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Wednesday 23 March 2016

Hypothetical Budget FY17

Despite the spaghetti of issues that face a treasurer and the PM there are a few simple steps that it can take that will win wide acclaim by their party and the electorate at large. That is not to say it will not receive wide criticism from the ALP, Greens and the cross bench, as well as all the vocal vested interests. Alas that is political life today. No policy good or bad will escape a cacophony of critique.

Nevertheless let me venture to suggest a hypothetical Budget for FY16-17.

Setting the narrative: principles and strategy

The government needs a straightforward narrative that applies not only for a single budget but for the long term. This narrative should include a statement of principles along the following lines.

The Narrative

Size of government
All money raised by government is revenue foregone by individuals and corporations. Therefore it is incumbent on the government to remain as small as possible but have sufficient revenue to effectively and efficiently deliver the services the electorate mandates.
Historically, average Australian government revenues have been below 25% of GDP. While in recent years this has blown out due to both additional spending and lower tax revenues, your LNP government will return the revenue to and then ensure it remains below this historical average.

It is incumbent on governments to ensure any spending is equitable across all sections of the electorate. Within any budget there will be individual measures which advantage some sections and disadvantage others, but taken as a whole the measures in any budget will fall equitably across all sections of the community.

Equity also applies to generational equity. It is immoral for the current generation to continue to spend more than it earns and leaving the debt to future generations. Therefore the government will always strive to reduce government debt and to bring the budget into balance.

Current Economic environment 
While we firmly believe in the above two principles, we find ourselves in a difficult situation.
  • The large increases in expenditure initiated under the Rudd/Gillard/Rudd governments and the subsequent collapse of the mining boom have caused a wide and widening gap between Government income and expenditure creating a ongoing structural deficit.
  • The current gap between Expenditure and Income is such that we are failing our own limits on the size of government. Last year government revenue rose to just under 26% of GDP and due to the on going deficit we are failing on generational equity as well.
  • However our structural deficit cannot be redressed in a single cycle, as the consequences of introducing measures to redress it could be counter-productive putting further pressures on the economy and reducing government revenues.
    Our strategy 
    Given these constraints we see it prudent to take gradual but significant steps to redress our issues, with an emphasis on growing the economy while maintaining but not growing government.

    This implies; -
    • Addressing inequities in welfare and superannuation systems whereby lower income earners subsidize higher income earners.
    • Limiting personal tax relief to the real savings achieved by the above measures.
    • Ensuring full compliance with government policies, applies to corporate and personal tax collections, welfare payments etc.
    • Increasing the productivity within government departments.
    • Increasing productivity within business by eliminating red-tape and high-cost industrial relations practices.

      Proposed policy changes

      While I am at it I may as well put some 'flesh on these bones' and propose some specific budgetary changes. Needless to say these are just hypothetical and where figures are provided they are largely '"guesstimates".

      Specific Measures and their Impact

      Proposed Expenditure measures

      Effective for the 2017 Financial year we will require all government departments to improve their productivity by 5%.

      Given total government projected spending for 2016-2017 is $451 B (see MYEFO papers), of which ~$150 B is for Social Security and Welfare, the cost to run the government is ~$ 300B, a 5% cut amounts to ~$15B pa (see Table 1).

      Table 1: Australian Government general government sector historical and projected fiscal balance (a)

      Net Future Fund earnings
      Underlying cash balance(d)

      % GDP

      % GDP

      (a) Data have been revised in the 2015-16 MYEFO to improve accuracy and comparability through time.
      (b) Receipts are equal to cash receipts from operating activities and sales of non financial assets.
      (c) Payments are equal to cash payments for operating activities, purchases of non financial assets and net acquisition of assets under finance leases.
      (d) Underlying cash balance is equal to receipts less payments, less net Future Fund earnings. For the purposes of consistent comparison with years prior to 2005 06, net Future Fund earnings should be added back to the underlying cash balance.
      (e) Estimates.
      (p) Projections.
      Source http://www.budget.gov.au/2015-16/content/myefo/html/16_appendix_d.htm

      As a result of this move the size of government will decrease from 26.1% of GDP (projected in the 2015 Budget papers ) to 25.2%, close to the government's target.

      In support we note; -
      • The lack of productivity in governments of all persuasions is legend. Moreover such directed cost cuts are a common approach in larger commercial organisations, which traditionally do not carry as much 'fat' as governments departments.
      • Rather than single out specific sections of government for cuts, we will do it uniformly across all departments with the details of the cuts to be worked out by Department heads.
      • No doubt this will create a lot of noise from Unions and other vested interests, but the savings can come from many areas not just staff numbers.
      • Nor does it require redundancies since staff turnover is greater than 5%, any savings related to staff can be done through natural attrition.(Australian Human Resource insititute survey showed the average Staff Turnover Rate for in 2103 was 13%) 
        Proposed Revenue measures


        The objective of our superannuation system is Self Funded Retirement for the majority of Australian workers. 

        To be fully self funded a retiree today must have an Accumulated Superannuation Balance of ~$1,000,000. With this balance even at a modest investment return rate of 5% they will have an annual income equivalent to the single pension cut-off rate of $50,000.

        The government provides concessions on super contributions in order to maximise the contributions by workers during their working life in order for them to reach this Self-Funded Retirement Threshold (SFRT).

        Effective July 1, tax concessions on super contributions will only apply while the Projected Superannuation Balance at retirement is less than this SFRT.

        The SFRT (Self-Funded Retirement Threshold ) will be established each year together with a table of how to calculate the projected balances based on the workers years to retirement. These will take into account investment return rates and inflation.

        The super contribution discounts however will stay as they are today in order to limit the cost to business of administrative changes.

        This measure will ensure everyone is entitled to concessional contributions but only to the extent that they contribute to a self-funded retirement.
          Lump Sum withdrawals from super will be limited. Retirees will only be allowed to withdraw a lump sum from their super if their balance remains above the SFRT. ie you cannot withdraw a lump sum then go back on to the pension.

          This measure will raise ~$4 B pa.

          Personal Income Taxes

          Bracket creep is the insidious mechanism by which inflation pushes workers to increased Tax rates.
          We will apply all the savings from the Superannuation measures ($4B) and part of the reductions in the Productivity Dividend ($6 B) from government departments to relieve the tax burden on all workers. The reduction will be applied across the tax brackets to ensure the saving as proportional for all workers.

          This measure will re-dress most of the bracket creep projected in FY17. Further measures will be introduced when the government can afford them.

          Corporate Income Tax

          Red tape
          The existing program to eliminate red-tape will continue to reduce business costs and streamline operations.

          Corporate Tax compliance and Minimum Tax
          While most corporations pay their due taxes, there are some, including that largest multinational corporations which through complex transfer pricing mechanisms limit the amount of tax they pay in Australia.

          The government will continueit s programto close taxation loppholes and audit corporations to ensure all corporation comply with taxation rules.

          Effective for FY17 all corporations with an annual Turnover in excess of $250 million will have to pay a Minimum Tax equivalent to 5% of their turnover. This is a temporary measure that will be terminated when global agreement on the taxation of Multi-national corporations come into effect.

          These measure are anticipated to generate $5B per annum and will be applied to reduce Company tax for all companies to 27.5%.

          No other changes
          There will be no change in GST, Negative Gearing, or capital Gains tax. These raise limited revenues to the Federal Government and can have a range of unintended consequences.


          The effect of these changes on the projected figures from the 2015 Budget papers are presented in Tables 2 and 3.

          Table 2: Financial impact of new policies

          Corporate tax cut
          Corporate compliance and Min Tax
          Personal Income Taxes

          Productivity Dividend
          Net impact

          Table 3 Impact on Estimates for FY17 after MYEFO (see MYEFO appendix)

          Impact on FY16-17 after MYEFO$B$B$B
          % of GDP24.5

          % of GDP26.1
          Net Capital Investment505

          Fiscal Balance-33

          In summary

          The proposed measures will;
          • provide personal income tax cuts reducing the effect of bracket creep
          • provide modest but significant company tax cuts 
          • address the inequities in Superannuation 
          • partially address the problem of large companies not paying the fair share
          • reduce the projected deficit for FY17 from $33B to $24B 
          • reduce the size of government from 26.1% of GDP to 25.2% of GDP.
          Now let's see what ScoMo and Mr T deliver.

          Wednesday 16 March 2016

          Customer disservice

          Some posts ago I lamented the intrusion of our media into our daily life; setting our mood, dictating our conversation, advising a therapeutic 'switching off', even if for just a few days.

          So it came to pass that two weeks ago fate broke my computer and left me adrift. If you thought my diatribe about the intrusion of our media into our very soul was bad, "you aint' seen nothin' yet". Being without my computer was like ..Batman without Robin, Bert without Ernie or indeed a smoker without a cigarette. I was left disconnected, my finger twitching for a touch of the key board, thirsting for the flickering lights of the display, characters reified with the beating rhythm of my fingertips, the enticing connection with the ether-verse, the ...the...
          Mmm, Yes it was pathetic. I raved about it noon and night, to nods of "I know, the computer is down", "poor schnooky has no computer", "Yes, those Beeblebrox people are terrible". Indeed they were!  I shall not mention their name, as they came 'OK' in the end, but really the service was abysmal.

          I won't labor the point but it had all the common hallmarks of poor service; -

          • A call centre in Asia with long wait times, 
          • polite but ineffective telephone operators, having to talk to someone else for information or authorization
          • service policies that are impractical for real customers. In my case the standard 'service' was to send my computer by mail to have it fixed and returned in 15 days!
          • promises that were not kept. I was promised a technician would telephone in 2 days and it took 8 days with repeated calls in between. In the end what seemed to turn the tide was a strongly worded email to one of the bosses.
          • Harried service technicians with much too much on their plates. My guy spent a total of 30 minutes on site and hurried off to service his workload of some 40 calls a day.

          Today like a patient after heart surgery I am doing well. My computer certainly works, however I am still rebuilding the environment that was my home; the layout of icons on the screen, the configuration of directories; the apps that would burst into life whenever they were called on. All taken for granted till they were missing and all appreciated the more once they were missing. Still I am almost there.

          The sorry saga is symptomatic of our complex world. We are so interdependent that small failures can lead to serious consequences. No I am not talking about my computer catastrophe, although for me those consequences were serious. No the same connected-ness that we rely on for the orderly functioning of our society is also a weakness. We can see it when an unusual weather event or an accident can cause chaos on our roads. It all argues for systems that interact but are standalone. Systems with greater intelligence. In my case I am looking to move more of my stuff into the cloud and create a System Image to allow seamless recovery. For the rest of the world it is more of a challenge.