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Turnbull’s first budget missed two big opportunities

Getty

Getty

Prime Minister Turnbull and Treasurer Morrison deserve qualified praise for their first budget.

The government got some things right, particularly by taking long overdue action on the tax dollars leaking out of the budget through superannuation tax concessions and corporate tax avoidance.

And it was wise to spend the bulk of that extra revenue stimulating the small business sector through tax cuts, and giving middle-income tax relief to people likely to spend money with those very businesses.

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Turnbull and Morrison also stared down the far-right of the Coalition party room by allowing tax and spending to rise over the forward estimate to just above 25 per cent of GDP – not the 23.9 per cent target of the Abbott years.

The reason praise should be qualified, however, is that more could have been done on budget repair, and stimulus – and a bit more of both would have been desirable heading into an extremely tough 2017.

Missed gear

On the budget repair side, the government decided months ahead of the budget not to touch Australia’s generous negative gearing and capital gains tax concessions – the two taxes that have created excessive price inflation in the housing market.

The folly of this political move was clear to see on budget day, when the Reserve Bank cut its cash rate to 1.75 per cent.

Its statement on the decision said that “supervisory measures are strengthening lending standards and that price pressures have tended to abate. At present, the potential risks of lower interest rates in this area are less than they were a year ago”.

Why is that relevant to the budget? Because a sensible policy on negative gearing would take even more heat out of the housing market and give the RBA room to cut further if required to add to government stimulus measures through 2017.

Deciding, for political reasons, not to address this obvious flaw in the tax system is a lost opportunity in terms of tax revenue forgone, and the additional ‘macro-prudential’ effect such reforms would have had.
budget-2016-estimates

Not enough nation-building

Housing bubble policies were left in place.Photo:Getty

Housing bubble policies were left in place. Photo:Getty

There was speculation in the media before the budget that Turnbull and Morrison would unveil a dramatic, bold and nation-building plan for infrastructure.

Well, it cobbled together a list of existing, re-announced and new schemes which it claimed was worth $50 billion. But that’s not what the pre-budget speculation was about.

The really ‘bold plan’, which may still be announced during the election campaign, was to use the government balance sheet to borrow money at very cheap rates, and to on-lend it to state and local governments to help address Australia’s ‘infrastructure deficit’.

A large part of that mooted plan was to use ‘value capture’ to help fund repayment of those loans.

That effectively shifts the burden of infrastructure spending from the federal government to local and state governments, and encourages them to recoup the costs through rates and other forms of land taxes.

Economists broadly agree that broad-based land taxes are the least economically distorting form of tax – so that ‘bold plan’ would also be a tax reform plan too, taking some of the burden off inefficient taxes such as income tax and corporate tax.

That idea did not make an appearance on budget day.

That’s a pity, but let’s see if it reappears in the weeks ahead of the July 2 election. It would be a smart way to address budget repair, the ‘tax mix’ and the need for stimulus spending all at the same time.

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