The government has a delicate balancing act for this year’s federal budget explains Jason Murphy.
As the second Tuesday in May approaches, expectations for the federal budget grow more intense. Australia’s fortunes depend on it – will we get tax cuts or pay more? Will it deliver a stronger future, or borrow from the future to serve some immediate goal? And, of course, will it save the government’s skin, or leave it politically vulnerable?
At this stage, what will be in the budget is uncertain. But several major clues have been planted by the government. Most prominent is talk of a package to make housing more affordable.
Housing affordability – what won’t be done
In a recent speech, federal Treasurer Scott Morrison made home ownership a key focus.
“If Australians are able to affordably own their own home and achieve housing stability, this can set them and their children up for success,” he said, noting that rates of home ownership have fallen as prices have risen.
The continual stream of press articles on housing prices confirms the topic as a national obsession. But the federal government can reach only some of the levers that determine house prices. State governments are best placed to affect supply, while the independent Reserve Bank of Australia controls official interest rates.
What the federal government does control is tax policy. But it has somewhat tied its own hands in that regard too. It’s already ruled out changes to negative gearing in the budget.
Changes to capital gains tax may still be possible, but if the government is too bold in raising the tax rate payable on the sale of investment properties then demand for investment properties could fall, triggering an unwelcome slide in prices. The government faces a conundrum.
“More than two thirds of Australians who live in owner-occupied homes would agree that reducing the value of their home is not a good plan, and it is not the government's plan,” Morrison said in April.
Another possibility to make housing more affordable that won’t reduce housing prices – allowing young people to access their superannuation to put a deposit on a house – has also been ruled out by Prime Minister Malcolm Turnbull.
Housing affordability – what may be done
That leaves the government with a limited set of options. One possibility is to channel more money into the building of community housing. To this end, the federal government has established a taskforce to encourage private funds into that sector through the development of an affordable housing bond aggregator model.
Another option is to tempt older “empty nesters” to move out of established homes and into smaller houses. Rumours have circulated in the press that this may be in the budget.
Monash University department of economics deputy head Gennadi Kazakevitch says incentives for older people to move could be effective, but the federal government doesn’t necessarily hold the best lever.
“If you want to increase supply of established homes … there are plenty of families in Melbourne and Sydney that are sitting on properties where there are more bedrooms than people. One of the ways to tackle it would be to remove stamp duties from retirees who are downsizing.”
Stamp duties – a tax on the purchase of a house – can add tens of thousands to the cost of a home. The problem is the federal government cannot make such a decree, Kazakevitch explains. “It cannot be in the budget – stamp duty is a state tax.”
The government has also hinted it will use the 2017-18 budget to ditch a range of so-called ‘zombie measures’ – policies that were introduced in 2014 but never passed the Senate.
These measures, including the deregulation of the higher education sector, were introduced to save money in the budget. So ditching them will make the budget bottom line look weaker, making it tougher than ever for the budget to contain the usual ‘sweeteners’ to keep voters happy, such as tax cuts and other handouts.
The elusive surplus
The budget is highly unlikely to project a return to surplus in the short term, according to ANZ senior economist Cherelle Murphy.
“We are still in a position of having fairly large budget deficits,” Murphy says, predicting a deficit of around $37-39 billion before any policies are changed in this year’s budget.
“From then on, the government will show a path toward surplus. It cannot step away from that intention,” Murphy says. “If it does, it threatens the much prized triple-A credit rating and as we know the government is very keen to hold onto that. And so it won’t deviate in its projection too far from getting to surplus by 2020-21.”
“But,” she continues, “there is a big difference between projections and results. In no year since the GFC has the government been able to deliver public finances as good as previous budgets projected.”
Murphy says government revenues from iron ore will be higher than expected thanks to buoyant prices and that will boost the bottom line this year and next. But most upside will be undone by weak results in wages and full-time employment growth and new spending announcements.
“The thing about the labour market right now is that its weakness translates to a lower than expected personal income tax take,” she says. “Bracket creep isn't moving taxpayers into new tax brackets as quickly as the government expected. I can't see that trend turning around quickly.