[HSC] Economist: 4th April

A summary of this fortnight's Economics news: the budget and fiscal policy!

Zack Bolland

Zack Bolland

99.80 ATAR, Dux, 8th in NSW for Econ

Since the release of the Federal Budget, questions have been raised as to whether this Budget was in the public’s best interests or instead, the best interests of the government. The priority for the government was to reduce the cost of living, particularly for young Australians and those looking to buy into the property market, introducing extensions to the HomeBuilder scheme and culling the scrutinised fuel tax excise. Whilst individual policies like this purport the Budget to be a successful, albeit politically-driven, use of discretionary fiscal policy, it is debatable whether that is truly the case. This week’s article will assess the potential impacts of significant policies within this year’s Budget and will determine potential future implications of the Budget, as well.

How key Budget policies may prove to be an overwhelming success for the government

Last week’s article predicted a substantial cut to the fuel tax excise, which proved to be a centrepiece of this year’s Budget. With a 50% reduction in the excise, shifting from 44.2 cents per litre to 22.1 cents per litre for 6 months, consumers have been rewarded with higher levels of disposable income as they reduce non-discretionary expenditure (fuel). Already, this policy has proved to be significant. Average fuel prices have fallen from a peak of $2.105/L to $1.743/L, as service stations pass on lower input costs onto consumers.

It is estimated that 227 petrol stations have cut their prices by at least 30 cents a litre in the last week. Whilst some rural service stations are yet to replicate their trans-regional neighbours, the short-term impact of the policy has been profound.

Alongside the fuel excise cut was two concurrent ‘Cost of Living Payments’ - the Cost of Living Payment and the Cost of Living Tax Offset. These payments consist of a one-off $250 payment to eligible taxpayers and an additional $420 payment to LMITO recipients, aiming to further reduce the cost of living and to marginally improve income inequality. Since low-income, high MPC (marginal propensity to consume) individuals are affected by these policies to a greater extent than high income earners, it is likely that the result will be an improved level of income equality as low-income earners retain more disposable income.

Whilst Australia has remained below the United Nation’s “warning level” of a 0.4 Gini Coefficient with its 0.33 score (relatively low income inequality), Australia is only ranked the 11th highest out of 33 OECD countries for income equality. This appears to be an astounding achievement. However, in 2004, Australia recorded a Gini Coefficient of 0.29, meaning that income inequality has increased substantially in the last two decades. Although these key policies are designed to ease the cost of living and to improve short-term economic growth, it may indirectly benefit income equality levels nationwide.

What future problems may arise as a result of the recent Federal Budget?  

Whilst it’s good to focus on the positives from this year’s Federal Budget, we must also consider the potential negative implications the Budget may have in the long-term. Often, the Budget is considered to be more politically motivated than economically motivated, meaning that the government focuses on garnering support for their upcoming political campaign and make economic objectives a secondary consideration.

As noted by Greg Jerricho, the LMITO or the ‘Cost of Living Payment’ is highly controversial as it is a flat payment of $420 for individuals with an income up to $125,999. Therefore, a proportion of those included in the second top income quintile will receive the exact same payment as those in the bottom three quintiles. Jerricho goes on to argue that those who have an income exceeding the $125,999 threshold will attempt to minimise their tax and creep into lower brackets to obtain the flat $420 payment. Ultimately, those who are able to minimise their tax will receive a significant tax cut compared to the original LMITO, damaging income inequality and hindering the overall effectiveness of the policy in providing ‘targeted assistance’.

Considering the other policy under the ‘Cost of Living Payment’, the one-off payment of $250 to those on welfare payments is a punch in the face for its 6 million recipients. As argued by the ABC, this payment is insufficient for those living below the poverty line and is “nowhere near adequate” according to Antipoverty Centre spokesperson Jay Coonan. With this new addition, the Jobseeker rate has increased from 43.9% below the poverty line to 43.1% below, as per Greg Jerricho. Therefore, those receiving the $420 payment alone are comparatively ‘better off’, many of whom are in the top two income quintiles. This will exacerbate the aforementioned income divide and has the potential to cause community outrage in the near future.

Beyond the ‘Cost of Living Payment’, the fuel excise cut has the potential to cause harm as well. Despite there being a significant improvement in fuel prices for the average motorist, the ABC argue that changes to tax credits and heavy vehicle charges limit the amount of savings for heavy vehicles, only saving 4.3¢ per litre, lower than the intended 22¢. This is because heavy vehicle users are no longer able to cash their tax credit that they previously received under the 44.2¢ fuel tax.

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