A budget special from inside the lockup

Hello, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, Publisher of The Constant Investor.

And we are…

The Money Café.

In fact, we are the budget lockup Money Café Team tonight folks.

We are The Money Café inmates, locked up.

Yes, we’re inside, we are locked up and we are locked up for a while yet, Alan.  We’ve been in here since 1:30 and everyone, as usual, is starting to get exhausted now and starting to walk around and everyone is chatting.  Meanwhile the production people are super busy trying to put it all together.

And the party pies have gone cold now.

And there’s no tea left.

There’s no tea left.

Actually, there’s no water left.  It’s because all these public servants go home.

The sandwiches have gone hard and curling, it’s a sad sight.

They go home early, they expect us to clean up first in here.  So, tell me, we got a fair bit leaked, didn’t we really?  Especially the big stuff they leaked this morning and we knew about tax cuts with a good idea but what’s your first impressions of this pre-election, this last budget before the next election from the treasurer and his team?

Well, there’s just all this money coming in and I just think budgeting is so much easier when there’s lots of money around.

Where is that money coming from?

Well, it’s coming from extra company tax and extra individual income tax and it’s because of growth in employment.  Wage growth isn’t strong as we know but employment growth is strong and company profits are strong so there’s just money pouring in.  So, I’ve calculated that in the two years between the last time we had an actual outcome as opposed to forecasts which was last financial year 2016-17, year to June 17.  Between that time and the budget year that this budget is about which is 2018-19 the extra money is $64 billion or an increase of 15.6% in tax receipts.  That’s a lot.

Which is absolutely, and completely outpacing economic, economic growth is almost misleading when you find out that that’s the amount coming in.

In the golden years, in Howard and Costello’s golden years when they were reporting surpluses and paying off the national debt and setting up the Future Fund the tax receipts were growing at the same pace as they are now.

Right, so it’s really broadly similar.

It’s similar now to what Howard and Costello had.

And just on that revenue lift is it commodities, is that important in the overall scheme of things?

Yeah, but it’s broader than that now, I mean in those days obviously it was all about the mining boom, now it’s about tourism, the education boom, it has a lot to do with China really and also the employment boom which is increasing individual income tax receipts.

That’s actually healthier, isn’t it.  So, just to give people an idea of the basic announcement obviously they did come through with the promise on tax changes and they’re really at the lower end, and also some of the other inducements I suppose they had in mind for older people and retirees.  But, before we get to all that if all the money is rolling in one thing I noticed was all these measures, the ones that were leaked and the ones that people would read about tomorrow, they’re not really big.  They take these measures and they’re revenue neutral often, either 5 million, 10 million, they’re tiny, they’re not spending much.

They can’t for two reasons.  The two reasons they can’t have big measures and also the tax cuts have been put off for years, it’s a seven year plan which is meaningless in the context of a two or three year electoral cycle, I mean a seven year plan, come on, you’ve got to be joking.

Yeah, we know from the company tax cuts the reality of that.

Okay, so the reason they can’t do anything big is firstly they’re starting off with quite a whopping deficit so they’ve got to get it down and they have said that they’ll get the deficit down by 2020, and they’re going to do that, and the other…

To be fair they’ve accelerated that, haven’t they?

Yeah, they have.

That’s coming in earlier than they said.

They’ve brought it earlier one year, one year earlier.

One year earlier than they said last year.

Well, because they’re just rolling in money and the other reason is the NDIS which is soaking up a huge amount of money.

Now, look about the NDIS, so what they were going to do was they were going to increase the tax rate basically by 0.5%, they were going to lift the tax rate effectively because the Medicare levy was going to go up by 0.5%.  Now, they decided not to do that, so tell me about the NDIS.  How important is it and is it jeopardised by the fact that they decided not to specifically fund it?

So, I mentioned the 64 billion increase in receipts between 2017-2019.  Now, of that 18.7 billion goes on reducing the deficit, right?  That leaves 45 billion to spend on other stuff and the assistance to people with disabilities increases by 23.6 billion over that period.

So, when you take out that reducing the deficit it’s half of all the government’s money, is that right?

Yeah.

Yeah, so it’s enormous really.

It’s enormous, totally enormous.

Yeah, and it’s kind of like they have very little wriggle room around it, it would seem.

So, that’s half of it and then the rest of it is on health, education, defence, there’s a lot of money on defence.  This is over the past couple of years.  So, I try to look at the government like a company, money in, money out, how much are they making, and what’s real, not what’s forecast but what’s real. 

Not promised, yeah.

That’s kind of it.  So, of that money that’s coming in 8 billion has gone on defence.

And 20 billion plus is going on the NDIS.

Yeah, and so then you look at what’s going to happen over the next four years according to their forecast, which as I say aren’t real but anyway it gives an idea of what they’re going to be doing and basically, it’s all about increasing social welfare.  If you look at the individual expenditure forecasts health and social welfare soak up everything and everything else including transport, housing, public order, recreation, culture, all these kind of line items in the budget all get cut.

Yeah, to some extent they always do though, the health and social welfare, especially with an aging population they always do.  I mean, one of the things I thought to me the outstanding thing is the emphasis on the family home.  So, they’ve kind of decided that’s it, we’re stuck, we can’t tax it ever and it’s been going up in value.  So, you think about all the measures today, they’ve got that in common.  If you think about the reverse – it’s an interesting one, they’ll get an awful shock if this government backed reverse mortgage becomes a success.

Tell me what’s going on with that, I haven’t had a look at that.

Well it’s a reverse mortgage where the government has said you can get a mortgage not from the bank but you can go into the government and they’ll give you a reverse mortgage and that means what happens is let’s say you have a house, a big family house, but you’ve got a small pension and you don’t have enough money each year you can actually extend your income by getting an income stream from this loan that you’ll go with the government.  That’s it basically.

And you mortgage your house to the government?

You mortgage your house to the government which is a lot better, perhaps, than mortgaging it to a bank.  The scheme actually exists.

I’m not so sure about that.

Look, I’d be sure about it, actually, have you been watching the Royal Commission?  But, also that scheme actually exists, it’s been going for 30 years, there’s always been a government reverse mortgage but nobody knows it exists and nobody goes near it.

I certainly didn’t know.

Did you know that it’s given away 30 million over 30 years which is like nothing?

30 million over 30 years, not 30 billion?

No, Hawke brought it in and no one knows about it and no one goes near it.  It’s extremely restrictive.  So, what happened today was they said we’re stopping the restrictions, there are no more restrictions, if you’re of pension age in Australia you can come to the government and get a reverse mortgage.

So, can I do that?

You can.

So, it’s not means tested.  Mind you I’d come under any means test, I’m poor.

Well, there are limits to how much the income stream can be, something like I think it’s 1.5 times, it can only be 1.5 times what the pension is.  But, gee it’s not bad, you know, and the other thing is that it’s currently considerably cheaper than the banks’ ones, the obscure one is 5% and the banks ones are 6% up, so it would be cheaper to do it with the government so that’s interesting.

And what are they doing with superannuation which is the other end of retirement?

Very little because they did so much last year, I mean very little really.  The other big one was they’ve introduced a couple of things like they’ve done a tweak on SMSFs.  You know Costello’s thing about the forgotten people, that is the wealthy and the big income earners, well there’s a little giveaway in there.  If you earn more than $260,000 a year and you’ve got problems with your SGC because the SGC payments from your multiple employers are crashing into each other you can nominate that one of them doesn’t pay it anymore.  So, there was a little tiny benefit for the wealthy, the forgotten wealthy that Costello mentioned this morning.

So, they can go back to being forgotten now.

Yeah, there’s not much.  The other thing was they announced, and they leaked this of course, they gave it to both the national newspapers this morning, an extra 15,000 places for home based aged care.  But, that’s again on the same theme, it’s kind of exploiting, if that’s the right word, the family home and making it even more sacrosanct than it was.

Didn’t I hear you call out across the room that they’re increasing the SGC levy?

Yeah, they are in four years’ time.  So, the SGC is 9.5%.

Four years’ time?

Yeah, you see Abbot froze it and the forward estimates this year they had to make a call, will they extent Abbot’s freeze at 9.5% or whether they’d continue on their merry way to 12% which was what the original plan was and they’re continuing on their merry way. 

So they’re saying it’s going to 12% or is it going to just go to 10%?

No, they are but it goes from 9.5% to 10% in July 2021, so 1^st of July 2021.  So, the industry funds and the big finance houses will love that.  But, there was some stuff, they scrapped exit fees in super and there’s some sort of protective measures they’ve taken, that’s the big one, to protect low income super people.  So, they did a few things there.

So, the super guaranteed levy will become the same as the GST?

It’s on its way, yeah.

There you are.

Yeah, so that’s an interesting one because they could have said we’ll extent the freeze and they might have got away with it but clearly they couldn’t get it through their own party for one reason or another.  If you think when we look at it now do you think they’ve distinguished themselves enough now?  Because up until now between the two parties there wasn’t much except the franked dividends, that was the big difference.

Well, it’s still just the franked dividends, I think.  I mean I think they are not very dissimilar, if I can put it that way, the two big parties.

Well, what about these issues today, what about these efforts today, don’t you think that the tax cuts – what about the speeding thing about the government tax will not represent more than 23.9% of the budget, that’s something the ALP haven’t signed up to.

That’s true, but I think it’s a relatively meaningless figure because it’s only ever breached 23.9% ever four times.

Yeah, and when did it breach at last, GFC?

2006.

Yeah, right, that’s not GFC, it’s pre-GFC.

So, it was really the four years under Costello and Howard when they were making all this money and the huge surpluses came in.

So, what you’re saying is it’s not much of a limit, it’s not much of a speed limit.

Well, look I mean it is forecast to hit 23.9 in a few years’ time but it kind of almost never does.  I mean, it is a hard limit and they’ve made it a cap and good on them I suppose, but the trouble with that is that it means that the taxation is kind of forever consigned to increase at the rate of GDP and GDP is forecast to increase 3% and expenditure over the next five years is forecast to increase 5.5% per annum.

So, it sort of legitimises the trajectory.

So, if receipts really are held to 3% increases per annum and expenditure is going to increase at 5.5% to 6% per annum which is what they’re forecasting then something has got to give, right?

Yeah.

And particularly with NDIS growing and aging and health and all that stuff all growing tremendously, so they’re just going to have to – and I suppose this is, in a way, the point of the 23.9%, is to lock in cuts to other services, lock in cuts to the public service, cuts to other expenditures because you have to do it.

Institutionalise them.

But, also what it means though is that you don’t end up with big surpluses like the Coalition had when it got to 24.2% of GDP back in the mid-2000s and they managed to pay off the national debt, set up the Future Fund.

Well, I suppose on a global scale it’s pretty impressive, really, on an international comparison to other countries it’s quite impressive to even have that.  One last thing before we go we haven’t mentioned all about the roads and the rail, and all the huge tunnel projects, but with all these endless projects which of course they have pre-announced in every city, they did a little road tour and they went to every city and they said we’re going to do this, we’re going to do that.  We’ve got de facto fiscal policy back with us…

I reckon basically what it is is immigration policy, the reason they have to spend all this money on infrastructure is because of the immigration policy.

There’s no mention of that today.

No, but that’s what it’s about, they’re desperate, because if they don’t spend the money on infrastructure they’ll just get voted out because we can’t actually drive around anywhere.  It’ll be an absolute nightmare, we won’t be able to go anywhere, we’ll all be stuck at home and we’ll chuck them out.

Yes, well perhaps that’s it.  What’s interesting over the next few days that’s really what’s going to come out, the first night all we can do is really give you what happened, it’s in the next few days we start to distil what really happened.  We will actually be back with you again with our regular Money Café this Thursday, folks, and we’ll have had time to think it through.

Think it through, and I can assure you, everybody, that we will not change our mind.

But, we’ll leave it there for tonight, we’re still here in the lockup and we probably have to get out of here pretty soon.  I want to thank everybody for tuning into our special edition and we’ll leave it there for today, Alan.  Don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice and leave a review and rating.  If you want to send us in questions, including questions on the budget for this week’s show, e-mail us on hello@theconstantinvestor.com.  Until next week, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, Publisher of The Constant Investor.

Talk to you soon.