Econocrats’ report card: Turnbull not really trying

Economically and fiscally, the Turnbull government is flying by the seat of its pants. It hasn't done enough to secure future "jobs and growth", nor to get the budget balance improving strongly and government debt falling in coming years.

That's the conclusion you draw from the econocrats' oh-so-politely worded commentary in their "pre-election economic and fiscal outlook" issued on Friday, independently of the elected government, as legally required.

Treasury secretary John Fraser and Finance Department secretary Jane Halton made virtually no changes to the budget estimates and economic forecasts and projections contained in the budget delivered less than three weeks earlier.

What they did was highlight the key vulnerabilities they had alluded to deep within the voluminous budget papers they had prepared for the government.

The 10-year budget projections out to 2026-27, they warned, were underpinned by an assumption that annual growth in productivity would be the same as the average of recent decades.

However, "continued economic reform would be required in order to achieve this growth," they said.
The "crucial importance" of increased productivity would require "renewed vigour in encouraging and delivering structural reform across all parts of the economy" – something they'd seen little sign of so far in the election campaign, they hinted without saying.

Doesn't sound to me like a ringing endorsement of the adequacy of the budget's "economic plan for jobs and growth".

They warned further that these "medium-term projections" showing the budget returning to surplus in 2020-21, then staying at 0.2 per cent of gross domestic product for the following six years, were "very sensitive to the underlying assumptions".

In other words, with such a wafer-thin surplus – equivalent to just $3.5 billion in today's dollars – the budget could easily fall back into deficit.

And "should Australia experience a significant negative economic shock, the fiscal [budgetary] position would be expected to deteriorate rapidly".

Since Australia had run current account deficits on the balance of payment for much of its history – the consequence of our heavy reliance on foreign investment to exploit our rich endowment of natural resources – it was "prudent for Australia to run a relatively conservative fiscal stance".

But the stance isn't looking too prudent at present, they implied.

The medium-term budget projections – the device successive governments have used to reassure us that everything in the budgetary garden is going fine, and thus a fit subject for the off-the-leash econocrats to zero in on – assume that tax receipts will be capped at 23.9 per cent of GDP (the average during the period from 2000 to the global financial crisis) from 2021-22, by means of annual tax cuts.

But that being the case, the econocrats warned, it wouldn't be possible to get the budget surplus rising to 1 per cent of GDP [and thus make big strides in paying off government debt] "without considerable effort to reduce spending growth".

"Reducing spending growth has proved difficult in practice", they said with monumental understatement.

Indeed, after the beating Tony Abbott took in the polls thanks to his one attempt to reduce government spending, both he and his successor have retreated to doing no more that ensuring they don't actually add to spending by finding sufficient cuts to offset their new spending programs (of which there are always plenty).

The econocrats said that, even if spending were reduced from the levels projected for 2026-27 in this year's budget to their long-term average of 24.9 per cent, achieving a surplus of 1 per cent of GDP by then would require tax receipts to be allowed to rise to 24.2 per cent. (Don't forget the government also receives non-tax revenue.)

See what they're saying? Let me say it more bluntly.

It's all very well for Scott Morrison to keep saying the budget has a spending problem, not a revenue problem, but if you're not actually game to cut spending – because you know full well the electorate won't let you – then your only remaining choice is between higher taxes or higher debt.

In the election campaign, it's all very well to say Labor is high spending and high taxing. It's true enough. But what reason do we have to believe it's not true of the Coalition?

Its plan to cut the rate of company tax will be hugely expensive. The budget shows that, over the first four years of the phase-down, the cost will be covered by increasing the tax on smokers, multinational tax shirkers and people with too much superannuation.

The medium-term projections imply that the remaining phase-in cost of $43 billion will be covered by allowing bracket creep to rip until 2022-23 and by running a wafer-thin surplus.

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Why wage growth is so weak

Are we waiting with ever-growing impatience for the economy to get back to normal, or has the economy shifted to a "new normal"?

I think that's the central question in macro-economics today – not just in Oz but throughout the developed world.

To put that question in econospeak, are the changes we see before us "cyclical" – just part of the normal ups and downs of the business cycle – or are they "structural", a lasting change in the way the economy works.

Trouble is, neither I nor anyone else can say with confidence what the answer is.

But further evidence that things in our economy are looking far from normal came this week with the news that wage growth over the year to March – as measured by the  Bureau of Statistics' wage price index – decelerated to 2.1 per cent, the slowest since this series began in 1997.

Why is wage growth so weak? Because the rise in consumer prices is so weak. Why are prices growing so slowly? Because the rise in wages is so weak.

Yes, there is a circular, chicken-and-egg relationship between wages and prices. When prices rise, workers need a pay rise of at least that much just to preserve the purchasing power of their wages.

But when they have to pay higher wages, firms pass their higher costs on to customers. That's why – in normal times, at least – we always have some degree of inflation.

So don't bother wishing prices were rising faster so wage growth would be higher – that wouldn't get you anywhere.

No, what matters to wage-earners is the difference between the rise in their wages and the rise in consumer prices – that is, the change in their "real" wages. In normal times, wages should be rising comfortably faster than consumer prices.

Why? Because increased business investment in more and better machines increases the productivity of workers' labour (output per hour of labour input), and competition for the services of workers should ensure they receive a share of the improved value of their labour.

Here the news is better, though not great. Although wage growth over the year to March slowed to 2.1 per cent, the rise in consumer prices over the same period slowed to 1.3 per cent, implying real wages grew by about 0.8 per cent.

This is better than for most of the past two years, but the "normal" rate of productivity improvement should be nearer 1.5 per cent a year, even 2 per cent.

So what's going on with wages? This is what Professor Jeff Borland, of the University of Melbourne, tried to discover in a recent paper. He used a different measure of wage growth – average weekly earnings for adult male full-time employees – because the series goes back much further to the early 1980s (when the stats were more sexist than they are today).

He found that the rate of growth in "nominal" wages – that is, before adjusting for the effect of price inflation – is lower than at any time in the past 30 years.

Real wage growth – after allowing for inflation – is also low, but real wage growth has been negative in several periods over the past 30 years.

Borland tests to see how much of the weaker growth in nominal wages over the two years to the end of 2015 can be explained by lower growth in consumer prices and labour productivity, which he does by comparing them with the figures for the five years to 2013.

He finds that weaker prices and productivity growth explain about 70 per cent of the weaker wages growth but, obviously, that leaves 30 per cent of it unexplained.

Next among the usual suspects is weaker growth in employers' demand for labour. It's well established that the strength of wages growth varies to some extent with the business cycle.

Wages should grow faster when demand for goods and services is strong and firms need to attract more workers, but grow more slowly when demand is weak. Indeed, it's common for employers to skip wage rises during recessions, when workers are more worried about hanging on to their jobs.

Economists use the "Phillips curve" (named after the Kiwi economist Bill Phillips) to study the relationship between wage inflation and the demand for labour, using the rate of unemployment as an inverted "proxy" (stand-in) for labour demand. Borland uses a broad definition of unemployment by adding to the official rate the rate of under-employment.

He finds, as expected, that wage growth is lower when unemployment is higher. But he also finds that a structural shift in the relationship between wage growth and broad unemployment occurred in the mid-1990s.

His figuring suggests that any level of demand for labour is now associated with a lower rate of wage growth than it used to be, and that an increase in labour demand now leads to a smaller increase in wages.

He lists various potential explanations for this structural shift, of which I think the most plausible is our move in the early 1990s from centralised wage-fixing to enterprise bargaining.

But a change so long ago can't explain why wage growth has been abnormally low in just the past two years or so – more than can be accounted for by lower inflation and productivity improvement.

Borland's best explanation for this is the weak growth in "output prices" – the prices charged to customers by employers, including the prices of exports. Slower growth in output prices will have constrained employers' capacity to pay higher wages.

So maybe wage growth will return to the post-1990s norm once coal and iron ore prices have stopped falling.

But my suspicion is that other global developments – including digitisation and the greater ability to move businesses to cheap-labour countries – has permanently weakened workers' bargaining power.

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THE 2016 FEDERAL GOVERNMENT BUDGET

Talk to Economics and Business Educators NSW annual conference, Burwood

In this talk I’m not going to give you the basic budget details that you could get - and probably already have got - from many other sources. Rather, I’m going to focus on just a couple of analytical issues about the budget that are new, tricky and contentious. My hope is that, by doing so, I’ll be giving you something new or newish to think about and also get you ready for any curly questions your students may ask.

In our study of the budget in Year 12 we tend to focus on the budget’s effect on the macro economy - on its role in macroeconomic management. But I’m a great believer in the Year 11 point that the budget also has two other economic effects - on the allocation of resources (what today we’d call microeconomic policy) and on the distribution of income - the equity or fairness perspective.

I’ll get to a discussion of the budget and fiscal policy’s role in the policy mix, but first I want to talk about the budget as tax reform, meaning I’ll consider its measures from the efficiency and equity perspective. In particular, I’ll look at the phased reduction in the rate of company tax.

The budget as tax reform

The government spent much of its first term grappling with the possibilities for reform of the tax system and, though we didn’t get the promised green paper/white paper process, five major tax measures were included in the budget. We got a tiny tax cut worth about $6 a week to the top quarter of taxpayers, costing the budget $4 billion over four years - the budget year, 2016-17, plus three further years. We also got a reduction in the rate of company tax, to be phased in over 10 years, with the cost to the budget in the first four years of $5.3 billion.

That gives us a total cost of $9.3 billion to a budget not expected to be back into surplus until 2020-21. So the budget also announced three tax savings measures. First, further hefty increases in the tobacco excise, worth $5.2 billion over the four years. Second, a crackdown on multinationals’ tax avoidance, including introduction of a diverted profits tax - the Google tax - that should raise at least a net $3.3 billion over the period. And third, a rejig of the superannuation tax concessions that should reduce the concessions enjoyed by very high income-earners by $6 billion, but increase the concessions to people on middle and low incomes - particularly women - by $2.8 billion, thus yielding a net saving of $3.2 billion over the four years.

Pulling all that together, we have tax cuts costing $9.3 billion, less tax increases totalling $11.7 billion, yielding a net increase in taxation over the period. There are a few things to note about this. One is that the tax increases were essentially copied from Labor. Another is that the cost of phasing in the reduction in company tax will progressively get a lot higher over the remaining six years, with a cumulative cost over the period of $48.2 billion. Our best available (unofficial) estimate is that, when fully phased in, the company tax cut will have an annual cost of $16 billion. So, viewed as a tax reform package, the changes announced in the budget are by no means revenue neutral, let alone revenue positive, as the story for the first four years implies. They’re revenue negative. Scrutiny of the budget’s “medium-term projections” out 10 years to 2026-27, suggest the package’s net cost will be covered by avoiding any further, bracket-creep-returning cuts in income tax until 2022-23, and by settling for a budget surplus in the last seven years of the projection that plateaus at a tiny 0.2 per cent of GDP (about $3.5 billion in today’s dollars).

Viewed as tax reform, the package is mixed. It doesn’t add up to an integrated program. The income tax cut is neither here nor there and the tobacco excise increase seems motivated more by revenue raising than improving smokers’ health. On the other hand, the super changes are genuine reform, while the moves to curb multinational tax avoidance are needed to help protect “voluntary compliance” by ordinary taxpayers and are likely to be increasingly effective as other, international measures come on line. Finally, the international economic agencies and many economists believe the most significant single reform we could make to encourage growth is to cut the company tax rate.

Leaving consideration of the company tax cut aside for a moment, it’s hard to see that the other measures will do much to make the allocation of resources more efficient or foster growth and jobs. The government’s claim that they will hasn’t been substantiated. On the other hand, some high income earners will claim that the tightening up of their super tax concessions will discourage saving, but it’s more likely merely to affect their choice of tax-preferred vehicle for their savings.

From an equity perspective, the effects of most of the measures are easily assessed. The tax cut is regressive, but only to a minor extent. Technically, the increase in tobacco excise is highly regressive, but not if you think discouraging low income earners from smoking will be of benefit to them. The super tax changes are progressive, making the concessions significantly less unfair. It’s hard to analyse the anti-multinational tax avoidance measures in conventional terms, although it’s obvious most Aussies think it’s an improvement to have foreigner companies “paying their fair share of tax in Australia”.

Analysing the cut in company tax

From an economic perspective, the plan to phase down the rate of company tax from 30 per cent to 25 per cent over the 10 years to 2026-27 is the centrepiece of the budget, the aspect of it most worthy of careful analysis, but also the hardest to analyse.

The phase-in plan is to start with small and medium-size companies and work up to big business. From July 1, 2016, the rate of company tax will be cut to 27.5 per cent for all companies with a turnover of less than $10 million a year. The cuts won’t start for big business until 2024-25, when the rate for all companies will drop to 27 per cent. After that it will be cut by 1 percentage point a year, reaching 25 per cent on July 1, 2026.

There is a widespread view among voters that the more of the tax burden that’s borne by companies, the less there is to be borne by you and me. This is a misconception, arising from the public’s inability to distinguish between the initial or legal incidence of a tax and its ultimate or final or economic incidence. Your students need to be reminded that, in the end, inanimate objects such as companies don’t pay tax, only humans do. In due course, the cost or benefit of a change in the tax imposed on businesses is passed back to the employees of the business, stays with the shareholder ownership of the business or is passed forward to the customers of the business in the form of higher or lower prices.

Let’s start with the legal incidence. The existence of Australia’s almost unique system of dividend imputation - introduced by Treasurer Keating in 1987 to eliminate the “double taxation” of dividends - returns to Australian shareholders the company tax already paid on their dividends by giving them a tax credit - a “franking credit” - set at the same rate as the rate of company tax. This means a cut in the company tax rate is offset by a cut in the rate of their franking credit, leaving them only a little better off should the company increase the amount of its dividends. But roughly half the shares in Australian companies are owned by foreigners, who aren’t eligible for dividend imputation credits. This is the basis for the claim that much of the initial benefit from a cut in company tax will go to foreigners.

About a quarter of foreign equity investment in Australia comes from America, where the rate of company tax is higher than ours, at 35 per cent. American companies with dividends on their Australian investments have to pay American company tax on them, but they get a credit for the Australian company tax already paid on them. This is the basis for the claim that, by cutting our rate of company tax for American owners of Australian shares, our Treasury is just making a gift to America’s Treasury. It’s true, however, that many American companies operating in Australia use various artificial devices to delay bringing their Australian earnings on shore and having to pay more, US tax on them.

Now let’s move from the initial, legal incidence of the company tax cut to the much trickier final, economic incidence. The plain fact is that economists have no solid empirical evidence on where the burden of company tax ends up. So they rely on theories and modelling based on those theories. These theories, and assumptions flowing from them, are still contentious among economists. The models they use aren’t capable of coping with the possibility that part - maybe a lot - of the burden of company tax is passed on to consumers, so they divide it between the two main factors of production, the suppliers of equity financial capital (shareholders) and the suppliers of labour (employees).

Note that the shift from legal to economic incidence is expected to be complete only in the long term - generally taken to be 20 years - as the economy changes in response to changed prices. You will have heard the quite counter-intuitive claim that, since about half the final economic incidence of company tax is borne by wage earners, it’s wage earners who would gain most from a cut in company tax. What’s the mechanism that would bring this about, according to the theory believed by many tax economists? It’s that the higher after-tax rate of return to equity investors caused by the lower rate of company tax causes them to increase their investment in Australian businesses. This increases our companies’ investment in physical capital, which increases the productivity of their employees’ labour. When competition in the labour market ensures workers gain a share of the benefit of that higher productivity, their real, after-tax wages rise. Note that the equity investors’ increased competition for investment opportunities eventually forces down the pre-tax returns they receive.

Note too, that, because of the effect of dividend imputation, most of the increased equity investment would come from foreign investors. Remember that the main argument for a cut in the company tax rate coming from big business and even from Treasury, is that our rate is higher than most other countries, making us “uncompetitive” in the search for foreign investment.

Treasury has modelled the final, economic incidence of a simple cut in the company tax rate from 30 to 25 per cent in the long run. Note that it has included in this modelling the economic effects of the budget measures needed to cover the cost to the budget of the company tax cut. It’s most realistic scenario is that the cost of the cut is covered by higher personal income tax (such as via bracket creep).

Treasury’s results suggest that, after about 20 years, a 5 percentage-point cut in the rate of company tax would cause the level of real GDP to be about 1 per cent higher than it otherwise would be. However, because most of the increased investment would come from overseas and would thus lead to an increase in our dividend payments to foreigners, about 40 per cent of the benefits from the increased business investment would flow overseas, leaving the level of real gross national income (the bit we keep) to be only 0.6 per cent higher that otherwise after about 20 years. Within Australia, the main benefit would come in the form of the level of real, before-tax wages being 1.2 per cent higher than otherwise. However, because it’s assumed the budgetary cost of the company tax is covered by higher income tax, the level of real, after-tax wages would be only 0.4 per cent higher. And note this: according to the modelling, the level of employment would be a mere 0.1 per cent higher. (Note too that, because in reality the company tax cut is to be phased in over 10 years, it could take the best part of 30 years before the full effects had flown through.)

Sorry, but this modelling - which like all modelling is full of debatable theory and assumptions - leaves me unconvinced that cutting the rate of company tax would have any great effect on “jobs and growth”.

Fiscal policy and the policy mix

Whichever way you measure it, the “stance” of fiscal policy adopted in the budget is, for all practical purposes, neutral. The budget deficit is expected to fall from $40 billion in the financial year just ending to $37 billion in the coming year, 2016-17. In principle, and using the econocrats’ shorthand way of judging it - the direction of the change in the overall budget balance - this decline in the deficit suggests the budget’s stance is contractionary. But a decline of $3 billion is equivalent to less than 0.2 per cent of GDP, which makes it too small to matter.

If you judge it the more careful, Keynesian way, which ignores the change in the cyclical component of the budget balance and focuses on the change in the structural component caused by the policy changes announced in the budget, you find that, adding up all the new measures, Mr Morrison plans to cut revenue by $1.7 billion and increase government spending by $1.4 billion, thus adding $3.1 billion to the structural deficit. In principle, this is a stimulatory stance of fiscal policy but, again, it’s too small to register. In which case, the stance is near enough to neutral.

The budget papers show the budget deficit falling only slowly from $40 billion this financial year to $6 billion in four years’ time, reaching a surplus barely on the right side of the line in 2020-21 (0.2 per cent of GDP), where it is projected to stay without growing for the following six years. When you remember the government’s goal had been to get the surplus up to at least 1 per cent of GDP by 2023-24, it’s clear the Turnbull government has abandoned the Coalition’s goal of reducing the deficit as soon as possible. And when you remember that the larger the budget deficit, the faster the public debt can be reduced, it’s in no hurry to cut its debt.

I make this point not in criticism, just to ensure you realise that the attack on debt has now been given a much lower priority. In this budget the priority has switched to cutting the rate of company tax and making a token attempt to return bracket creep.

With the economy growing at below potential for six of the past seven financial years, the budget expects economic growth in the year just ending and the coming year still to be a below-par 2.5 per annual rate, accelerating only to 3 per cent in the following year, 2017-18.

Although the stance of monetary policy has been highly stimulatory for the past three years, it obviously hasn’t been very effective in spurring the economy along. The further 0.25 percentage-point cut in the cash rate to a record low of 1.75 per cent announced on the same day as the budget is unlikely to do much to stimulate the economy, except to the extent that it seems to have reversed - for the moment, at least, the upward drift in the exchange rate.

In other words, it seems pretty clear that monetary policy has almost run out of puff. In which case, what’s left? What could the government do to give monetary policy a helping hand? Well, how about some fiscal stimulation? Not possible with the budget deficit so high? It’s not as big as it looks. The budget papers reveal (page 6.17) that the expected budget deficit for the new financial year of $37 billion includes about $36 billion in infrastructure spending. That is, the recurrent or operating budget is close to balance, and has been for a few years. The federal Treasury’s strange practice of lumping capital spending in with recurrent spending - implying that there’s something bad about failing to fully fund in the first year the construction of infrastructure that will deliver services to the economy for the following 30 or 40 years - makes little sense.

The consequences of this mentality seem particularly wrong-headed at present when the economy is running below potential, the rapid fall-off in mining construction activity is leaving room for a build-up in public construction activity, and the cost of long-term borrowing has never been lower.

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Why Turnbull's Google tax would be reasonably effective

So, Malcolm Turnbull and Scott Morrison are introducing a "Google tax" to ensure multinational companies "pay their fair share of tax in Australia". Really? You could be forgiven for being sceptical.

Does the Coalition really want to crack down on their generous mates at the big end of town? And, even if they do, how do we know a Google tax will work?

My sceptical mind (professionally trained by 40 years of living and breathing politicians) can see it all.

Big business had become disillusioned with Turnbull who, like Tony Abbott before him, had balked at increasing the goods and services tax. On no, is he a dud, too?

Turnbull knew he had to deliver "reform" for the big end of town and a cut in the rate of company tax was what it had its heart set on.

Further, he knew he had to have a project to be getting on with, a reason we needed to re-elect him, a way he could be seen to be doing what we expect of governments: adding to jobs and prosperity.

But polling shows most voters don't think cutting company tax is a good idea. Those blighters should be paying more, not less. What about all those internet companies defiantly telling a Senate committee they pay every cent they're legally required to? What about the Panama Papers?

My sceptical mind sees Turnbull realising that, if he wanted to get away with cutting company tax, he'd have to balance it by doing something big on multinational tax avoidance.

I know, let's copy the Brits' diverted profits tax, and not discourage the media from calling it the Google tax.

Look up the government's "tax integrity package" in the budget papers, and your scepticism deepens. It contains eight measures, but six of them only rate an asterisk, denoting that "a reliable estimate [of the revenue expected to be saved] cannot be provided".

The diverted profits tax is expected to raise a mere $100 million a year, and not start doing so until 2018-19.

So how come we're being told the package will raise a net $3.3 billion over four years? Because all the money will come from establishing a new "tax avoidance taskforce" and hiring hundreds more people to audit "large corporates and high wealth individuals".

Hang on. Isn't this something the government could and should have done years ago? Hasn't it actually been cutting Tax Office staff until now?

Right. Got all that? Now get this: although much of that scepticism is no doubt justified – especially in terms of motivations – I'm convinced the crackdown on multinational tax avoidance is genuine, that it started a couple of years ago, and that the new diverted profits tax is likely to be reasonably effective in collecting more revenue.

The fact is that – no doubt in response to pressure from voters and their own difficulties finding the revenue to cover all the spending they want to do – the developed countries have finally got serious about countering tax avoidance by the "transnational corporations" (including some headquartered in Oz) that have come to dominate global commerce.

This requires a high degree of co-operation between countries, and this was initiated by the G20 a few years ago, using the services of the Organisation for Economic Co-operation and Development.

During our year in the G20 presidency, Joe Hockey and Treasury became heavily committed to the organisation's BEPS – base erosion and profit shifting – project, pushing it along and vowing to set a good example to others.

A key part of the project is the "country-by-country reporting requirement" which requires big multinationals to report details of their profits, sales, employees, assets and income taxes paid in each of the countries in which they operate.

They should do this in their home country but, if they don't, any country in which they operate can demand the full report and share it (confidentially) with the other countries involved.

We put our end of the BEPS agreement through Parliament last year. Once this arrangement gets going it will greatly improve national tax authorities' ability to counter transfer pricing.

The Brits got impatient and introduced their own diverted profits tax, which involves the taxman making an estimate of the amount diverted, without the benefit of the detailed information that will soon be available. Their new tax took effect in April last year.

There are plenty of campaigners against multinational tax avoidance and they weren't impressed by the Google tax, just as they were disappointed with the final report on the BEPS project.

By now, however, they've decided the tax is reasonably effective. And Amazon has announced that it will avoid the diverted profits tax by paying ordinary tax on its retail sales in Britain rather than booking sales through Luxembourg.

That's an important point. Our version of the tax, which would apply from July next year, would be levied at the penalty rate of 40 per cent, rather the present big-company rate of 30 per cent.

So it's designed not to raise tax directly, but to encourage multinationals to avoid it by paying the right amount of ordinary company tax. Our expected collections of only $100 million a year would come just from the slow learners.

Fortunately, sometimes it's possible for our pollies to do the right thing for the wrong reasons.

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Hard-working Aussies help pay for company tax cut

I often think Scott Morrison does a remarkably good Joe Hockey impression, but in this budget he's performed a Wayne Swan sleight-of-hand that's better than Swanny ever did.

Consider this. Big business has been desperate for a higher goods and services tax. Why? Because this was the only way the government could afford to grant them their longed for cut in company tax.

So when Malcolm Turnbull balked at increasing the GST, it seemed he wouldn't be cutting company tax either.

When the budget was unveiled, however, we still saw the government committing itself to cutting the company tax rate from 30 to 25 per cent over 10 years, and making an immediate start by cutting the rate to 27.5 per cent for all companies with turnover of less than $10 million a year, from July 1.

For good measure, Turnbull and Morrison threw in a small personal tax cut for the top quarter of earners. How on earth did they afford this without a higher GST?

Over the four years of the forward estimates, the company tax phase-down will cost $5.3 billion. Add $4 billion for the personal tax cut and we have $9.3 billion to account for.

The measures in the "tax integrity package" – which include the Google tax – should raise a net $3.3 billion.

The reforms to superannuation tax concessions will save a net $3.2 billion over the period, and the further hikes in the tobacco excise should raise $5.2 billion, meaning the three big revenue-saving measures will raise a combined $11.7 billion.

This leaves the government – the one so committed to lowering taxation – $2.4 billion ahead on the deal.

Satisfied all is in order? I'm not. Once fooled by Swanny, twice shy.

This government has done nothing but complain about how Labor committed itself to two expensive new spending programs – the national disability insurance scheme and the Gonski school funding – which proved to be "uncosted and unfunded".

What Swan did was stagger the introduction of the two schemes so that they didn't cost all that much in the first four years (the ones shown in the forward estimates) but got a lot more expensive in the following years (which we couldn't see).

Get it? This is the same trick Turnbull is using to hide the unaffordability of his vastly more expensive plan to cut the company tax rate over the next 10 years.

Little wonder he was so reluctant to reveal that the cumulative cost of the company tax "glidepath" was a paltry $48.2 billion.

So we've been told how the first $5.3 billion will be funded, but not the remaining $42.9 billion.

A key figure we haven't been told is the annual cost of the tax cut once it's fully introduced. But Deloitte Access Economics' Chris Richardson's estimate is about $16 billion a year.

Clearly, this is far more than the budget's tobacco excise increase, super reforms and company tax "integrity package" are likely to be able to cover.

In the last year of the forward estimates, 2019-20, those three measures are expected to raise only about $5.1 billion.

So if Morrison can now claim that the 10-year company tax cut phase-in has been costed, can he also claim it's been funded?

He's making the same claim Swan used to make by producing the "medium-term projection" of the budget showing it returning to surplus (in 2020-21, no change from the mid-year update) and staying in surplus until 2026-27.

Trouble is, whereas in last year's budget the government's "budget repair strategy" required it to deliver surpluses "building to at least 1 per cent of gross domestic product by 2023-24", this year's projection shows the surplus plateauing at 0.2 per cent for the last six years to 2026-27.

Why? Because progress in increasing the surplus (so as to pay back more debt) has been sacrificed to covering the ever-growing cost of the cut in company tax.

The cut really becomes expensive in the last three years, when big businesses join the phase-in. You can bet this "glidepath" has been carefully structured to stop the medium-term budget projection looking too sick.

Note too that the medium-term projection assumes tax collections are capped at 23.9 per cent of GDP after 2021-22, with the possibility that any excess is used to fund bracket-creep-returning tax cuts for Morrison's "hard-working Australians".

So the projections purporting to show that the company tax cut can be funded by our settling for seven years of a budget surplus no higher than $3.5 billion in today's dollars, also rely on the assumption of no further personal tax cuts for another six years.

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How the budget stacks up as tax reform

When politicians announce a tax cut to be delivered after they've been re-elected, there are no prizes for guessing it's an electoral bribe. But they never fail to sanctify the exercise by assuring the lucky recipients that the money they're getting will do wonders for the economy.

Malcolm Turnbull is going into this election promising a pathetically small tax cut to the top quarter of taxpayers, which starts – officially, anyway – the day before the election.

Plus a one-sixth cut in the rate of company tax that's to be phased in over the next decade, starting small and ending big.

Company tax will be cut because Turnbull & Co Ava Plan to help Jobson Grothe​.

Which sounds nice. But is it good enough?

Before the last election, Tony Abbott promised to devote his first term to laying the ground for major tax reform. There'd be a full inquiry – with no restrictions on what could be considered – a green (discussion) paper and finally a white paper setting out exactly what the government planned to do in its second term if re-elected.

So we're entitled to view the tax measures announced in the budget against the major renovation we were promised.

How does the budget stack up as an exercise in tax reform? How does it measure up against the two big reform criteria of efficiency and equity (fairness)?

Well, the budget contained five big tax measures, but they don't add up to an integrated whole.

First is the tiny tax cut, which will have an annual cost of about $1 billion, and a combined cost of almost $4 billion over the four years of the "forward estimates" shown in the budget.

Then there's the plan to slowly cut the company tax rate from 30 per cent to 25 per cent, but starting with small business and working up in size, not getting to big business until 2024-25 and reaching the finishing line in 2026-27.

This will cost $700 million in the budget year, 2016-17, rising to $1.7 billion by the last year of the forward estimates, and costing $5.3 billion over the first four years.

We've subsequently been told (reluctantly) that, by 2026-27, the total cost of the phase-in will be just a fraction higher at $48.2 billion. Chris Richardson of Deloitte Access Economics estimates that, by then, the annual cost of the full cut will be $16 billion. Not cheap.

Helping to cover the cost of these personal and corporate tax cuts will be a big rise in the excise on tobacco (raising $5.2 billion over four years), the crackdown on multinationals' tax avoidance (raising about a net $3.3 billion over four years), and the net saving from various reforms of superannuation tax concessions ($3.2 billion over four years).

Let's start with equity: how do the tax measures affect the distribution of income between rich and poor households?

Since the tiny tax cut ($6 a week) goes to only the top quarter of income earners, it's "regressive" (reducing high earners' average tax rate by a higher proportion than low earners' average rate). But, obviously, not by much.

On the other hand, the superannuation changes hit the top few per cent of fund members quite hard, then give about half of those savings to members with lower incomes, particularly women. So, quite "progressive".

Strictly speaking, taxes on tobacco are highly regressive – and getting more so as the better paid give up smoking or never take it up.

But is discouraging poor people from smoking doing them harm? Not in my book.

It's a lot harder than you may imagine to determine whether cuts in company tax and reduced tax avoidance by multinational companies are progressive or regressive.

But I'll unpick that knot on another day so we can move on to efficiency. An economically efficient tax system is one that raises the revenue we need with least distortion of the choices each of us makes about working, spending, saving and investing.

Since most taxes do have effects on our choices, the efficiency objective is about choosing the combination of taxes that does least to affect them.

It's a stretch to imagine the tiny tax cut will have much effect on incentives.

And despite the government's claims about the fabulously beneficial effects of the company tax cut, if you actually read its own modelling you discover the benefits are tiny – and would take 30 years to arrive.

People hit by the super changes will tell you they'd discourage saving, but don't believe them. Their effect – if any – will be on which tax-preferred vehicle wealthy people use for their saving. Studies show high income-earners save a lot of their income regardless of the incentives offered.

But there's a class of taxes that are consciously used to discourage certain forms of behaviour. High taxes on tobacco are an example. So is a tax on emissions of carbon dioxide.

And there's another small class of taxes that can't distort behaviour because they tax only "economic rent" – the profits or other benefits people enjoy that are in excess of the returns they need to keep them doing whatever it is they've been doing.

A good example is a resource rent tax. Another is a tax on the unimproved value of land.

Judged as tax reform, this budget does little to improve efficiency by shifting the mix of taxes away from taxing "goods" (such as work) to taxing "bads" (such as pollution). Nor has it done anything to shift towards taxes than don't distort behaviour.

Though one of its first acts was to abolish a tax on a bad – the carbon tax – and a tax designed not to distort choices – the mining tax – the government has done little to replace them with anything better.

This budget is a plan for jobs and growth? Only at the rhetorical level.

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Why Turnbull's super changes are sorely needed

I'll never forget the budget of May 2006. It was during the first half of the resources boom, before the global financial crisis. The economy was booming, tax dollars were pouring into the government's coffers and it was embarrassed at the way the budget surplus kept piling up.

John Howard and Peter Costello were competing with each other to shovel money back out the door. Howard liked spending it on middle-class welfare, whereas Costello wanted to use it to cut taxes.

He was more than halfway through his eight tax cuts in a row, but in the 2006 budget he found a way to go one better. He had to fix some problems with the superannuation system, and he hit on the idea of making sweeping changes to the various super tax concessions that made them far more generous.

The changes would be pretty expensive, likely to grow rapidly every year. But that didn't matter because the budget was overflowing and mineral export prices would stay high forever. An election was coming in 2007 – when the changes would start – and voters would love 'em.

I remember business people saying privately the largesse was too good to last. Big-name economists were saying publicly the new concessions were unsustainable.

That was 10 years ago. Turned out the doubters were right, and last week it fell to the next Coalition government to correct Costello's monumental miscalculation.

People say the politicians are always tinkering with super. It's true. That's partly because, in the intervening Labor years, Wayne Swan chipped away at Costello's excesses in almost every budget.

But the measures announced last week were much more comprehensive, and braver, than anything Labor did – or has promised to do if it wins this election. This is the Libs cleaning up their own fiscal mess, and doing it at the expense of their own supporters.

You've seen all the articles by personal finance journos explaining how the changes will work and heard all the complaints from the well-lined.

So let's focus on the changes from the perspective of public policy, not your pocket. You start to understand their rationale when you realise that, until now, all the tax concessions for super have never had a formally stated objective.

The new objective is "to provide income in retirement to substitute or supplement the age pension". Which is a nice way of saying we're no longer going to let you use super to amass far more than you're ever likely to need to live on – that is, to get a tax break on savings you're intending to leave to your kids.

In principle, there are three points at which the government could tax money being saved for retirement: when you make contributions to your fund from your annual income, when the money in the fund earns interest and dividends, and when, in retirement, you withdraw money from the fund.

Under the rules Costello established, contributions are taxed at a flat 15 per cent (rather than at your "marginal" rate of income tax which, depending on the size of your income, can vary from 21c in the dollar to 47c).

Earnings in the fund are taxed at a flat 15 per cent and withdrawals are tax free.

Malcolm Turnbull's new rules would lower the annual cap on concessionally taxed contributions and lower the threshold at which concessional contributions are taxed at 30 per cent rather than 15 per cent.

They would limit to $1.6 million the amount you could have in the pension part of your fund, where no tax is charged on annual earnings. Anything in excess of that would have to stay in, or return to, the pre-retirement "accumulation" part or your fund, where earnings are taxed at 15 per cent (less tax credits from dividends).

The new rules would also impose a $500,000 lifetime cap on non-concessional (after-tax) contributions. This affects people who want to transfer other savings or inheritances or the proceeds from selling investment properties into low-taxed super.

Treasury calculates that only the top 3 or 4 per cent of fund members will be affected by these measures. So the plan is to chop back the tall poppies. Even so, because they (including yours truly) have been getting the lion's share of the concessions, by their third year these measures would be saving the budget $2.1 billion a year – and rising.

Some of this saving would be used to pay for changes that made it easier for women to build up bigger super balances despite their years of broken and part-time service.

The changes would make it much harder to use "salary sacrifice" to boost super balances (at one stage Costello was letting people like me sacrifice up to $100,000 a year – a stretch, even for me) but would encourage more savings-splitting as husbands helped wives to get higher balances.

Rather than making super concessions fairer, I'd prefer to say Turnbull's plans would make them less unfair. It would still be true that people on less than $37,000 a year got no concession on their contributions, whereas people on $180,000 to $230,000 got a saving of 32c in the dollar.

The biggest "incentives" – which apply to contributions that are compulsory anyway – go to well-off people who could, and would, save a lot of their income even without any concessions.

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How to unspin the budget

You can't look hard at the budget and its glitzy packaging without being reminded of Rob Sitch's highly educational TV show, Utopia.

My colleague Peter Martin has detected that the Turnbull government, as distinct from its Coalition predecessor, is less ideological and more evidence-based in its policy making. Its reforms to superannuation and Work for the Dole are prime examples.

That's good news. Even so, the more intelligent and articulate Malcolm Turnbull hasn't been able to withstand the pressure to use spin doctors to massage his messages to the electorate.

A better term for that dubious profession is "perception manipulators". They "operationalise" one of modern politicians' core beliefs: the perception is the reality.

The world of government is such a complicated place that reality is seen only in glimpses - which is hugely fortunate for our pollies because the reality is usually much harder and more costly to fix. It's a lot easier to manipulate the punters' perceptions of that reality.

Scott Morrison has been relentless in insisting that the budget is not just another budget, but an economic plan for jobs and growth.

Really? Name the budget that hasn't been a plan for jobs and growth.

So why the fuss this year? Because, to quote Morrison, "Australians have clearly said we must have an economic plan". How does he know what Australians have clearly said? Because that's what a few of them said to the Liberal Party's focus groups.

Feeding back to voters the sentiments they've expressed in your focus-group research is a standard perception manipulators' trick.

My guess is the government had a collection of end-of-term and pre-election bits and pieces it wanted to get up, but felt it should package them as an "overarching narrative" by saying they were a plan.

A plan about what? The usual: jobs and growth. Just about everything you do - raise the tax on cigarettes, stop wealthy people like me saving too much in tax-sheltered super accounts - can be portrayed as helping to promote jobs and growth. And they were.

Every non-plan plan needs to come in impressive packaging. The plain and earnest budget papers prepared by Treasury and Finance have long been accompanied by an overview booklet prepared by the spin doctors and disparagingly referred to by the econocrats as "the glossy".

This year there are four glossy documents, not one. And whereas the original majored in fancy graphs and tables, the extras add a lot of colour pics of good looking punters. It's fiscal bling.

Even the budget website has had the interior decorators in. You now have to click through a host of pretty fluff to find what you need.

Key to the success of perception manipulation is the use of magic words - words with strong positive or negative connotations, words that arouse emotions.

What words are guaranteed to frighten punters? Try "debt" and "deficit". What word gladdens the hearts of business people? "Growth".

And of the punters? "Jobs". They may not claim to know anything much about economics, but one thing they do know: there can never be enough jobs. Claim to be creating them and you're well on the way to the punters' tick.

This time the magic-word workhorse is "middle". Almost all Australians believe themselves to be middle class, on incomes near the middle. The higher your income, the less your ability to know where the middle is.

Morrison never actually said his tiny tax cut for people earning more than $80,000 a year was aimed at middle-income earners, all he said (correctly) was that the threshold had been set just above the average full-time wage.

That was enough to have innumerate political journalists - particularly at the ABC - saying it for him.

Trouble is, almost a third of wage-earners are part-time, not full-time. And plenty of taxpayers aren't employees. What's more, the relatively small number of people on super-high incomes means that the "average" or mean taxpayer's income is well above the middle (or median) taxpayer's income.

All this explains why the tax cut will go to only about the top quarter of taxpayers. That's the middle?

These days, no self-respecting perception manipulator fails to pull some "modelling" out of his bag of tricks. The results of the modelling are almost invariably misrepresented, being made to sound more significant than they are.

The spin meisters​ pray the media won't actually look at the modelling, and their prayers are almost always answered.

You can blame it all on ever-declining standards of political behaviour - which Turnbull's arrival has failed to arrest - or you can share the blame with a media that allows itself to be manipulated.

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Just where are all the jobs and growth in the budget?

As you may have heard Scott Morrison mention a time or two this week, this isn't an ordinary budget, it's an economic plan for "jobs and growth". Sorry, Scott, that's what they all say.

Jobs and growth – without worsening inflation – are the objective of what economists call "macro-economic management".

And, along with monetary policy (the manipulation of interest rates), budgets (fiscal policy) are the instruments they use.

The obvious and quickest way a budget can attempt to boost growth and jobs is to use increased government spending or cuts in taxes to "stimulate" the economy and make it grow faster.

Is that what Morrison has done? No, not really. The short-cut way the econocrats assess a budget's likely effect on the economy is to examine the direction and size of the expected change in the budget balance.

This shows the net effect of the government's spending (which puts money into the economy) and its revenue-raising (which takes money out).

Morrison is expecting a budget deficit of $40 billion in the present financial year, which should fall to $37 billion in the coming year, 2016-17.

That expected fall in the deficit of just under $3 billion may sound big, but relative to the value of the nation's expected production of goods and services – nominal gross domestic product – of $1.7 trillion, it's equivalent to less than 0.2 per cent.

So, though the expected fall in the deficit suggests the budget will be working to inhibit the economy from growing and creating extra jobs, the effect is so tiny it doesn't count.

An alternative, more textbook Keynesian way of making that assessment is to focus only on the policy changes announced in the budget and the combined effect they are likely to have on the economy's growth and job creation.

The budget papers reveal that, in the coming financial year, the measures announced should reduce budget revenue by $1.7 billion and increase government spending by $1.4 billion.

So, judging it this way implies the budget will stimulate growth rather than work against it – that is, have a "contractionary" effect. But, again, the size of the net effect – $3.1 billion – is too tiny to matter.

Thus, at the macro – economy-wide – level, there's no evidence to support Morrison's claim that the budget will do great things for growth and jobs.

This conclusion is supported by the budget's forecasts that the economy (real GDP) will grow no faster in the coming financial year than it's expected to grow this year – by a below-potential 2.5 per cent a year – and improve just a little to 3 per cent in 2017-18.

But that's not the end of the story. What can we say about the budget if we switch from examining its likely effects at the short-term, macro level to viewing it as an exercise in using longer-term, micro measures to foster growth and jobs?

"Micro-economic reform" is about making changes to the way the government intervenes in particular markets, or is affecting people's incentives, with the objective of improving the economy's ability to grow (and create more jobs in the process).

Morrison offered a list of things the government has been doing to encourage growth.

But his chief exhibit is his new "10-year enterprise plan" to support growth and jobs. The plan involves cutting the rate of company tax from 30 per cent to 25 per cent over the 10 years to 2026-27, biasing the phase-in towards small and medium-size businesses, so big business's tax rate doesn't start to phase down until 2023-24, as well as widening access to accelerated depreciation by about 90,000 medium-size companies.

These reforms, Morrison assures us, will boost business investment and make Australia more competitive as a destination for foreign investment, thereby leading to "more job opportunities, more secure jobs and higher real wages".

And get this: Morrison has Treasury modelling to prove it. Delivering tax cuts for companies is expected to "permanently expand the economy by just over 1 per cent over the long term".

Impressed? Don't be. The Treasury modelling has been summarised and separately released. First, it's not an annual increase in real GDP of 1 per cent. It's saying that, by the end of the long term, the level of real GDP would be 1 per cent higher than otherwise.

In econospeak, "long term" means about 20 years. Divide 1 per cent by 20 and you get an annual increase too small to see.

Second, Treasury didn't actually model the government's complicated 10-year phase-down with priority to smaller companies. Econometric models are far too simplified to measure real-world policy changes.

It modelled a simple cut in the rate from 30 per cent to 25 per cent. So it could take even longer than 20 years for the full benefits to flow through.

Third, Treasury has accepted that, particularly because much of the benefit from a cut in company tax would go to foreign shareholders in Aussie companies and much of the new investment would be funded by foreigners, for Australians the change in real GDP exaggerates the benefits of the move.

A better measure is the change in real gross national income, which reduces the expected long-term level increase from 1.1 per cent to 0.7 per cent.

The modelling says much of this benefit would show up as an ultimate long-term increase in the level of real, after-tax wages of 0.8 per cent.

But note this: the ultimate long-term increase in the level of employment would be 0.2 per cent. So, even on the government's own modelling, the increase in growth would be small and the increase in jobs would be trivial.

To be fair, many economists believe that cutting the rate of company tax is the biggest and most obvious thing to do to improve our economic performance.

Sorry, but I can't see it.

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Budget more about politics than jobs and growth

You get the feeling this budget was pulled together with the use of a checklist. "We've got to have something on super, bracket creep, women, company tax, cities, multinationals, infrastructure . . ."

It involves a lot of imminent-election tidying up of loose ends from projects the government has supposedly been working on for three years, plus much squaring away of key interest groups.

What it's not is any kind of carefully considered "plan" for the economy, whatever Scott Morrison's claims.

It is, of course, a plan to get Malcolm Turnbull re-elected. Its measures are much more easily explained in political terms than justified as doing wonders for "jobs and growth".

Coming from the man in whom we held so much hope, it's uninspired and uninspiring. It's neither agile nor innovative, with not a spark of greatness.

That doesn't make it a bad budget, however. It's competent. It will play its part in ensuring the economy keeps chugging on for another year.

It contains all the Coalition biases you'd expect in a Coalition budget.

It's a cautious budget, with little to which many people will take great exception. Most voters' pockets won't be greatly affected one way or the other - certainly not in the near future - which, of course, is the reason for the caution.

If you believe the government should be pressing on with reducing debt and deficit - as it repeatedly promised it would - the budget is a great disappointment.

Turnbull and Morrison have achieved little more than their Coalition predecessors did. They inherited from Labor an expected budget deficit for 2013-14 of $30 billion (or 1.9 per cent as a proportion of gross domestic product).

Now Turnbull and Morrison are expecting a deficit of $40 billion (or 2.4 per cent of GDP) in the present financial year, falling only to $37 billion (2.2 per cent) in the coming year.

They expect government spending to grow by 4.7 per cent and tax revenue by 5 per cent.

Morrison boasts that the budget "outlines a path back to surplus", but that's true of every previous budget, back to the one Julia Gillard took to the 2010 election. The path first supposed to end in 2012-13, now stretches to 2020-21 - if you can believe it.

Up to now, the slow progress is explained partly by continuing falls in export prices. Much of what progress the Coalition has made is explained by it keeping the proceeds of bracket creep.

The truth is Turnbull and Morrison have abandoned any attempt to cut the deficit. Their best effort is to avoid doing anything that adds to it, while they wait for nature - "growth" - to take its course.

But while this lack of enthusiasm for the axe will disappoint those who've been convinced our debt is perilously high, I'm not among them. Morrison is right to say the "transitioning" economy is still too "fragile" to cope with public sector slashing and burning.

To that extent the budget wins high points for its steady contribution to the management of the macro economy.

It doesn't win many points for fairness, however. We now know what more than three years' big talk about tax reform adds up to: not a lot.

Low to middle income-earners have been saved from an increase in the goods and services tax, but gain nothing.

For years we've been told bracket creep is a terrible thing, hitting people on low taxable incomes harder than those on high incomes.

So what's the remedy? A tiny tax cut which, because it starts with people on more than $80,000 a year, will benefit only about the top quarter of taxpayers.

Thus the government gets to keep all the bracket creep to date and most of the bracket creep to come. But remember, only Labor stands for higher taxes.

What else do high earners get? No reneging on ending the 2 per cent temporary deficit levy. No change to negative gearing schemes, to the 50 per cent discount on capital gains tax, to family trusts or to deductions for professional development courses in Hawaii.

Big business missed out on its longed for increase in the GST and on a cut in the top rate of income tax but, even so, did get the promise of a company tax rate falling by 5 percentage points to 25 per cent, starting in the early 2020s and continuing until 2026-27 - if you can believe it will happen.

The big exception to this, however, are the changes to superannuation tax concessions, which will be less generous to high earners and less mean to women and low earners.

In other key areas of reform - particularly improved effectiveness in healthcare, education and infrastructure - after three years the government has hardly scratched the surface, with little further progress in the budget.

"Jobs and growth" is a slogan, not a plan. Its purpose is to create the illusion of a busy, striving government and divert attention from the lack of progress in achieving the much-promised return to budget surplus.

Name the budget - or the government - that hasn't claimed to have jobs and growth as its overriding goal.

To claim that a tiny tax cut and a "glidepath" cut in company tax will have any significant effect on jobs and growth is an exercise in over-optimism and exaggeration.

The tax cuts for small business, and their extension to a relative handful of medium businesses, is more about politics than jobs and growth. Small businesses have votes; big business has most of the jobs.

This is not the budget we were entitled to expect when Turnbull ousted Tony Abbott last September.

It's probably better than Abbott and Joe Hockey would have delivered, but only by a bit.

This is the last of three budgets from a government seeking re-election on the basis that only the Coalition is any good at managing budgets and running the economy.

That was a lot easier to believe at the last election than it is today.

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