Category Budget Policy

COVID-19: What the states and territories are spending

Every state and territory government in Australia has announced a spending response to the COVID-19 crisis. The measures, including loans, tax deferrals, and health spending, so far total almost $15 billion. This compliments the almost $194 billion in direct economic measures already announced by the Federal Government.

At 2.8 per cent of gross state product (GSP), the Tasmanian Government’s response is the largest so far.

Queensland Premier Annastacia Palaszczuk last week announced a $4 billion package, taking her state’s response to $4.5 billion, about 1.2 per cent of GSP.

South Australia has announced measures amounting to 1.0 per cent. Western Australia, Victoria, NSW, the Northern Territory, and the ACT’s responses range from 0.6-to-0.3 per cent of GSP, as this chart shows.

About 28 per cent of the spending by the states and territories is on hospitals and health care, including Intensive Care Unit (ICU) capacity, COVID-19 testing, ventilators, medical equipment, and respiratory clinics.

46 per cent of the money will go to supporting business, most of it via payroll tax relief. All six states will waive the levy for select sectors.

Another 14 per cent is destined for households. This includes rebates and freezes on household fees and charges, as well as money for retraining and redeploying workers who would otherwise have lost their jobs.

Other initiatives include direct support for employment, bringing forward of capital and maintenance expenditure, and support for community groups and charities.

Largest budget measures in each state and territory:

Co Authors :

Tracking the impact of COVID-19 on the Australian economy

Man using Grattan COVID-19 econ tracker on his desktop computer

We live in difficult economic times. But while we wait on the official statistics to see just how bad things get, policy makers and citizens are making decisions on how to manage the fallout. To help inform these decisions, Grattan has identified what we think are the best early measures of how Australian households and businesses are faring through the crisis.

The Grattan Econ Tracker is a new public dashboard illustrating the impacts of COVID-19 on the Australian economy. Split into three themes, you can find the latest indicators of business activity, jobs and unemployment, and consumer spending and mobility.

Whether you’re a policy maker, journalist, researcher, or concerned citizen, we hope you will find the Grattan Econ Tracker convenient and informative. It complements the Grattan Coronavirus Announcements Tracker, which documents all Australian government decisions by date and type, and is continuously updated.

Grattan will update the econ dashboard as frequently as the data sources allow – in some cases this is daily, in others weekly or monthly. Our selection of indicators will evolve over time as new and better data becomes available.

No single measure tells the whole story but together they paint a picture of how the economy is tracking. The early signs suggest the economic impact of COVID-19 is already very large. As the health situation improves, and shutdown measures are eased, we look forward to seeing the economic recovery in these indicators too.

Co Authors :

Tax-deductible childcare — the worst of all worlds

Many researchers and commentators have called for childcare costs to be made tax-deductible, as an alternative to the current means-tested subsidy. Such a policy may be superficially attractive because for many people, childcare is a cost borne because they are working. But making childcare tax-deductible would be a backward step. Most families, and especially low-income families, would be worse off than under the subsidy. And work disincentives would be even worse than they are now.

Most families would be worse off

A tax deduction will inevitably give more to high earners than to low and middle earners – the very opposite of the means-tested subsidy. So it’s no surprise that a switch from the subsidy to tax-deductibility would leave all but a handful of high-earning families worse off.

Take a family with two parents working full-time, each earning $40,000 a year, and two children in childcare. Their total childcare cost is currently about $57,000 a year, and they can claim about $46,000 a year in childcare subsidy. Under the tax-deductible option, this would be replaced with a tax deduction of only $4,500, leaving the family $42,000 worse off.

Even a family with much higher income would be worse off under tax-deductibility. A family with two parents working full-time, each earning $90,000 a year, and two children in childcare, can currently claim about $29,000 a year in childcare subsidy.  Under the tax-deductible option, this would be replaced with a tax deduction of $19,000, leaving the family $10,000 worse off.

Barriers to work would be higher for low and middle earners

A move to tax-deductibility would also be bad news in terms of work incentives. Grattan Institute research has shown that second earners (most often women) with young children face very large disincentives to increasing their work hours, especially if they are considering taking on a fourth or fifth day. A move to tax deductibility would exacerbate some of the worst disincentives.

The chart below shows the ‘workforce disincentive rate’ – the proportion of income from an extra day’s work lost through higher taxes, reduced family payments, and child-care costs – for second earners. Under tax-deductibility, the workforce disincentive rate would be more than 100 per cent for women earning $60,000 or less. That is, they would be paying for the privilege of working. Surely few would bother.

Cashflow would be a serious problem

The timing of receiving a tax deduction would also create huge cashflow problems for families. Under the Child Care Subsidy, an estimated subsidy is paid upfront to providers, and parents need only pay the ‘gap’. Under the tax-deductibility policy, parents would presumably need to pay the full amount upfront, and receive their deduction and rebate at tax time. Given the full cost of childcare is so large (about $29,000 per year per child for full-time care), this would create a cashflow squeeze for all but the most well-off families. Many households simply could not bear this cost upfront and would drop out of childcare and work.

An opt-in system would be too complex

Some proponents of tax-deductible childcare suggest a hybrid system where parents can choose to ‘opt in’ to tax-deductibility or continue to use the subsidy as per the current system. But an ‘opt-in’ system would be very confusing for parents, who would need to understand two different payment systems, and have a very good idea of their expected earnings for the coming year, to properly choose between a deduction and a subsidy. And this additional complexity would do very little to improve childcare affordability, since only a small number of high-earning families would be better off opting in to the deduction.

An increased subsidy would make childcare more affordable and reduce work disincentives

Reforming the Child Care Subsidy should be should be central to the Federal Government’s plans for lifting Australia out of the COVID-19 recession. An increased subsidy of 95 per cent for low-income households, gradually tapering for families with incomes above $68,000, would reduce disincentives to work, supporting higher workforce participation and boosting GDP by about $11 billion a year.

By contrast, switching to tax-deductibility would increase pressure on low and middle-income families and force parents, mainly mothers, out of the workforce by making childcare less affordable, further reducing the financial return from work. Not the result I think any of its proponents would be hoping for.

Explainer: the argument over personal income tax cuts

The debate around the Government’s personal income tax cuts is heating up, with further announcements expected in tomorrow’s Budget.

Many of the core arguments appear contradictory: most of the tax cuts benefit high-income earners, yet some people argue that high-income earners will end up paying a higher share of tax. Some argue the tax cuts are needed to support the economic recovery, while others argue they won’t be effective or could even hinder the recovery.

This piece explains the main points of contention and why sensible people can come to such different conclusions.

What could happen

Tomorrow’s tax cuts will be the government’s third attempt at a tax plan in as many years. The current plan has three stages:

  • Stage 1 has already begun and delivers temporary tax cuts to low-and-middle-income earners until mid 2022, via a Low and Middle Income Tax Offset (LMITO).
  • Stage 2 starts in July 2022, following directly on from Stage 1. It makes the Stage 1 benefits permanent and extends them to high-income earners too.
  • Stage 3 commences in July 2024 and makes further permanent changes to the tax rules, including abolishing the 37 cent bracket, and reducing the 32.5 per cent tax rate to 30 per cent.

These three stages are already legislated – so will come into effect as per this timeline unless Parliament passes new legislation.

The first point of debate is whether the tax cuts should be fast-tracked. The Prime Minister and Treasurer have all but confirmed they will be, which means Stage 2 or even Stage 3 could start next financial year or could even be back-dated to the current financial year.

If Stages 2 and 3 are brought forward, and Stage 1 is kept, most workers will receive a tax cut. But Stages 1 and 2 were not originally designed to run in parallel. Stage 1’s LMITO is scheduled to expire in July 2022, with Stage 2 designed as its replacement. If Stage 2 is fast-tracked, it is unclear whether the LMITO will end immediately, be scrapped in 2022 as currently legislated, or whether it will now become a permanent feature of the tax system. As Chart 1 shows, this makes a big difference to what kind of tax cut is on offer for low- and middle-income earners – but either way there’s a big tax cut for higher-income earners.

Do tax cuts make for good stimulus?

Economists widely agree that while tax cuts do provide stimulus, there are many better stimulus options available. Whether tax cuts provide ‘good’ stimulus depends on how low the bar is.

Tax cuts generally don’t provide as much economic kick as others forms of government stimulus, because some of the money leaks to savings. This is even more true in the current environment of heightened uncertainty, and because these tax cuts will largely benefit higher-income earners, who are more likely to save than lower-income earners.

In a recent Economic Society poll of the stimulus options preferred by 49 leading economists, only 20 per cent put income tax cuts in their top four.

The stimulus bar may be fairly low right now. Grattan Institute estimates that $100-to-120 billion in extra fiscal stimulus is required in the next couple of years to get unemployment down quickly and avoid a long recession. This means that even if these tax cuts are not the best option available, they could form part of a broad suite of options that collectively deliver sufficient stimulus.

But the danger is the scale of the cuts might leave the government less willing to spend big on other choices – such as social housing, permanently boosting JobSeeker, and investing in government services such as aged care, mental health, and childcare services – that would be most effective at creating jobs.

Who benefits from the tax cuts?

Even though the tax cuts can provide stimulus, many still object to them on fairness grounds, arguing that they disproportionately favour the well-off and will reduce the scope for the government to fund necessary increases in services in the future. But others claim that the cuts are merely ‘a radical plan to stay the same’ and that the share of tax paid by high-income earners actually falls. So, what’s really going on?

There is no question that fast-tracking Stages 2 and 3 delivers the biggest dollar cuts to high-income earners. The average tax cut next year for someone earning more than $180,000 would be more than $11,000. By contrast, someone on median income of about $48,000 could expect a tax cut of just over $1,000 if LMITO is kept and only about $100 otherwise.

But in a progressive tax system any tax cut will deliver a bigger dollar cut to people on higher incomes.

Another measure of the ‘fairness’ of the cuts is the change in share of tax paid by different groups.

Figures produced by Deloitte Access Economics suggest that the top 5 per cent of income earners will pay a slightly higher share of tax in 2025, even with the tax cuts, than they did in 2018-19. However, Deloitte estimates the share paid by the top 10 per cent and top 20 per cent will be lower.

Deloitte compares the full tax plan to no tax plan (unwinding existing tax cuts under Stage 1). This might have been an appropriate comparison when the tax package was first debated, but it doesn’t pinpoint the effect of possible changes in this Budget.

As Table 1 shows, our estimates of the share of tax paid by high-income groups in 2025 under the Stage 2 and Stage 3 tax cuts compared to today show that the top 5 per cent, 10 per cent, and 20 per cent will all pay a lower share of tax if the tax plan goes ahead.

Table 1: Stage 3 reduces the share of tax paid by the top 5%, 10%, and 20% compared to today

Share of total tax for groups of tax-filers FY21  FY25 Stage 2 only FY25 full plan
Top 5% 38.5% 37.8% 37.5%
Top 10% 52.0% 50.7% 50.0%
Top 20% 69.5% 68.0% 67.3%

Table notes: The 2024-25 scenarios do not include LMITO because LMITO is currently scheduled to expire in 2022-23. Top 1% not shown because results are unreliable in a 2% sample file.

A better way to look at who benefits from the cuts is to look at how it changes average tax rates across the income distribution.

Chart 2 shows that compared to today (black line), Stages 2 and 3 would reduce average tax rates mainly for higher-income earners. But keeping LMITO (dotted lines) means that tax rates come down for low-and-middle-income earners as well.

Tax-filers around the 90th percentile (that is, people earning about $120,000 year) would get the biggest reductions in their average tax rates – from 29 per cent to 25 per cent – if Stages 2 and 3 are brought forward. By contrast someone on $50,000 could expect a 2 percentage point fall in their average tax rate if LMITO is kept – and only about 0.2 percentage points less without LMITO.

The key thing to look for regarding tax cuts in tomorrow’s Budget is whether LMITO is continued, and for how long. Those decisions will have the biggest impact on both the fairness of the tax system and the effectiveness of these tax cuts as stimulus.

Understanding the impact of tax cuts on the progressivity of the system is complex. Budget Papers have historically focussed on the dollar tax cuts and the impact on share of tax paid for high-income groups. But it’s worth remembering these provide only part of the picture. Looking at average tax rates across the distribution, or progressivity indexes such as the Reynolds-Smolensky Index, give a much better picture of how tax cuts change the system. But we will probably have to wait beyond budget night to see them.

Co Authors :

Is Labor’s childcare policy welfare for the well-off?

Lots of families are celebrating federal Labor’s plan to make childcare cheaper. But some commentators are concerned that the policy delivers big benefits to the well-off – questioning whether ‘cost of living relief’ is appropriate for these families.

But it’s wrong to think of Labor’s policy – to increase the maximum Child Care Subsidy from 85 per cent to 90 per cent, slow down the rate at which the subsidy tapers off, and remove the annual cap – as middle class welfare.

It’s economic reform, not welfare

As veteran commentator John Durie points out: “When a politician spends billions on building roads everyone nods and ticks the box but if that same money is spent on childcare subsidies, some question its merit and call it middle class welfare.”

Early education and care has benefits for children. But it is also a cost associated with working. Parents need childcare in order to be able to work.

Normally, costs associated with doing your job count as tax deductions. But the system is not set up this way for childcare (for good reasons, see this post). Instead we have a Child Care Subsidy, which provides a high subsidy for low-income earners (currently an 85 per cent subsidy for families with combined income of $69,000 or less). The subsidy then reduces quite steeply for every extra dollar earnt.

This steep taper is the source of a lot of ‘workforce disincentives’ – as is the annual cap on the total amount families can claim. Labor’s policy is an economic reform because it flattens the taper rate and removes the annual cap, encouraging parents to work more and earn more. Under the current system, the incentive to work is weak or non-existent for single parents and ‘second earners’ in a couple (usually women), particularly if they want to work more than three days a week.

We estimate that Labor’s plan would increase hours worked by second earners by 11 per cent, and this higher participation would boost GDP by more than double the additional cost.

Who benefits?

Labor’s policy boosts the childcare subsidy right across the income spectrum, as Chart 1 shows. Middle- and higher-income families who are currently subject to the annual cap would get the greatest gains. But total childcare support would still be much greater for low-income families than for middle- and higher-income families.

Table 1 compares the benefits for three example families under the current system compared to under Labor’s policy.

Family situation Current policy Labor’s policy
Subsidy WDR Subsidy WDR
Both parents would earn $60k if working full-time; one works full-time, the other part-time (4 days) 73% ($33k) 102% 84% ($39k) 83%
Both parents would earn $80k if working full-time; one works full-time, the other part-time (4 days) 61% ($28k) 83% 77% ($35k) 63%
Both parents would earn $100k if working full-time; one works full-time, the other part-time (4 days) 50% ($23k) 107% 70% ($32k) 68%

Notes: WDR = Workforce disincentive rate, which is the proportion of every extra dollar earned by the second earner that is lost to tax, net childcare costs, and benefit clawback. Subsidies shown are for the 2022-23 financial year.

The benefits for low-income families come through raising the maximum subsidy to 90 per cent. The benefits for middle- and high-income families come through flattening the taper rate and removing the annual cap.

You can’t fix the workforce disincentives without generating additional benefits for higher-income families. If you are outraged that the top marginal tax rate is 45 per cent, then you should be doubly outraged by the workforce disincentives facing single parents and second earners – of at least 80 per cent and sometimes more than 100 per cent (yes, that means they are paying for the privilege of working).

Some commentators have highlighted the benefits for rich families earning more than $350,000. A family earning $360,000 is at present not eligible for any childcare subsidy. This is because the current system has a ‘cliff’ at $354,000, which creates a very strong disincentive to work for families close to the cliff. Under Labor’s plan that family would be eligible for a 34 per cent subsidy, because the taper continues to do its work, meaning that the subsidy continues to reduce as family income increases.

The benefits flowing to families with combined income higher than $350,000 represent only 6 per cent of the new benefits and less than 2 per cent of the total subsidy paid under the policy, because very few families (4 per cent) earn this much. About 80 per cent of families have combined income of $200,000 or less, and these families will receive about 75 per cent of the new benefits and 80 per cent of the total benefits, as Chart 2 shows.

It makes little economic sense to lock-in very high workforce disincentives to avoid giving money to a small number of well-off families.

Won’t childcare centres just raise their prices?

Labor’s plan boosts the subsidy and removes the annual cap. But there has been some confusion about what ‘removing the cap’ means, because there are two caps in the current system. One journalist has observed that: “Wealthy parents in exclusive suburbs can pay $200 a day or more at private centres offering yoga and organic meals… Why should taxpayers subsidise 90 per cent of the cost of boutique childcare in Sydney’s eastern suburbs?”

Labor plans to remove the annual cap (which limits how much families can claim in total), not the hourly rate cap (which provides a benchmark price for childcare providers to discourage them from charging above that rate).

This is a critical distinction because the hourly rate cap – introduced by the Coalition Government as part of its 2018 childcare reforms – plays an important role in containing fee rises. It represents the maximum amount the government will subsidise for each hour of care. This provides ‘a guide to providers and families about what a high fee might be’ and discourages providers from charging above that fee.

‘Boutique’ childcare centres still exist, but they are far from the norm. Only about 12 per cent of providers charge fees above the hourly rate cap, and parents who choose to use those services pay much higher out-of-pocket costs.

Even under a 90 per cent universal childcare scheme – which Labor says it plans to investigate – the hourly rate cap would be very likely to stay.

Labor’s plan to make childcare more affordable is an important economic reform for these times. It builds constructively on the Coalition’s 2018 reforms to improve women’s workforce participation. With bipartisan support it could support the economic recovery too.

Co Authors :

When do I get my tax cut? It’s complicated

When do I get my tax cut? It’s should be a simple question following last week’s federal Budget, but the answer is complicated.

What’s actually changed in this Budget?

In the last week we’ve heard a lot about ‘Stage 2’ of the Government’s three-stage tax plan. Stage 2 was originally supposed to start in 2022. Now it’s been brought forward.

But what’s easy to miss is that Stage 2 doesn’t actually cut taxes for anyone on less than $90,000 a year. For this (very large) group of Australians, it just swaps out one type of tax cut (an offset called the LMITO, the Low- and Middle-Income Tax Offset, from Stage 1) with another (a different offset, plus a bracket shift). The two stages are almost exactly identical for people in this income range.

That might seem like a pointless exercise, but the Government’s stated aim was to make the tax system ‘simpler’, rather than leaving it cluttered with a bunch of different offsets.

This means that if the Government had just brought forward Stage 2 and done nothing else, the result would have been no tax cut for most people. Instead, the Government decided to keep the LMITO alongside the new changes for one year. So instead of replacing Stage 1, Stage 2 now augments it for one year only. The benefit from both stages at once is double what it would otherwise have been this year for those who earn less than $90,000.

The Government describes this as ‘an extra LMITO’. That makes it sound like LMITO is the thing that’s new. But it’s not: the thing that didn’t happen last year but will happen this year is the Stage 2 cut.

Why does that matter if they’re identical? Because they are not identical in timing. Offsets get paid out at tax time in July. Threshold changes – which are one component of Stage 2 – are reflected in fortnightly pay checks.

So, when do I get my tax cut?

To answer this question, we need to examine the Stage 2 changes, which are a combination of threshold changes and a change to another offset – the LITO (Low Income Tax Offset):

  1. LITO increases from $445 to $700. This tapers out faster than before so that nobody earning above $45,000 gets any of the extra bit.
  2. The top threshold of the 19 per cent tax bracket moves from $37,000 to $45,000.
  3. The top threshold of the 32.5 per cent tax bracket moves from $90,000 to $120,000.

The first change – LITO – gives $255 to anyone on less than $37,000. Since LITO is paid at tax time, these people (40 per cent of tax-filers) get nothing new until July next year.

The second change – the 19 per cent threshold – gives $1,080 to everyone who earns more than $45,000. Since it’s a threshold change, it will start reaching these people (50 per cent of tax-filers) in their fortnightly pay packets as soon as the ATO is able to make the necessary adjustments.[1]

If you earn between $37,000 and $45,000 (10 per cent of tax-filers), the answer is mixed: for each extra dollar you earn in this range, you’re getting a little less LITO and a little more threshold change – so a little less next July and a little more now.

The third change – the 32.5 per cent threshold – gives up to an extra $1,350 to the top 20 per cent of tax-filers and will also reach pay packets soon.

The results are summarised in the table below:

As for LMITO – which we were already expecting to receive this year – it is dispensed at tax time. That means it won’t reach anyone for at least nine months. And if we take Stage 1 and Stage 2 as a package – as the Government would like us to – then the bottom 80 per cent of tax-filers will get less than half their tax cut in their pay packet.

[1] Reports suggest this could be as soon as December, although it’s not yet clear whether the months prior to this will be made up at the end of the year, or if fortnightly pay packets will be tweaked to make up for lost time.

 

New data a reminder that high childcare costs continue to bite in Australia

Tomorrow’s Consumer Price Index figures will put childcare costs back in the headlines. The ABS estimates the rise in childcare prices will add a sizeable 0.3 percentage points to the overall increase in the CPI in the December quarter.

The increase is mainly triggered by costs and attendance bouncing back from the lows during the COVID shutdowns, but it serves as a useful reminder that high childcare costs are hurting Australian families.

What do families pay for care?

Childcare spending varies a lot, depending on the amount of care a family uses, the number of children they have in care, the hourly or daily rate charged by the provider, and the amount of government subsidy the family qualifies for (this depends on family income, because the Child Care Subsidy is means-tested).

Long-day care centres – used by most families with children in formal care – charge about $105 on average for a 10-hour day.  About 14 per cent of families pay more than the hourly rate cap (which translates to about $110-to-$120 per day).

At the rate cap, the total cost of full-time care is more than $28,000 per year per child.

The government provides a subsidy to help defray these costs. The subsidy ranges from 85 per cent for households with incomes up to about $70,000, to 20 per cent for households earning about $350,000. Households with incomes of more than $353,680 receive no subsidy.

The government stresses that after the subsidy, 70 per cent of families have out-of-pocket costs of less than $5 per hour per child for centre-based care.

But don’t let the reasonable sounding per hour costs fool you (can you remember the last time a government sold its tax cuts in hourly terms?!). $5 an hour translates to about $50 a day, $250 a week, or $13,000 a year for each child in full-time care. This is more than the cost of sending the child to an exclusive primary school, and beyond the reach of many Australian families.

These high costs are a problem

Some members of Parliament say the cost of childcare doesn’t come up much in constituent feedback. This doesn’t mean the concern isn’t real; it probably reflects the fact that only a small proportion of the electorate is paying these costs at any given time. We also suspect that many working parents are too busy to stop for a chat with, or respond to a survey from, their local MP.

National surveys of parents with young children present a more accurate picture of the difficulties and consequences of high out-of-pocket childcare costs.

The 2017 HILDA (Household, Income and Labour Dynamics in Australia) survey found that 49 per cent of people with children under 5 had difficulties with the cost of childcare, up from about one-third in 2002.

And many other surveys highlight the impact of high costs on labour force participation, particularly for women:

  • In the 2017-18 ABS Survey of Income and Housing, about 30 per cent of mothers who have pre-teenage children and would prefer to work more nominated childcare cost as the main factor preventing them from doing so.
  • The 2019 ABS Participation, Job Search and Mobility survey found that the most common childcare-related reason for not being in the labour force was the cost of childcare (28 per cent).
  • A survey conducted by The Parenthood in June 2020 found that 66 per cent of parents reported the out-of-pocket costs of childcare before COVID were too expensive, and 76 per cent said the cost of childcare was too high for either them or their partner to work full time.

These results are no surprise: Grattan Institute’s analysis of the disincentives to work generated from the interaction of high childcare costs, tax, and welfare clawback shows that for many women with young children, working more than three days a week provides little or no financial benefit.

Making childcare more affordable is one of the single best things the Federal Government could do to boost workforce participation and help the COVID recovery. Chapter 5 of Grattan’s Cheaper Childcare report lays out a number of options to reduce the out-of-pocket costs of care. But the first step to finding a solution is admitting you have a problem.

Co Authors :