THE AUSTRALIAN BUDGET 2018-19
A DAMOCLEAN BUDGET
Sword of Damocles
Any situation threatening imminent harm or disaster.
Caption – Tax Cuts or Education, R&D & Innovation
BUYING VOTES AND DEMEANING DEMOCRACY
These comments are not a critique of the budget, the intention is to highlight aspects of the budget as it relates to secondary education, tertiary education, R&D, innovation and infrastructure – matters that are important for increasing Australia’s export income.
The centrepiece of the budget appears to be tax concessions to ‘hard working ‘ Australians. Tax inducements was one among several reasons that cost Najib Razak his position as Prime Minister of Malaysia. Rumblings of disapproval have been heard in Australia on this ‘tax reduction’ budget that does not bode well for Mr Turnbull. The Conversation (8 May) has commented ‘this is not a big budget for school funding and that the freeze on university funding continues into this year’s budget’.
In the WE Australian (12-13 May), Alan Kohler noted ‘the Federal Budget is a political event, a statement on election strategy not a report on financial administration’. The term ‘jobs and growth’ will continue to be an oxymoron until export income replaces low, paid jobs churning cash around a fragile internal economy. Well proven round the world and now corroborated in Australia, the trickle down effect from a natural resource rich export economy is a myth.
In delivering the Budget the Government emphasised its good economic management, proof being the creation of a million jobs and a lower deficit. What the Treasurer did not mention was a surprising increase in export income from coal, iron ore and gas and also a boost to the ATO due to company tax losses from the GFC being fully absorbed. These windfalls were due to good luck not fiscal rectitude. The statement on employment glossed over under-employment and continuing low wages which cannot substantially improve until export income increases. Also last year’s youth jobless rate was 13% with under employment hovering round 18%. ( The Guardian March 2017)
IMPEDIMENTS TO RISING EXPORT INCOME.
Secondary Education. Education in Australia is in a deepening turmoil, and yet it is the very foundation for innovation and export income. There are several reasons for this critical situation:
- Back in 1901, at Federation, the nation inherited the colonial structure that morphed into six states and two territories. Today the nation is burdened with separate education systems managed with variable rigour by several Departments of Education.
‘Turf’ protection will ensure there can be no unified national curriculum.
- Australia has a growing inequality problem. According to the IMF Fiscal Monitor, Australia has the fastest rising inequality rate in the OECD over the past thirty years, As a consequence, an increasing number of children are growing up in impoverished poorly educated households. The failure of the ‘trickle down’ effect will be a contributory factor to this situation.
- The OECD League Tables on education standards (March 2015) show Australia at 14th behind Poland and Vietnam. Further more the PISA assessments show Australia consistently slipping between 2000 and 2012. Ranking declines are: Maths 6 down to 8, Science 8 to 16, and Reading down 4 to 13.
- NAPLAN – Despite its short history there is pressure to abandon the tests, reasons given are that the tests are too stressful for students and there are odious comparisons between schools..
- Federal and State governments are floundering seeking a solution to the entire education model. The Finnish education model is an outstanding success utilising well-trained highly-paid teachers who operate under a uniform national system. (Simola, H, 2007, The Finnish Miracle of PISA). Australia’s six state education system is an impediment to a national uniform education syllabus.
Vocational Education & Training (VET). This education division is the big loser. A year ago the Federal Government promised $1.5 billion to the Skilling Australia Fund. No state has signed up to participate although Victoria has donated $200 million to the project. The Government has offered $50 million inducement to any state that signs up by early June. At Budget Night there were no takers. Vocational Education and Training is in crisis; Australia cannot function without a trained artisan workforce. This situation will lead to an influx of skilled foreign tradesmen under the Temporary Skill Shortage (TSS) program meaning lost jobs for Australians.
Tertiary Education. The Federal Government has extended last year’s funding freeze to universities in the 2018-19 budget. Funding, however, is available to regional, rural and remote students for Bachelor degrees at rural hubs, student access to youth allowance, Commonwealth supported places and education, training and employment assistance. The government has funded 4000 extra places costing $124 million for diplomas, associate degrees and postgraduate course work. A further 700 new student places costing $96 million ($120,000/student) will be made available for young people from regional, rural and remote areas.
Another twist of the knife into university funding is that from 2020 funding for new students will be based on the 2017 enrolment numbers, adjusted for population growth but tied to attrition, completion and employment numbers. This is grossly unfair since Federal/State education systems are turning out ill-prepared and poorly-educated students struggling to meet required STEM and PISA proficiency. There will be no Government subsidy for additional students and no funding for indexed inflation but the universities will receive indexed student contributions. So the bottom line is funding for students but no funding to improve university infrastructure. It is an election budget designed to foster student supporters.
Science, R&D and Innovation. Australia rates poorly in research and innovation on automation and artificial intelligence. The OECD Innovation Index shows Australia’s place slipping during the past three years – records show 2015-17, 2016-19 and 2017-23 (UN World Intellectual Property Organisation). Further, these conclusions are reinforced by the World Economic Forum: Davos in 2017, was critical of Australia’s performance where a seminar concluded Australia trailed in skills uptake and risks becoming uncompetitive due to poor grasp of STEM. This information is reinforced by Professor Greg Austin, Centre for Cyber Research, ADF, who commented that ‘over the past twenty years the Government has been fostering a culture of incompetence in training in computing skills and cyber security’.
Has the Government been stung into a major initiative by its position on the Innovation Index – 23rd? A National Research Infrastructure Plan will fund projects of the National Collaborative Research Infrastructure Fund to the tune of $4.1 billion .
- Develop research institutions.
- Develop data linkage systems.
- Leverage of knowledge and learning to drive innovation.
- Develop alliances and models of collaboration.
- Achieve interoperable bioscience.
It is very likely all this work and more could be carried out in existing universities, why the requirement to set up new organisations?
Grants for important scientific research will be maintained at existing funding levels. This is important for continuity. It is also important because R&D in the corporate sector is decreasing.
The proposed corporate tax cut from 30% to 25% will cost the Government net $5 billion a year. Before implementation there are issues which should be considered:
- The effective tax rate after deductions is already about 17%.
- Presidents Regan and Bush reduced corporate tax rates to stimulate the American economy, the result was disaster. Companies bought back shares, went looking for new investments, but did not employ more staff. President Clinton raised corporate taxes, created jobs and reduced the deficit.
- The Turnbull Government appears oblivious of this case study.
Research & Development. The Government has placed the Sword of Damocles over Research & Development, Innovation and also, on the mantra of ‘Jobs and Growth’ in Australia. Professor Roy Green, Innovation Advisor, University of Technology, Sydney, considers the budget is not good for Australia’s Research and Development industry. (Science Show 19 May) Professor Green considers that, at a time when Australia is struggling to innovate away from a resource driven economy to a high tech export economy, the budget is a disappointment, the more so when the corporate sector will receive $5 billion a year income tax saving while this sector expenditure on R&D is declining.
The Government has cut $2.4 billion from the R&D tax incentive so that now revenue measures have been bought forward and spending measures pushed back. The proposed commitment of $1.9 billion over 12 years ($158 million a year) is almost meaningless beyond the four year forward estimates. During the Abbott and Turnbull Governments the science and R&D budgets have been cut by around $2.0 billion. In terms of comparison, the proposed tax concession to the corporate sector is effectively a handout by the Government of $5 billion a year and this at a time when corporate R&D is declining.
Funding for R&D has also taken a hit. The tax relief threshold for R&D funding has been raised and funding has been reduced. Holland along with Australia are the only members of the OECD that rely on tax incentives to fund R&D. Professor Green considers the future is bleak for science, R & D and innovation. The Academy of Science concurs with this assessment. Regressive elements of the budget are:
- The R&D tax offset will now have the cash refund capped at $4 million per year with additional expense carried forward.
- Companies with less than $20 million turnover were eligible for a 43% refund of a refundable tax offset, this is now lowered to 41%.
- The threshold that can be claimed at the allotted R&D tax offset rate is being raised from $100 to $150 million for the financial year. (Research and Development Services, 9 May 2018)
Infrastructure. King &Wood Mallesons (8 May) have provided an analysis of infrastructure forecasts that could be construed as an election budget. Major projects in the budget provide for $75 billion expenditure over a ten year period. Beyond the four year estimate the funding cannot be guaranteed. Some $12 billion is to be spent during forward estimates period in six states on road, rail and bridge upgrades. Additionally, $44 million is earmarked for innovation studies for Roads of Strategic Importance and Infrastructure and Regional Cities portfolio.
Three new funds have been created:
- $250 million for a MajorProject Business Case Fund to assist with the development of business cases for future critical land transport in infrastructure projects. This appears to be placing the cart before the horse – mining, agricultural projects and industrial ventures all depend on resources and capriciously, where one finds them.
- $1 billion to establish an Urban Congestion Fund to support projects to alleviate congestion, improve traffic safety and commuter/freight movement. London is the obvious starting point but the whole process will be bedevilled by politics, not science and logic.
- $536 million will be spent over five years to regenerate the reef. This is probably a political decision where ‘something must be seen to be done’ before the election. Scientific study will identify problems from rising sea surface temperatures and chemical run off from inland agriculture. Professor Grabic, Environmental School, Griffith University, states ‘the 2018 budget may not go far enough to save the Reef. The problem is not only declining water quality but expanding coastal development, bleaching, acidification, extreme weather events, marine heat waves and cyclones. Risks cannot really be addressed, they are inevitable as the climate changes. Progress on water quality is slow and targets may not be met’.
A Voice of Reason. Andrew Mackenzie, CEO, BHP, was critical of the size of the infrastructure budget. He suggested this is the responsibility of private enterprise not government. (FR 11 May) The commitment of $24 billion in projects with a ten year program exceeding $75 billion is not wise. Pledges for funding have been made through equity investments thus big ticket difficult items like the National Broadband Network can be kept off the balance sheet. The real problem is the Government strategy could result in financial loss if projects do not achieve commercial return. The firm message is government should use money for education and health, not funding infrastructure.
Australia should create incentives to use corporate balance sheets to invest in infrastructure; corporate knowhow and ability is normally better than governments. The interests of the nation would be better served by investing in education, research and health. These sentiments are endorsed by Dr Bowditch, Executive Director, Better Infrastructure Institute, Sydney. He commented that too many projects are orchestrated and funded by government which sits oddly with Super Funds which have the capacity to invest in infrastructure. This whole situation needs redress.
Private enterprise should be given the chance rather than relying on taxes taken from ‘hard working Australians’. Using private funds will free up government funds for budget repair and targeting community and social infrastructure – direct commercial returns will be low but the quality of life will improve.
Comments by Andrew Mackenzie raise fundamental issues on government policy which cannot be addressed here. Commentators have noted that the 2018-19 budget is an election budget so the question must be asked: is all infrastructure work in the six states absolutely essential or is this expenditure designed to curry votes?
Final Word. With respect to budget policy on education, science , infrastructure and innovation, the consensus is that the budget will do little to promote high-tech export-income Science and innovation; the main drivers to generate export markets are not well funded.
Secondary education is in disarray, university funding has been cut by at least $2 billion, there appears to be no strong impetus to improve on the IMF Innovation Index and R&D funding has been made more expensive. Finally, according to the BHP CEO, private enterprise should do more heavy lifting for infrastructure and the Government should concentrate on raising the nation’s living standards. There is much room for improvement.
By the end of the financial year the Sword of Damocles will still be hanging by a thread.
JOHN HUGH HILL
Current Affairs Flash Points – towardsthefinalhour.com