It’s that time of year again that political reporters dread – budget speculation time.  There is no time in the political cycle during which so much stress is generated to such little effect than the final weeks and days leading up to a Federal budget. Editors demand budget “scoops” and reporters live in dread that they will be “out-scooped” by their competitors – and all this stress and anxiety over information which will be comprehensively made public a few days later. It’s all part of the great, never-ending game of politics that is played out between the politicians and the media and which is utterly disconnected from the reality of everyday life for ordinary people and the impact on it of Canberra politics.

The annual federal budget is the point in the political cycle at which ordinary people are most likely to be impacted by the decisions taken by the politicians and their bureaucratic advisers. But little of the Canberra conversation about the budget would have any meaning outside the Canberra inner circle. Context – that is, relating a particular budget matter to the people it is most likely to affect – is rarely part of the story. For example, almost every budget is accompanied by speculation about the prospect of tax cuts. In the lead up to this year’s budget there have been reports that the government is discussing options for tax relief for low and middle income earners. Tax cuts are discussed in terms of their political impact, on the assumption that they will be popular with voters and good for the government’s poll ratings. Yet most polls on the subject show no overwhelming clamour for tax cuts and rarely a political dividend for the government that delivers them. Several recently published opinion polls, which ask respondents to rate the issues that are most important to them, put tax well down the list. Health, economic management and education rank well above tax.

To better understand the factors influencing these choices, NATSEM has taken the latest available data on Commonwealth Government tax and transfer payments and run them through the STINMOD+ model (which is a microsimulation model of the economy similar to that used by the Federal Treasury) to get a picture of the impact on individuals and households of possible policy changes.

The first, most striking finding from this exercise (see accompanying graph) is that the Australian tax and social payments system is highly redistributive. While the gap in incomes between the poorest (average net incomes for the lowest earning households is below $30,000 a year) and the richest households (the top 20 per cent of households with incomes in excess of $200,000), the gaps could be much greater under a less progressive tax system. The modelling suggests that nearly half of Australian households receive more in Commonwealth provided welfare benefits (including rebates) than the tax they contribute.

The bottom 20 per cent is almost entirely dependent on government payments. Their private income on average contributes only three per cent of their household disposable income. Eighty-five per cent of the disposable incomes of the bottom 20 per cent come from pensions and allowances, 10 per cent from family tax benefits and three per cent from rebates and supplements. The next 20 per cent are dependent for nearly 35 per cent of their disposable incomes on government payments. The bottom 20 per cent contributes no tax (apart from GST and possibly some state taxes such as land tax) and the next 20 per cent contribute just three per cent of their disposable incomes to Commonwealth tax revenue.

Source: NATSEM estimation of the 2016 income distribution based on ABS, and ATO data, and the STINMOD+ model. The estimation follows the ABS’s definition of households and may contain multiple income units.

The middle 20 per cent receive around one tenth of their disposable income in government payments (five per cent of it from family tax benefits) and contribute the equivalent of 16 per cent of their disposable income to Commonwealth tax. The next twenty per cent contribute an equivalent of 22 per cent of their disposable income to tax revenue (and receive five per cent in government payments) while an equivalent of 33 per cent of the disposable income of the top income households goes to pay Commonwealth tax (with two per cent received in pensions, rebates etc).

So what does this mean for budget planning? Of course, it is obvious that specific budget decisions about spending and taxation are going to have different impacts on different income groups. But what these data show is that spending cuts which target government payments (pensions, allowances, rebates, supplements and benefits such as family tax payments) will hit the bottom half of households while tax relief will benefit the top half of households.

As a general statement, this is unsurprising. However, as the graph of the STINMOD results demonstrates, the divide between the beneficiaries of the Australian redistributive system and the funders of it is quite stark. When this is related to the political debate ahead of this year’s election-eve budget, it raises questions about the political wisdom (as distinct from the economic advisability) of income tax cuts. But equally, given that the tax base is heavily skewed to the upper income level it also poses questions about the justification for raising taxes for higher income earners.

If you overlay this graph with graphs of federal voting intentions based on income, it is easy to see why the government has had so much difficulty getting the parliament to approve significant parts of the last two budgets. The parties of the left – Labor and the Greens – know that their constituencies are substantially represented by the lower Quintiles on the income decomposition charts. Using their Senate power (with the help of the cross-benches) to block cuts in social payments and programs is seen as representing the interests of their constituencies. Labor sees little disadvantage for itself in policies aimed at collecting more revenue from higher income earners – via tighten superannuation contribution concessions and restricting negative gearing for housing investment.

At the same time, it helps explain why the Coalition government has rejected Labor’s negative gearing crackdown. This is especially so as the government is reported to have concluded that the fiscal challenges it faces compel it to introduce some restrictions on the generous tax treatment of self-provision of retirement incomes. Cuts to superannuation concessions are unlikely to cost the Coalition electorally but the government clearly believes that Labor’s restrictions on negative gearing, and the effective increase in tax that will result, will be highly unpopular with aspirational voters in the modestly taxed, middle income brackets and therefore be a vote winner for the Coalition.

Geoff Kitney writes for the Financial Review on news specialising in Politics and Policy. Read more at: http://www.afr.com/geoff-kitney-j7gck#ixzz476RxicbL