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On Tuesday 11 May, the Australian Government used its 2021 Federal Budget as a spending springboard, announcing tax cuts and investment in infrastructure and essential services.
While welcoming much of the proposed spending, experts from The Australian National University’s College of Business and Economics highlighted the Budget’s failure to prioritise mass vaccination as a major flaw.
“The additional spending on the COVID-19 vaccine rollout is welcome but, so far, the process has been severely mismanaged and its rectification must take top priority,” stresses Dr Timo Henckel, who also chairs the Reserve Bank of Australia’s Shadow Board. “Every day in which vaccinations are delayed comes at great economic and social cost.”
Professor Rabee Tourky echoes Dr Henckel’s sentiments, noting, “none of the relatively short-term economic policies released in the Budget matter as much for Australia’s future as vaccinations do.”
But the lack of priority around mass vaccination was not the only shortcoming spotted, with a number of concerns around infrastructure, tax cuts, aged care, child care and superannuation also identified.
Every day in which vaccinations are delayed comes at great economic and social cost.
“The Budget’s infrastructure spending is over a ten-year period, and as a result, will contribute to the country’s growth in the medium run,” notes Professor Markus Brueckner.
However, Dr Henckel has concerns about under investment in specific sectors.
“Investment in infrastructure is inadequate and inefficiently focused on roads and carbon intensive projects. Investment in other modes of transport, in particular mass transit and other low emissions modes, as well as large-scale investment in zero emissions energy generation and high-speed internet deserve much higher priority,” he argues.
Turning to the Budget’s housing infrastructure objectives, Dr Henckel is concerned that extensions to the homebuilder program and the ‘New Home Guarantee’ will only add fuel to the housing market fire and exacerbate wealth inequality.
“What is needed to make housing affordable and to avert a potential household debt crisis is a long-term strategy that eases supply side constraints on the one hand and reduces, or eliminates, incentives to speculate on housing, especially relative to other asset classes, on the other hand,” he contends.
What is needed to make housing affordable and to avert a potential household debt crisis is a long-term strategy.
Professor Brueckner, who received the Young Economist Award from the Economic Society of Australia last year, welcomed the Budget’s tax reliefs, with empirical evidence showing that tax cuts have larger effects on GDP growth than government purchases.
“The tax cuts will have a positive effect on GDP growth by stimulating investment and consumption,” he says.
While Dr Henckel agrees with the sentiment, he believes that the Budget’s tax cuts fell short in some regards.
“The extension of tax relief granted by the low and middle-income earner tax offsets is appropriate, but does not provide enough support for the very low-income earners and is unequitable relative to the tax relief granted to high-income earners in the Government’s previous budgets,” he says.
The extension of tax relief granted by the low and middle-income earner tax offsets is appropriate, but does not provide enough support for the very low-income earners.
Dr Henckel welcomed the Budget’s investment in aged care, saying “the spending on aged care – home care packages, increase of aged care residents’ ‘care minutes’, and increase in payment to aged care providers – is a good start.”
However, he noted that, as with several other budget expenditure items, underfunding of aged care is not the sole problem, with “the entire industry needing a major regulatory overhaul."
The Budget’s child care changes will benefit around 270,000 families. However, with around one million Australian families with children in child care, this is not enough.
Associate Professor Maria Racionero believes that while the Budget’s child care initiatives are a step in the right direction, more needs to be done to broaden its reach.
“The Federal Government estimates the Budget’s child care changes will benefit around 270,000 families. However, with around one million Australian families with children in child care, this is not enough,” she argues.
She also believes changes could have unintended consequences further down the line.
“The increased childcare subsidy is likely to induce higher demand for childcare places. If the supply of childcare places does not adjust, or does not adjust quickly enough, childcare prices may go up,” she warns.
“Higher childcare prices may not be a bad thing in themselves if they translate into more jobs and higher wages for childcare workers. However, if childcare prices go up in response to the subsidies, and judging by past evidence this may well be the case, the 75 per cent of families missing out on support in this year’s Budget may well end up worse-off.”
Dr Henckel agrees with her sentiments, stressing that “boosting the childcare rebate without tackling supply side issues is suboptimal as it will inevitably see an increase in overall childcare costs.”
He goes one step further, adding that the “removal of the annual subsidy cap for high-income earners makes no economic sense.”
Increasing minimum superannuation contribution rates may not benefit all Australians.
Associate Professor Geoff Warren notes that the removal of the minimum wage threshold for Superannuation Guarantee (SG) contributions will assist low-income earners in building superannuation balances without reducing the earnings of low-income Australians.
“Of more interest to some commentators was what was not included in the Budget,” adds Associate Professor Warren. “Specifically, there were no major steps taken to accommodate direct access to superannuation to assist with home purchase, or reverse plans to increase the SG to from 9.5 per cent to 10 per cent from 1 July. The increase in the SG should now proceed.”
The benefit of this increase is questionable, with research conducted by Associate Professor Warren, Dr Gaurav Khemka, and PhD candidate Yifu Tang, casting doubt on whether a higher ‘one-size-fits-all’ SG will benefit the majority of superannuation fund members.
“Large differences in personal circumstances and the existence of the Age Pension, which underpins income for lower income earners, mean that increasing minimum superannuation contribution rates may not benefit all Australians,” Associate Professor Warren explains. Evidence provided by the Retirement Income Review also casts some doubts over the need for a higher SG.
Given this, the Government may still consider plans to increase the SG to 12 per cent.
“They are yet to make a definitive statement in this regard, meaning it will be very much a matter of ‘wait and see’,” he adds.
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