Diligence, not bread and circuses

This Budget, Treasurer Jim Chalmers was the Juvenal of Australian politics ­– deploring bread and circuses.

The Roman poet Juvenal deplored the handing out of wheat and the putting on of circuses to gain pubic approval rather than the hard work of good public policy.

Alas, bread and circuses work, at least in the short-term. The first opinion poll on the Budget showed that fewer people thought it was either good for them or the country than the last Budget of the Coalition in March.

In the long term, however, Chalmers is right. It does no-one any good handing out sweeteners if it only contributes to inflation. People who set prices, such as big businesses, can generally hedge against inflation. However, workers on wages find their real incomes falling.

This Budget did something perhaps more important on the bread and circuses front. It moved against at least two of the unintended of the largesse handed out by Peter Costello who was Treasurer from 1998 to 2007.

In 2001 Costello doubled the first home-Buyers grant from $7000 to $14,000. The FOMO effect (fear of missing out) meant people did everything they could to get into the housing market. The result was that dwelling prices rose way over the $14,000 of the grant. The bread-and-circuses approach had precisely the opposite effect of what was intended.

The Chalmers Budget, on the other hand, did not put money into buyers’ hands. Rather it committed the money to put more housing (about 30,000 dwellings) on to the market, thereby reducing demand and prices.

The second measure is more difficult to explain. It is the measure to wind back cash payments to people who are paid what are called “franked” dividends on shares.

The logic is straight-forward. Say a company pays 25 per cent tax on its profits and then distributes the balance of the profit to shareholders as dividends. Those dividends are then taxed in the shareholders’ hands as income. It amounts to double taxation and discourages investment in Australian shares. So, Paul Keating as Treasurer gave the shareholders a “credit” for the 25 per cent tax already paid by the company against the shareholders’ income-tax liability.

Then in 2001 along came Costello. What if the shareholder had no income-tax liability? Or their liability was less than 25 per cent? Surely, they should still get the credit for the tax the company paid? Let’s give it to them in cash.

It had disastrous unintended consequences. First, people and superannuation funds flocked to invest in companies that paid fully franked dividends. The cash payments rose from half a billion in the first year to around $8 billion now.

Second, companies did their best to pay fully franked dividends. They did that by paying out all their profits, or as much of them as possible, in franked dividends, rather than keeping some for research and development.

This way the extra demand for their shares would drive the share price up, so the books looked good. But it had the unintended consequence of taking money from innovation, research and development, and productivity to pay dividends, making the nation worse off.

In the 2019 election Labor, under Bill Shorten, promised to abolish the cash rebate on franked dividends, which contributed to Labor’s loss.

As Labor leader, Albanese withdrew that policy, and nothing much more was said about cash-back franked dividends. 

But the Budget contained measures to claw back about $550 million of the cash rebates over four years, while keeping the promise to leave cash rebates alone.

Huh! It was a bit difficult and technical and that is why it was beyond the shock jockery to get outraged about it and indeed for most of the media to notice it.

The Government simply changed the definition of “taxed profits”. From Budget night, no part of the money received by shareholders from off-market share buy-backs can be considered as dividends. Nor will any money from new capital raising be allowed to be paid to shareholders as franked dividends.

But the critical point is that Chalmers and Finance Minister Katy Gallagher have been assiduously combing through tax arrangements tweaking here and there to remove perks for the well-off. It is the reverse of Coalition Governments assiduously going through welfare arrangements cutting any butter and jam from the bread ration.

This augurs well. There were a few other similar tweaks with depreciation and multi-national companies juggling money between jurisdictions to avoid tax.

Expect more.  

And here’s one for Chalmers and Gallagher to ponder. This Budget widened eligibility for the Commonwealth Health Card. A couple with taxable income up to $144,000 can get the card. But “taxable income” in this context is redefined.

If the couple has a negative-gearing deduction or concessional superannuation deduction, it reduces their ordinary taxable income, but those reductions are not taken into consideration when determining “taxable income” for card eligibility.

Sounds fair enough to me. So, I ask, why would it not be fair enough to exclude those reductions when determining a taxpayer’s Medicare levy? Why should someone with a, say, $50,000 negative-gearing deduction reduce their Medicare levy by $1000. Or someone who plonked a tax-deductible $27,500 into super reduce their Medicare levy by $550?

And maybe the capital-gains-tax concession should be treated in a similar way when working out a taxpayer’s Medicare levy. 

Combined, that would add a welcome $1 billion a year to Medicare’s funding.

This Budget shows a lot can be done by imaginative tweaking rather than grandiose sweeping changes that frighten the horses.

In a way, Chalmers and Gallagher have reversed budgetary thinking. With apologies to John F Kennedy, they are asking how the wealthy can contribute more to their country not asking how the country can provide less for the not so well-off.

Crispin Hull

This article first appeared in The Canberra Times and other Australian media on 1 November 2022.