By Professor Fabrizio Carmignani, Griffith Business School

The measures contained in this budget go only halfway towards the objectives of promoting growth and creating jobs and lack some vision around diversification.

Admittedly, the macroeconomic context of the Turnbull government’s first budget is difficult and challenging. The economy is going through a “contraction”, the average duration of unemployment is increasing, the rate of job vacancy creation is very unequal across States and sectors of the economy, and the overall unemployment rate remains higher than its estimated natural rate. The cut in the interest rate decided by the RBA on Tuesday confirms that the short-term macroeconomic outlook is, at best, fragile. This fragility would call for strong fiscal support to promote the recovery.

Against this background, the government tried to “aim at growth” and “live within its means”. Now, “live within its means” is certainly a catchy phrase, but unnecessary in my view. The government is already living within its means.


While debt has been increasing over the last several years, there is at present no issue of it being unsustainable. The problem is that the focus on “live within its means”, and more generally the Coalition’s over-concern with debt sustainability, has constrained the budget policy pace for fiscal support.

As a result, the measures announced yesterday fall short of what is needed to promote growth, create jobs, and diversify the economy. In fact, the budget critically fails to deliver “inclusiveness”, which is a key condition to ensure that growth itself is sustainable in the long-term.

Most of the good and not so good news relates to five broad groups of measures: (i) the ten year enterprise tax plan, (ii) changes to superannuation and personal finance taxation, (iii) infrastructure investment plan, (iv) youth jobs path program, and (v) public goods delivery (education and health).

The ten year enterprise tax plan envisages a company tax rate reduction from 30% to 25% over a period of ten years, with an immediate application of a reduced tax rate of 27.5% to all business whose turnover is less than $10m. This supports small and medium-sized businesses and encourages entrepreneurs to engage in new activities.

Part of the resulting decline in tax revenues will be offset through increased receipts from new tax integrity measures, including a diverted profit tax and penalties for multinationals that do not meet disclosure requirements.


Turning to superannuation, a $1.6m cap on super transfer balances has been introduced. This measure, which applies retroactively, is a partial reversal of a provision that was probably too generous. Certainly harsher is the retroactive application of a new $500,000 lifetime cap for non-concessional contributions back to 1 July 2007. Taken together these measures imply that less than 40% of the current potential superannuation nest egg will be available in 15 years’ time (source: Grant Thornton, business advisor).

A total of $3bn is allocated to new infrastructure projects. This funding is unequally distributed, with Victoria taking the largest share and Queensland being more on the losing side. $1.2bn are allocated to States to fund public schools. Through this provision, the government partly reverses the cut operated in the 2014 budget. However, funding for schools remains below what would be required under the Gonski report.

It should also be noted that the forward estimates of the government do include $2bn in savings from the Higher Education Reform. This suggests that it is the intention of the government to push forward the reform if re-elected in July. The allocations to the health sector include a $2.9bn to States to fund hospitals and a $5bn for a subsidized public dental scheme.

Youth Jobs

The Youth Jobs Path Program aims at supporting the employment of young job seekers through three stages: (i) a pre-employment skills training, (ii) paid internships and (iii) financial support to employers that hire young job seekers.

Its obvious intent is to address the large pockets of youth unemployment that persist in various parts of the country. There is however a risk that the program might not lead to the emergence of a variety of non-standard (precarious) forms of employment rather than to an increase in continuing, permanent youth employment.

So, why is the glass half empty? First of all because the government has missed the opportunity to engage in a broader reform of the tax system that includes the value added tax, negative gearing, and the full system of taxes and benefits that relate to real estate investment.

Second, more is needed to address labour market issues and the lengthening of unemployment duration in particular. The structural transformation of the economy implies that jobs are created in new emerging sectors while other jobs are lost in the declining sectors. Workers have to be supported and re-trained through active labour market policies. Failure to do so will imply that a growing proportion of existing workers will experience long spells of unemployment and eventually drop out of the workforce. Intervening to prevent this scenario is crucial to generate inclusive growth.

Third, and perhaps more importantly, the entire budget (and the underlying economic plan of the government) seems to rely on the assumption that tax cuts and investment in infrastructure will automatically generate the type of diversified growth that Australia needs.

Lack of vision

Unfortunately, this is not necessarily the case. Experience and empirical evidence indicate that corporate tax cuts and infrastructures are at best necessary, but not sufficient conditions to generate growth and structural transformation. In this regard, the government seems to lack a bit of vision around the whole issue of how to promote the diversification of the economy.