April 6th 2019

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Articles from this issue:

COVER STORY The NSW election and our incredible shrinking farming sector

SOCIETY The pervasive and pernicious online porn epidemic

CANBERRA OBSERVED Coffers are full but Treasurer will take spending cautiously

OPINION Judge treats Cardinal Pell to a spot of 'open justice'

NATIONAL AFFAIRS NSW Liberals re-election gives a boost to Morrison

ECONOMICS The Great Dragon uncoils all around the globe

INTERNATIONAL AFFAIRS President Donald Trump: an unlikely promise keeper Part 2

REFLECTION On the conviction of Cardinal Pell

FICTION Orange Years: The Japie Greyling Story

TERRORISM Lessons from Christchurch

ASIAN AFFAIRS Xi's imperious play prompts U.S. to repair Asian friendships

YPAT Getting with the program: one young person's story

MUSIC To market, to market, to sell a good song

CINEMA The LEGO Movie 2: Building a world

BOOK REVIEW A template for living alongside the world

BOOK REVIEW Catholic Maryland and early tolerance



THE BUDGET Take your tax cuts and be merry, for tomorrow ... is another day

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Coffers are full but Treasurer will take spending cautiously

by NW Contributor

News Weekly, April 6, 2019

Josh Frydenberg was to deliver his first and possibly last budget as Federal Treasurer on Tuesday, April 2, just after this edition of News Weekly went to print, and it was expected that he would showcase the Coalition’s strongest suit: economic management.

It was the Government’s last chance to contrast its policies with Labor’s plans to introduce the most radical change to the taxation of investment income in living memory.

The Frydenberg Budget was expected, therefore, to be “fiscally responsible” but also likely to offer modest tax cuts to voters who are feeling cost-of-living pressures and several years of moderate wage growth after the mining investment boom peaked.

It would also almost certainly show a budget that was back in surplus a decade or so after Labor’s extravagant spending splurges in response to the global financial crisis.

With Labor currently strong favourite to win the May election, Treasurer Frydenberg would also have an eye on his own political future. His 2019 Budget will be a measure of his capability as a minister and his economic vision. If the Coalition loses the election, Frydenberg would be a front-runner to be Opposition Leader.

Sadly, however, that vision is not likely to be much beyond the coming term of government.

With small majorities and a recalcit­rant Senate, federal governments (both Labor and Coalition) have had to work in a political straightjacket for more than a decade, which has meant much-needed long-term decision making has been put on the backburner.

This has resulted in a lost decade of political backflips, leadership changes and political acrimony over quite minor issues.

Now, though, Labor is promising radical changes to the tax system, doing away with dividend imputation credits, slashing capital-gains tax concessions, and grandfathering negative gearing.

The extent of these tax changes has not fully dawned on people, but the fact is they will result in a massive reallocation of investments in Australia – away from property and Australian shares.

This may or may not be a good thing long term, but the shake-out in the meantime will be painful for many.

Labor expects to gain massive tax revenue from its tax proposals, a taxation bonanza, but their projections are likely not to eventuate.

A more likely outcome is that people will change their current investment strategies. We are already seeing this in the housing market, where investor inte­rest is drying up and house prices are falling.

In part, this is because a bank-induced credit squeeze in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, but a large part of this is surely based on expectations about the possibility of negative gearing being axed.

Labor’s proposal to axe negative gearing will also drive up rents because investors will need to secure returns on their capital and not rely so much on capital growth.

It should also be expected that older people will sell down their share investments and therefore rely more on the age pension, while others will invest in shares overseas, where there are the prospects of higher long-term capital growth rather than the regular high share dividends that Australian companies tend to provide.

Finally, with property investment being stymied by Labor, people will naturally invest more in the last great tax haven, the family home creating a further distortion in the market.

In truth, nobody knows what the consequences of Labor’s policies will be, but they will be substantial and they will send a shudder through the economy.

The Government will be promising a steady-as-she-goes alternative.

It won’t set the electorate on fire, but if the tax cuts are large enough to resonate, it could set the scene for a closer than anticipated election.

The Government’s record on jobs is a strong one, and the most recent unemployment rate fell to 4.9 per cent, which is as low as it has been for almost a decade, depending on which measure you take.

In fact, the Coalition is facing being replaced by Labor because of the prosperity it has helped to create. While there have been almost three decades of uninterrupted growth in Australia, Labor has been able to argue that wealth creation and the profits have not been distributed equitably.

Labor’s election campaign will be based on seeking to calibrate that wealth, giving less to the “top end of town” and more to the masses. It is an approach that has worked successfully pretty much since the French Revolution.

The problem is, it is easier to destroy wealth than to build it.

Treasurer Frydenberg is likely to be arguing the case for the former – the problem for him will be whether the people are still listening.

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Last Modified:
April 4, 2018, 6:45 pm