Warwick Smith, University of Melbourne
Budgets are a good opportunity to see through the spin to what the government really wants. Forget the Treasurer’s speech and the budget overview, the truth is in the measures themselves. Generally things the government increases taxes on are discouraged and things it reduces taxes on – or spends money on – are encouraged.
So, what does the 2016 budget tell us about the things the government wants us to do and not do?
Let’s start off with a pretty straightforward, textbook example. The government is raising tobacco excise (tax) by 12.5% per year for four years. this will lift the price of cigarettes to around $2 each by 2020.
Tobacco taxes are generally considered to be a good thing. Not only is tobacco use harmful to the individual, it also creates very substantial public health expenditure. Taxing the consumption of tobacco discourages smoking by increasing the price and raises revenue that contributes to health costs associated with smoking.
This story is complicated by the fact that tobacco is addictive. Because of addiction, price signals aimed at reducing consumption are often ignored by established smokers, many of whom are low income earners. This squeeze on the budgets of many low income earners has undesirable side effects, such as reducing expenditure on beneficial goods and services. However, the price signal does discourage potential new smokers from becoming addicted and ex-smokers from starting again and this is surely a good thing.
Jobs… or free labour?
The A$750 million PaTH (Prepare-Trial-Hire) program to encourage job seekers into internships, followed by subsidised employment, is aimed at job creation. The idea here is to encourage employers to give a person, who’s been unemployed for six months or more, a chance to prove themselves and develop skills through an unpaid internship (the government gives the intern $100 a week extra on top of Newstart).
Not only does the potential employer get an intern for free for four to 12 weeks, they also get $1000. The pros and cons of this measure are complex. The Australian Council of Social Services (ACOSS) has applauded PaTH. It has been arguing for subsidised employment as an alternative to work for the dole programs for some time. Professor Andrew Stewart from the University of Adelaide has warned that the program could actually destroy jobs rather than create them if employers opted for a free intern over a paid employee. It seems there is a lot of potential for exploitation.
The reality is that there needs to be greater demand for goods and services before businesses will employ more staff. The unemployment level in Australia is at 5.7%, meaning there’s no shortage of people willing to fill available jobs. This tells us that there aren’t many opportunities for companies to increase production of goods or services that are constrained by the availability of low-skilled labour at the minimum wage.
It is possible that the wage subsidy of between $6,500 and $10,000 included in this government package could make wage costs sufficiently low to encourage extra hiring. If this were so, what would happen to these employees once the subsidy runs out? Back on the dole?
This brings us neatly to the main slogan of the budget “jobs and growth”.
Company tax cuts and business
Company tax cuts are at the centre of the government’s claims to a jobs and growth budget. It’s standard rhetoric from business groups and the government that reducing company taxes will give companies spare cash that will “trickle down” through greater employment and increased wages and this will increase economic growth. Unfortunately, the actual evidence backing this up is slim. Even Treasury’s modelling used to support the measures puts the impact at an extra 1% increase in GDP over 10 years. That figure is so small that it might as well be zero.
The budget extends provisions for small business to write off small capital expenditure immediately, rather than through depreciation over years. Capital items, like computers, machinery, furniture and other equipment, lose value over time as they wear out or are superseded. These are the things that businesses usually deduct from taxable income.
What this measure means in practice is that the entire purchase of, for example, a new computer for a small business is a direct tax deduction in itself, instead of only the drop in value of that computer during this financial year. This measure was introduced as temporary stimulus in the last budget and has now been extended. In addition, the definition of small business has been expanded to include businesses with up to $10 million in turnover.
This is short-term economic stimulus. The impact will primarily be to bring forward expenditure that would have happened anyway. In other words, it’s likely to create jobs and growth now at the expense of jobs and growth later.
We know the Coalition are advocates of small government. They want to reduce taxes and minimise the role of government in society. The majority of the Australian people believe we should be increasing taxes in order to maintain or improve on the quality of services, particularly education and health. This conflict between public opinion and government ideology means that the government cannot always be transparent about their goals. There’s nothing new in this.
Examining budget measures and their stated aims and comparing them to the evidence is a good way to uncover the truth behind what the government claims it is trying to do.
Warwick Smith, Research economist, University of Melbourne
This article was originally published on The Conversation. Read the original article.