With the Government announcing its plan to scrap a proposed increase to the Medicare levy and talks of an income tax cut, economist Saul Eslake takes a look at what the May budget may look like.

Transcript
KUMI TAGUCHI, PRESENTER: Next month’s budget is being widely seen as the Turnbull Government’s last chance to seize the political initiative before the next election.

It has already flagged personal income tax cuts. Now there is another budget sweetener: dropping the proposed rise in the Medicare levy, which was meant to pay for the National Disability Insurance Scheme.

Economist Saul Eslake joined me from Hobart a short time ago.

Saul Eslake, thank you for your time.

SAUL ESLAKE, ECONOMIST: Thanks for having me.

KUMI TAGUCHI: Off the back of this announcement that the Medicare levy is going to be dumped, is there really enough money coming in to justify this?

SAUL ESLAKE: Well, we won’t know until the Treasurer releases all of the budget detail in next month’s budget.

But we do know that, in the first eight months of this financial year – that is, up to February – the budget was looking much better than had been foreshadowed as recently as December’s Mid-Year Economic and Fiscal Outlook (MYEFO).

In particular, personal income tax collections are running about $1 billion ahead of where they had been expected to be at that time in MYEFO; and that is primarily the result, it would seem, of the stronger-than-expected growth in employment and, in particular, full-time employment.

More importantly, company tax collections were running about $3 billion ahead of where they were expected to have been at the end of February. So it may well be that the outlook for revenue, which has been a real problem for treasurers since about 2011, when the mining boom peaked, is all of a sudden starting to brighten again.

KUMI TAGUCHI: We have heard repeatedly by the then-Abbott and now Turnbull Government that we need to be fiscally responsible. Is eight months of better numbers enough to sort of dump that fiscal responsibility and start shedding potential levies?

SAUL ESLAKE: No, it isn’t. And it is, I think, really important that the Government continues with its trajectory of putting the budget back into a sustainable surplus in 2021 and beyond.

We don’t want to see the Government repeating the mistakes of the Howard era, when what turned out to be temporary revenue windfalls from the commodities boom and property and share market booms of the time were converted into permanent erosions of the revenue base, which since 2010 successive treasurers have been slowly trying to reverse.

That said, however: there is, if the economic projections underlying the longer-term budget projections turn out to be valid, room for the Government to offer targeted, modest, personal income tax cuts.

KUMI TAGUCHI: Can something like the NDIS really be costed on a budget basis, as opposed to a levy, where at least it can have a consistent level of funding over a long period of time?

SAUL ESLAKE: Well, yes, it can. Indeed, the vast majority of government spending programs are funded out of general revenue, rather than out of hypothecated taxes.

I mean, the Medicare levy as originally conceived has never paid for even a fraction of the cost of Medicare, the government program. It is a symbolic way of getting people to accept the tax increase to meet part of the cost, as was the initial (0.5 per cent) increase in the Medicare levy, introduced by the Gillard government with the support of the then-Opposition, way back in 2012-2013.

But almost every other government spending program – be it the aged pension, be it payments to schools or universities, be it defence spending, be it industry assistance or health spending more generally – is funded out the general pot of revenue.

KUMI TAGUCHI: How much is this about a pre-election budget?

SAUL ESLAKE: Hard for me to judge, because that is a political consideration, rather than an economic one.

This time last year the Government would have been looking at a wafer-thin surplus for 2021, had it not introduced or had it not proposed to increase the Medicare levy by half a percentage point, because that increase was slated to raise about $4.25 billion in the 2021 financial year: almost half of the surplus, which the Government in last year’s budget was forecasting for the 2021 financial year.

And most of the rest came from including the earnings of the Future Fund for the first time, as the legislation establishing the Future Fund entitles them to do from 2021 onwards.

So they probably thought back then, given the outlook for revenue as they saw it, that they needed to do something to fatten up the surplus they were forecasting for the end of the forward estimates period.

It now seems as though the Government doesn’t feel it needs to do that and they can, therefore, back away from a measure which a) was unpopular, b) was inconsistent with their claim to be the party of lower personal income taxes and c) which they weren’t going to get through the Senate, it would seem, anyway.

KUMI TAGUCHI: Saul Eslake, thank you for joining us.

SAUL ESLAKE: Thank you for having me, Kimi.