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Was The Budget Fair?

This is more complex than simply pointing to the winners and losers for each new policy.

22/05/2017 10:55 AM AEST | Updated 22/05/2017 10:55 AM AEST
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"Given that cumulatively the burden of new measures largely fall on low and middle-income earners, and also fail to grapple with inter-generational equity, we have a way to go yet."

The current debate about whether the Federal Budget is 'fair' is a welcome one. However, it also poses the risk of taking fairness too far.

In formulating the 2017-18 Budget, the Turnbull Government clearly learned that both efficiency and equity must inform their policy choices.

By prioritising measures in education and health, and funding them through taxes that everyone pays, like the Medicare and bank levies, there is a sense of everyone doing their bit.

It's a lesson former Treasurer Joe Hockey learnt the hard way. Hockey's 2014 Budget confirmed that the public is not prepared to accept measures that disproportionately fall on the least able to pay.

So, the increased discussion of equity -– the distributional impact of policy decisions -– is a very welcome development.

It means government's can't just claim to be delivering outcomes -– better educated kids, more GP versus hospital visits, more revenue -– without considering who is paying the price along the way.

So, can a budget be too fair?

The reality is not every single policy needs to be fair. Rather, the system overall needs to add up to produce outcomes that are considered fair.

This is more complex than simply pointing to the winners and losers for each new policy.

Take for example the Medicare Levy. It's a flat rate (currently two percent, proposed to increase to 2.5 percent in this budget) applied to all income earners regardless of their earning. Arguably this is 'unfair' because 2.5 percent of $40,000 has a much larger impact on the disposable income as for someone on say $400,000. Despite this, the public appears to have largely accepted that the Medicare Levy is a reasonable way to contribute to the cost of a universal health system.

Similarly the GST is a flat tax applied to most goods, which is now accepted as a relatively efficient way to raise tax, in part because it is difficult to avoid and hence reduces the policy challenge of tax evasion.

So, some policies are designed with objectives other than purely redistribution in mind, and this can be appropriate.

As long as we maintain progressivity in our tax system as a whole, some policies that may seem less fair, can serve other important policy objectives like efficiency and simplicity.

The problem arises when less fair taxes are increasingly relied upon as opposed to more progressive taxes, such as personal income and land taxes.

It's why reducing the company tax rate, while increasing flat taxes like the Medicare Levy, will raise eyebrows amongst policy makers and the public alike.

There is clearly a balance to be struck. However, that balance needs to be looked at in aggregate and not solely by individual policy measure.

When we do this, the 2017-18 Budget starts to run into some serious trouble on the fairness front.

Assuming the Bank Levy is passed through to consumers (consistent with basic economic theory), the higher Medicare Levy is applied to all income earners, university loan repayments rise, and the company tax cuts proceed, then the proposed new measures disproportionately fall on those least able to pay.

This is particularly concerning as the cumulative effect is higher marginal tax rates at a time when wages growth is at a historic low -– meaning a real cut in disposable income, particularly harsh for low and middle income earners.

Of course, a number of measures contained in the budget will offset the regressive nature of the above measures. For instance, the needs based funding formula for schools will shift funding from wealthier schools to those with children from lower income households.

But, fairness also needs to be measured over time. Simply looking at the impact of measures today, fails to reflect the burden being placed on future generations.

Take the case of housing policy. While the Budget contains many housing measures, even cumulatively they fail to add up to something that will improve housing affordability, with significant implications for intergenerational equity.

So, is the budget too fair? It's certainly a welcome reset of the budget discussion. However, given that cumulatively the burden of new measures largely fall on low and middle-income earners, and also fail to grapple with intergenerational equity, we have a way to go yet.


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