The 2005 Budget

You are probably already knee deep in Budget analysis by now, so rather than adding unduly to that pile by attempting to summarise the entire Budget in this newsletter, I will include some personal thoughts on the highlights of Peter Costello's tenth and most significant Budget.

(All of the Budget documents are available from a link on the Budget website . I have also included a series of Budget Fact Sheets dealing with all the major Budget topics, a Budget Overview and a transcript of the Treasurer's Budget Speech in the Downloads section of my website here . And on the very local front, see here for details of additional Federal funds for improving roads in Wentworth.)

The tax cuts deservedly captured Wednesday morning's headlines. For many years Australia has had, by international standards, a top marginal rate that is high and a tax threshold from which that rate is paid which is very low.

The consequence of this is that instead of having the top rate cut in at 1.4 times average weekly earnings, taxpayers will not reach the 47% rate until they are earning around three times average weekly earnings. In comparative international terms this takes us from the bottom of the OECD pack to the middle of the field.

However, the most significant element in the Budget, in my own view, is the way in which it continues nine years of responsible economic management and establishes Australia as one of the best prepared developed nations for the demographic challenges which now await us in the years ahead.

The Government has established a Future Fund in which it will invest, from the proceeds of budget surpluses, an initial $16 billion. It is intended to make a substantial investment from the sale of Telstra into this Fund as well. The Fund is dedicated to fund the currently unfunded superannuation liabilities of the Commonwealth which stand today at $91 billion. It will be managed by an independent board, its earnings will be re-invested and its funds will accumulate (and thus cannot be appropriated for other purposes) until all the superannuation liabilities are fully provided for.

At the same time the Government has been able to reduce net Government debt to around $6 billion; or less than 1% of GDP. Under Labor it stood at $96 billion . This reduction is a remarkable achievement especially given the OECD average is around 50% of GDP!

By creating this fund and retiring debt we are ensuring that our liabilities are not passed on to our children and grandchildren. This is economic sustainability in action.

Another aspect to economic sustainability is increased workforce participation. Tax cuts are a major element in that. In addition the income levels at which Family Tax Benefits are progressively withdrawn will increase. This, together with other changes, will reduce high effective marginal tax rates and lessen disincentives for increased participation in the workforce.

A key element in increasing participation is the commitment to a more sustainable welfare system. As most Australians recognise,  our welfare system is out of date. There are 2.6 million Australians of working age on income support (principally Disability Support Pension and Parenting Payment).Those who qualify for the Parenting Payment have no obligation to seek work until their youngest child is 16. Those on the DSP have no obligation to seek work at all.

From 1 July 2006 those on Parenting Payment will have a year to seek work voluntarily from the later of 1 July 2006 or when their youngest child turns six. After that they will become subject to an obligation, based on their capacity, to seek part-time work of at least 15 hours per week. Similar changes will be made to the DSP.

These changes are not designed to save money in the short term. Because there will be a considerable new investment into child care (including an extra 84,300 Outside School Hours Childcare places) and other programmes to promote and assist participation, it is expected that the changes will not become revenue neutral for at least eight years. Once again, this is an example of the Government's determination to make responsible economic decisions which are designed to protect our prosperity in the long term.

Finally, in this deliberately brief discussion of the 2005 Budget, I should mention what for many people will be the most popular single measure: the abolition of the Superannuation surcharge. This surcharge was introduced in 1996 and imposed an additional tax on contributions to and relevant termination payments for higher income earners. As part of its commitment to encouraging savings and self reliance, the Government had endeavoured to reduce it to 7.5% as part of the 2004 Budget. The Senate had only agreed to a reduction to 10% (from next financial year.) Now it will be completely abolished.

Not everyone is happy however. Mr Beazley has said that Labor will oppose the abolition of the superannuation surcharge just as they will oppose the tax cuts. Of course when the surcharge was introduced in 1996 (to help pay off Labor's debt), Mr Beazley voted against it. Now that Labor's debt has been paid off, he will vote to keep the surcharge.

Mr Beazley 's ability to walk both sides of every street is not limited to superannuation. In February he told the Sydney Morning Herald that “Labor's priorities would be to relieve the electorally powerful middle-to-high income earners hit by the top tax rate." He complained that the top rate of tax cut in at too low an income threshold and that it was affecting ordinary trades' people. His Labor colleague Bill Shorten , the National Secretary of the Australian Workers Union, has made the same point many times.

What a transformation from February to May! Now that the threshold has been increased, Mr Beazley wants to keep it where it was. All of Labor's windy rhetoric about tax reform has been nothing more than talk. When the opportunity is presented to support a reduction in tax and an increase in incentives to work, the Labor Party reverts to one of its core principles:  High Taxes!

The Liberal Party, on the other hand, has continued over ten budgets to deliver  reductions in tax consistent with  responsible economic management.

Yours sincerely,
 

Malcolm Turnbull MP
Member for Wentworth