Cost, savings and productivity may not mean what you think

Dear ,

Here are a few things to keep in mind when either listening to the Treasurer tonight, or reading government statements and news coverage over the next few days.

Budgets are often a time for word salad, and today’s budget is likely to be no different. Not only will there be long strings of words meaning essentially nothing, but some words will be used to signify the opposite of what they mean.

Three words commonly repurposed are “cost”, “savings” and “productivity”.

The Australian Institute for Progress offers this brief guide to help commentators and others get what nutrition they can from the speeches and budget papers.

Cost

The plain meaning of cost is expenditure. When something is a cost to the budget it normally means an outlay. So the NDIS costs $48.752 billion and the Age Pension costs $61.672 billion.

When Treasury, as reported in The Australian, says there is a cost from negative gearing of $7.9 billion in the 2027 year, and the CGT discount will see a cost of $247 billion over the next 10 years, these are not actually costs, or revenue foregone.

If the treasurer asserts that they are, then you might ask him what the “cost” is of:

• the concessional rate on capital gains for superannuation funds
• the lack of any capital gains tax on the private home
• the tax-free threshold for personal income tax, plus any rate below the 45% top rate
• the lower company tax rate for small business compared to big business.

In fact, why do we only charge 45% as a top tax rate when Denmark charges 60.5%. That could just as easily be a “cost” to the budget.

Collecting less from some taxes compared to other taxes is not a cost, it is generally a design feature.

Savings

The plain meaning of savings is to reduce an expenditure. This will have a positive impact on the budget bottom line. Increasing a tax is not a saving, it is a tax increase, even though it will also have an assumed positive impact on the budget bottom line. (Although it may not have as big an impact as projected because taxpayers have a habit of minimising the tax they must pay).

 The Treasurer will claim that he is making savings tonight, but some of these savings will be the reverse side of the “costs” above.

Increasing the tax on capital gains is not a saving, it is a tax increase. Applying a tax to trusts is not a saving, it is a tax increase.

Reducing future outlays, such as for the NDIS, could arguably be a saving to future budgets, as long as it is achieved, but it is not a saving until that happens.

Productivity

The plain meaning of “productivity” is to do more with the same or less.

Cheaper or more accessible childcare does not increase productivity if all it does is increase the size of the workforce.

Wage increases in various government-controlled sectors like child or aged care do not increase productivity. In fact they may do the opposite. Higher wages follow productivity. If wages rise and output stays the same, or even falls, then productivity has fallen.

(This is the story of the whole of Australia with nominal wages increasing but productivity actually falling by 1.2% since 2019).

Expenditure on renewable energy will not boost productivity. Renewable energy costs more to do less, which is why measured household electricity costs have risen 70% faster than the CPI over the last 5 years.

There is also a good chance the Sydney to Newcastle Very Fast Train will also destroy productivity, but we won’t be sure unless we see a proper cost-benefit analysis.

Conclusion

If this budget is true to the form of the last 4 budgets it will take Humpty Dumpty’s aphorism to an extreme – “When I use a word it means just what I choose it to mean - neither more nor less”.

That might work in Wonderland, but we all have to be awake to it outside the rabbit hole.

For further information contact Graham Young on 0411 104 801 or graham.young@aip.asn.au