27 July 2015

It's All Downhill From Here...

We've now passed the half-way point of Parliament 44's term and are well into the downhill run to the next election.  The recent release of the June quarter CPI has prompted me to wrestle aside my customary laziness and update my chart collection to show the effect of tax-transfer changes on disposable incomes over that first half. 

Nit-pickers might say that the first half really ended in the March quarter, but the charts for that period were pretty boring.  As I noted in my previous post, very little of the contentious parts of the Government's budget agenda had managed to take effect at the 12 month point, and this remained more or less the case until 30 June.  But then the floodgates opened, the budget's fangs began to bite, and the tax-transfer excitement level went up a notch.  So lets look at the changes up to this slightly over half-way point.

As has become my usual practice, I'll start with a single person household, with Newstart allowance where relevant. Unfortunately, it's probably the most boring of the household types in terms of changes, but it does provide a kind of benchmark for the others. (If you are really keen to get to the more exciting bits, maybe jump to the discussion around Chart 6 onward.)

A quick note. These charts come from a comparison of the disposable income at the election date and 1 July 2015, for comparable levels of gross private income.  That requires that the 2013 earnings and disposable income results are adjusted for CPI movements. In the charts, all the results are in 1 July 2015 dollar values.

Chart 1: single person, Newstart allowance, no private health insurance

This is almost unchanged from the 12 month result shown in my last post.  The decline in incomes from around $25,000 a year has increased slightly as a result of bracket creep, but the only new feature is the appearance of three small 'stalactites' in the medicare levy.  They are a result of the freeze in the thresholds for the medicare levy surcharge and will become wider as we progress through the rest of the Parliamentary term.

At incomes below around $25,000 Newstart allowance enters the picture and here there is a net gain in disposable income.  The roughly 1% increase at zero private income is really an outcome of timing - the election date was just before the standard Newstart allowance CPI increase, resulting in there being 4 CPI increases (ie, 2 years worth) in the little over 18 months covered by the chart. The significant jump upward to 4% as private income increases is, however, a real effect.  It's the result of an increase in the amount of private income Newstart allowance recipients can have before their payment is reduced.

Note too that the gains from this change fall away quite rapidly from around $15,000.  Newstart allowance is taxable income, so the increase flowing from the income test change is partly clawed back by a higher tax liability.

Next up, single age pensioners.

Chart 2: single person, age pension, no private health insurance

At incomes above around $65,000 the results are as per the discussion for Chart 1.  The action in this household type is mainly at the lower end of the income scale.

The most obvious difference from the single Newstart example is the much larger reduction in disposable income from around $15,000. As the red area indicates, this is due to income tax effects, specifically the abolition of the mature age workers tax offset (MAWTO).  It should be noted that MAWTO was already being phased out as a result of decisions taken by the previous Labor government (as discussed in this post). However, in the first budget of Parliament 44 the phase out approach was abandoned in favour of complete abolition, a decision which affected age-pension recipients.

The pension itself has increased in value in real terms.  Some of this is due to the timing effect mentioned earlier, and some is a result of the more generous indexation arrangements for age pension compared to Newstart allowance.

In contrast to earlier periods, single students have had a somewhat quiet period, with only a couple of points to make.

Chart 3: single person, Austudy payment, no private health insurance

At incomes above around $30,000 the outcomes are the same as for single Newstart, except for the purple spikes.  These reflect changes in the real value of the various HECS/HELP repayment thresholds.  As with the maximum rates of payment, this is an effect of the timing of the annual indexation of the thresholds and doesn't reflect a policy change as such.

The relatively large movement in the rate of Austudy payment is almost entirely offset by the negative movement in the clean energy advance.  This is a hangover from the carbon pricing compensation arrangements that were largely in place by the end of Parliament 43. The indexation cycle of student payments means they lagged behind these broader Parliament 43 changes with their conversion from a clean energy advance to a clean energy supplement (a component of the actual Austudy payment rather than a separate entitlement) not being completed until January 2014.  What we are seeing then, is the abolition of the clean energy advance, with its value being (more or less) folded into the broader Austudy payment umbrella.

The only other noteworthy item is the decline in value of the student startup scholarship - its value was frozen as part of the budget changes.

Now to turn to couples...

First up, the 'golden child', a two-income couple.  I say golden child because this type of household is clearly favoured over the traditional (read old-fashioned) single income couple, as we'll see later.

Chart 4: couple (50:50 income split), Newstart allowance, no private health insurance

At incomes beyond the point at which Newstart allowance ceases to be paid the results are comparable with the single person household - perhaps unsurprisingly, given that the taxation system treats the couple as two individuals in most respects.  The exception is the medicare levy surcharge, the non-indexation of which has led to the stalactite at $180,000.

Again, as with the single Newstart example, the relaxation in the Newstart income test has led to a real gain in disposable income.  It's slightly more generous than the single example because a two income couple is making use of two lots of allowable income, which is proportionally larger (relative to the rates of payment) than for a single person.

Chart 5: couple (100:0 income split), Newstart allowance, no private health insurance

Single income couples did worse than their two-income counterparts across the income range. At incomes in excess of the Newstart allowance cutout their tax liability is greater than that on two-income couples at the same (combined) private income and as a result they are more affected by bracket creep effects.  In the income range where Newstart is paid there have been real gains primarily due to the income test relaxation mentioned earlier, although they are not as substantial as those for the two income couple.

The boost in disposable income from the point where partner one's Newstart allowance ceases reflects a correction to a problem introduced by Labor when it implemented the carbon pricing compensation (discussed here).

The abolition of the MAWTO discussed earlier (see chart 2) also affected older members of a couple.  However, they were also affected by another budget decision - the abolition of the dependent spouse tax offset (DSTO).  As a result, some older single income couples were able to participate in a triple whammy, losing both tax offsets and getting a dose of bracket creep.  Here's how that looks.

Chart 6: couple (100:0 income split), Newstart allowance and age pension, no private health insurance.

The most obvious aspect of this chart is the large negative red area, representing the decline in disposable income attributable to income tax changes (ie. loss of DSTO and MAWTO, plus bracket creep).  Also visible is the effect of changes to the seniors supplement (shown in grey), the rate of which was reduced to the point where it is now only a token carbon pricing compensation payment. The senior supplement loss will continue to grow over the current Parliamentary term as this residual amount is no longer indexed to CPI.

Now to households with children, where the action really intensified. First up, a sole parent example.

Chart 7: single parent, 2 children (8, 10), Newstart allowance, no private health insurance

This chart features the by now usual increase in real terms for low income households, with the added appearance of increased Family Tax Benefit (FTB).  However, as with the apparent increase in Newstart allowance discussed earlier, this is a reflection of timing.  Once again, 2 years worth of (FTB) indexation is being captured in 21 months. The real excitement, though, is in the income range where FTB Part B (the blue area) has been lost.

The loss of FTB B is a result of the budget decision to reduce the income test cutout point from $150,000 to $100,000.  In the range from $100,000 to around $117,000 this loss is compounded by the removal of the schoolkids bonus (which also acquired a $100,000 income limit) and the effect of changes to FTB Part A (the various ongoing indexation freezes and a reduction in the allowable income).  These changes have combined to reduce disposable incomes by over 8% a year in real terms in the affected income range.

To illustrate the significance of this, here's the same chart but with actual dollar losses instead of percentage changes.

Chart 8: Real dollar loss version of Chart 7

I suspect for those in the affected income range, this type of household might be noticing that budget changes do actually impact on living standards!

The loss of FTB B also affects some single income couples.  Here's an example which also features the effect of another budget change to FTB.

Chart 9: couple, 100:0 income split, 3 children (4, 6, 8), Newstart allowance and parenting payment, no private health insurance, real dollar loss

I've cut to the chase with this example and gone straight to a dollar loss chart.

The results for this household type are similar to that for the sole parent example as the same tax-transfer elements are in play.  The difference is that FTB A is showing a loss at all income points rather than a net gain at lower incomes.  This comes about as a result of the budget decision to increase from 3 to 4 the number of children a household needs to have in order to attract the large family supplement.

The result is that this type of  5 person household has gone backwards in real terms at all incomes above around $45,000 a year, a loss that reaches a quite staggering $7,500 or so at its highest point.

I mentioned earlier that the budget changes so far have been less financially damaging to two income couples than single income and sole parent households.  This reflects that fact that the main drivers of the losses have been the abolition of the DSTO (see chart 6) and the reining in of FTB B.

This is set to continue with further tightening of FTB B proposed (ie, it will only be payable until the youngest child turns 6).  Not everyone is happy with this turning away from support for these households, particularly the once traditional single income couple (see for example, this from Senator Matthew Canavan). I find myself wondering if the significant financial impact these changes have had will change the voting intentions of those affected, and whether there are enough of them for that to actually matter.

In some ways the examples I've given in this post still seem to have a slightly stereotypical Labor look about them, insofar as those with low incomes are showing net gains (albeit quite slight and in some cases an accident of timing) with the substantial losses being borne by those higher up the income scale.  However, compared to the results at the 1 year point of this Parliament, losses are now being experienced further down the income scale than before, and the financial impact of changes to come (eg, the FTB B restriction mentioned above and the complete abolition of  both the income support and schoolkids bonus) will extend right across the income range.  So yes, in the tail end of this Parliament's term it does appear to be downhill from here.

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