into housing through an increase to the first home owners grant, or increased funding for our schools, universities and health system.
We’ve developed a budget calculator so you can see how your family is affected by the 2018 budget.
Author:Robert Tanton, Professor, University of Canberra; Jinjing Li, Associate Professor, NATSEM, University of Canberra
