INTERIM ANALYSIS OF THE 2015‐16 FEDERAL BUDGET

1

1ThisresearchwascommissionedbytheAustralianLaborParty.

INTERIMANALYSISOFTHE201516FEDERALBUDGET1BENPHILLIPS,NATSEM,UNIVERSITYOFCANBERRA,MAY2015

Contents1 INTRODUCTION 32 METHODOLOGYANDASSUMPTIONS 43 RESULTS 74 CONCLUSION 12

1 INTRODUCTIONThis paper provides the distributional household impact of the main hippocketBudgetmeasurescontainedinthe201516FederalBudget.Theresearchinvolvedtheestimationofthedistributionalimpactonfamilyincomesofthe major changes to the tax and government benefit system under the CoalitionGovernment as compared to under the previous Labor Government. NATSEMsanalysis does not analyse themerits ofmeasures in the budget just the financialimpactonhouseholdsinadayaftercontext.TheNATSEMmodellingfocusesonthemajorchangestothetaxationandgovernmentbenefit changes as they relate to family budgets. This analysis is an independentsummary of the results and an explanation of the underlying methods used andassumptions.TheNATSEM analysisdoesnot include anypotential secondround effects such asbehaviouralchangestothepolicymeasures.This isstandardbudgetconvention.Theimpacts of bracket creep are included in the NATSEM distributional modelling,however,as the tablesbelowarea comparisonbetween two setsofpolicieswhichbothincludebracketcreeptheoverallimpactfromacomparisonstandpointisnil.

2 METHODOLOGYANDASSUMPTIONSThis research models 25 separate budget measures including some additionalelementsoutsideofthe201415and201516Budgets.Thesemeasuresdifferentiatethe trajectory of the previous LaborGovernment and that of the current CoalitionGovernmenttakingintoaccountmeasuresannouncedinthe201516Budget.EachofthesemeasuresisexplainedinbriefbelowinTable1.

Table1201415and201516BudgetSpecificmeasures: Commencing1 Family Tax Benefits (FTB) special supplement moved onto a lower special

supplementof$750perchildformaximumrateFTBArecipients2015

2 FTB B $100,000 income limit on primary income earner (reduced from$150,000)

2015

3 FTBBremovedfromfamilieswithchildrenagedoverfiveyears(mostfamiliesaregrandfatheredthrough2015and2016andnottransferredto(1)until2017

2015

4 FTBpaymentfreezefortwoyears. 2015to20175 RemovehigherincomeperchildaddonfortopincomethresholdforFTBA 20156 ReduceFTBAandBsupplements 20157 RemoveLargefamilysupplement 20168 Cleanenergysupplementfreeze 20149 ShiftNewstartAllowance recipientsunder the ageof25 to the lower Youth

Allowance(delayedin201516Budget)1Jan16

10 ApplyCPIindexationtopensions(Otherpensionsnolongerincluded) Singleparentsfrom2014

11 Maintain eligibility thresholds for income support payments (rather thanindexingwithCPI)

20152017

12 PensionerEducationSupplementremoved 1Jan1513 Startupscholarshipremoved 201414 Seniorsupplementremoved 20Sep1515 DependentSpouseOffsetremoved. 201516 MatureAgeWorkerTaxOffsetRemoved. 201417 Temporary Budget Levy introduced as 2 per cent for dollars earned above

$180,000perannum2014to2016only

18 ExciseonautomotivefuelindexedwithCPI 201519 Temporary Budget Levy introduced as 2 per cent for dollars earned above

$180,000perannum1Jan15

20 ChildCarepackagesinglepaymentsystemreplacingCCB/CCR includingnewworktest

2017

21 Pensionassettestchangeslargerwithdrawalrateandalteredcutinpoints 1Jan2017

22 201516personalincometaxcutsremoved(inabsenceofcarbonprice) 2015

Nonbudgetmeasuresintroducedpriororadjustedpost201415BudgetbytheCoalition:23 Carbon price removed (assuming a 2014 transition to an Emissions Trading

SchemeandPreelectionFiscalOutlookassumedpricesCPIincreasebeyond2017)

2014

24 School Kids Bonus income tested at $100k (previously removed in 201415)removedbutthenremovedfrom2017Jan1.

1January2017

25 Incomesupportbonus(previouslyremovedin201415)removed. 1January2017Toanalyse thesemeasuresNATSEMuses the STINMODmodelof theAustralian taxandbenefitssystems.Thismodelisbasedonverydetailedinformationfromasampleof44,450actualfamiliesinthetwolatestABSIncomesurveys(200910and201112)

andfurtherdataonnonprivatedwellingsfromthe2006ABSCensus2.Thesurveysareupdatedwith respect to their population, price and income data to 201415 usingappropriate assumptions aroundwages,prices,ATO taxationdata anddemographicpopulationchange.NATSEMdevelopedthismodelfortheCommonwealthofAustraliaandthemodelhasbeenusedbyTreasury,SocialServices,EmploymentdepartmentsandNATSEM for over 20 years.NATSEMsmodel further extends themodelling toincludea childcaremoduleandanassets testing component forpensions.As farasNATSEMisawaretheCommonwealthdoesnothaveeitherchildcareorassettestingin theirversionofSTINMOD.Bothasset testingand childcareare clearly importantelementsofthe201516Budget.A furtheradvantageoftheSTINMODmodel isthatincludeshoursworkedofbothparentsand theirstudystatuswhich is important formodellingofchildcarechangesasthere isanewstricteractivitytest.Administrationdataalonewouldnotbeexpectedtohavesuchdetaileddata.Themodelisastaticmodelofpolicychange.Itisbudgetconventionthatmeasuresinthe budget do not include secondround effects. It would be expected that thesavingslistedinthebudgetpaperswouldtakethesameapproach.Directly after the budgetNATSEM undertook two kinds of analysis. The first is thedistributionalmodelling. Thismodelling incorporates the full 25modelled changesand includes assumptions around the timing of the removal of certain payments(grandfathering) which means that some existing customers will be allowed tomaintaintheircurrentpayment(FamilyTaxBenefitPartB)untilJuly12017whilenewcustomerswillnotbeeligibleforthispaymentbeyondJuly12015.The secondanalysisundertakenbyNATSEM is cameoanalysiswhich considers theimpactonexamplefamilytypes.2FamiliesaredefinedinSTINMODasincomeunitswhichincludescoupleswithchildren,couplesonly,single

parentsandsinglepersons.

NATSEMuseditsstandardversionofSTINMODthathasbeenupdatedusingthemostrecent data available on wages, CPI, taxation data, unemployment statistics,populationdataandgovernmentsourcedadministrationdataforgovernmentbenefitssuchas familypaymentsandpensions.For the forwardestimates,NATSEMmakesanumberofassumptions.ThemostimportantassumptionsrelatetotheCPIandwages.ForCPI(beyondMarch2015)weassumeannualgrowthof2.5percentandforwagesweassume3.0percent.Unemploymentisexpectedtocontinueataround6percentwhileparticipationratesareexpectedtoremainsteady.

3 RESULTSResultsDistributional(201516)For the distributionalmodelling the STINMOD database has been split into incomelevelsQ1toQ5.Theserelatetothebottom20percentofequivalised incomeupto the top 20 per cent of income3. The unit of analysis is the income unitwhichroughlyequatesto families.These incomegroupsare furtherbrokendown into fourtypesoffamilies.Theanalysisprovidesanaverageforeachgroupandthewinner/loserthresholds determined by a comparison of a familys disposable income under theLaborandCoalitiontrajectories.Thebudgetimpactonfamiliesfor201516(Figure1a,1b)fallsmostheavilyonlowandmiddleincomefamilieswithchildren.Theimpactonhighincomefamilieswithchildrenissmallerindollartermsandpercentchangeterms.Inpercentageterms,theimpactisclearlyfeltbythelowestincomefamiliesmorethanhighincomefamilies.

3NATSEMusesthemodifiedOECDscaletoadjustincomesforfamilysizeandcomposition.

Figure1a%ChangeinDisposableIncomefromBudget201516Impact,201516

Figure1b$ChangeinDisposableIncomefromBudget201415Impact,201516

The201516budgetimpacts(comparedtoLabortrajectoryfromlastelection)showaclearpatternwithsimilarimpactsacrosstheincomedistributionindollartermsforfamilieswithchildrenbutwithrespecttoincomes,amuchlargerimpactforlowerincomefamiliescomparedtohigherincomefamilies.

1.1%0.8%0.8%0.3%0.4%0.5%0.8%

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2.5%1.3%0.9%

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Budget201516%ChangeDisposableIncomeImpactofTax/Benefit/Excise201516

$476$499$604$331

$692$532

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ResultsDistributional(201819)

The201819resultsareclearwithregardtodollarimpactsonlowincomefamilies(particularlycouples)havingamuchlargerlossofdisposableincome,thanhigherincomefamilies.Somehigherincomefamilieshaveasmallpositiveimpact.Thelargestimpactsinthenegativerelatetolossesfromfamilytaxbenefits(AandB),pensionlossesandforasmallfractionoffamiliesthelossofthechildcaresubsidyduetothe

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Budget201516%ChangeDisposableIncomeImpactofTax/Benefit/Excise/201819

$3,226$2,688

$1,931

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$626$98

$152 $9 $165$435

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newworktestarrangement.Themajorgainswillrelatetotheremovalofthecarbonpriceandforsomefamiliesthechildcarepackageprovidingalargersubsidy.Attheaggregatelevelforcoupleswithchildrenwefindthataround89percentoffamiliesareworseoffinthebottomquintilewhile8.6percentareworseoffinthetopquintile.Similarresultsarefoundfor201718andalargershareoflosers(butwithloweraveragelossesindollarterms)forbothhighandlowincomegroupsfortheearliestyears.201819 FamilyType Income % %

Quintile Loser WinnerCouple/ChildrenQ1 1 89.3% 10.7%Couple/ChildrenQ2 2 78.1% 21.9%Couple/ChildrenQ3 3 77.6% 22.4%Couple/ChildrenQ4 4 30.2% 69.8%Couple/ChildrenQ5 5 8.6% 91.4%

CameoAnalysisThefollowingcameoanalysiswaspreparedforeachyearthroughtheforwardestimates.EachcaseisacomparisonoftheLaborandCoalitiontrajectories.Allchangesrelatetochangestothedirecttaxandtransfersystemonlynotincludingchangestoindirecttaxeswhichonbalancewouldmakeonlyamoderatedifferencetotheseresults.

201516 201617 201718 201819 TotalAnnualImpact 3,714.86$ 4,865.38$ 5,959.72$ 6,107.80$ 20,647.76$WeeklyImpact 71.44$ 93.57$ 114.61$ 117.46$

201516 201617 201718 201819 TotalAnnualImpact 670.72$ 1,401.22$ 1,962.38$ 2,014.92$ 6,049.24$WeeklyImpact 12.90$ 26.95$ 37.74$ 38.75$



201516 201617 201718 201819 TotalAnnualImpact 825.56$ 2,285.68$ 3,648.76$ 3,843.44$ 10,603.45$WeeklyImpact 15.88$ 43.96$ 70.17$ 73.91$

Family#1:SoleParentwithincomeof$55,000with2kids(oneprimary,onehighschool)

Family#3:Couple,singleincomeof$65,000with2kids(oneinprimary,oneinhighschool)

Family#4:Couple,dualincomeof$120,000with2kids(bothinhighschool)

Family#5:Couple,dualincomeof$60,000with2kids(bothinhighschool)

Family#2:Couple,singleincomeof$75,000with2kids(onenotyetofschoolage,oneinprimary





4 CONCLUSIONTheNATSEManalysisisacalculationoftheimpactonfamilybudgetsfrommostofthemajorhippocketbudgetmeasures.TheNATSEManalysisisapurelyfinancialanalysisanddoesnotseektoevaluatetherelativemeritsofindividualmeasuresorthetotalityofthebudgetreforms.TheNATSEManalysisdoesnotincludeanysecondroundeffectsasisbudgetconvention.Giventhebudgetforecastofarelativelyunchangedjobsmarketandthepotentialcontractionaryimpactofmeasuresthatreducedisposableincomesoflowincomefamilies(whotendtohaveahighpropensitytoconsume)itisunlikelythatthesecondroundimpactswouldimprovethebudgetimpactsforlowincomefamilies.Theresultsclearlydemonstratethatlowincomefamilieswithchildrenarethemainfamilygrouptobeadverselyimpactedbypolicychangessincethelastelection.Thebudgetimpactisrelativelymoderatein201516butbecomesmoresignificantintheoutyears.Highincomefamiliesandsinglesandcoupleswithoutchildrenareshowntobelargelyunaffectedbythisbudgeteitherintheshortorlongerterm4.Theexceptiontothisrulewillbemiddleincomehouseholdsimpactedbytoughermeanstestingarrangementsforpensions.Theaverageimpactsaresignificantlylargerforlowandmiddleincomefamilieswithchildrenwherethelossesarebetween$2,000to$3,300perannum5.Theseaverageimpactsequatetoalossofdisposableincomeforlowincomecoupleswithchildrenof7.1percentand8percentforsingleparentsrespectively.Highincomefamilieswithchildrenaremoderatelybetteroffin201819.5Thesefiguresrepresentaveragesonly.Dependinguponfamilycircumstanceslossescanbebothsmallerand

larger.Thecamoesprovideamaximumlossperyearof$6,146forfamilythreehoweversomefamilieswithmorechildrencanlosemorethanasFTBAisaperchildpayment.

Whilethenewchildcarepackagedoesprovidesomesignificantrelieftosomefamiliesitalsoreducessubsidiestootherfamilies.Onbalancethisnewpackageismoregenerousthantheformersystembutthosefamilieswhotendtogainarenotalsothefamilieswholoseunderthebudgetchangesfrom201415whichremainblockedinthesenatebutremaingovernmentpolicy.Thesizeofthebenefittofamilieswithchildrenfromthenewchildcarepackageis,inanycase,muchsmallerinmagnitudethanthecutsproposedinthe201415budgetwhichwillstillclearlyleavefamiliesatthebottomendoftheincomespectrumsignificantlyworseoffinabsoluteandpercentageterms.

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INTERIM ANALYSIS OF THE 2015‐16 FEDERAL BUDGET