This is a longer version of Saul Eslake’s take on the budget, on why negative gearing is still the elephant in the room for the government.

Scott Morrison is very keen for his first budget to be viewed as “not just another budget” – to the point of saying so not once, but twice, in the first three lines of his budget speech. Rather, it’s a “plan” – a word he used 29 times in his speech. This is 28 times more than either Joe Hockey or Wayne Swan did in their respective first budget speeches. By contrast, “jobs and growth” only got a run 16 times in the budget speech (plus another 8 mentions in Budget Paper No 1).

But while the Treasurer’s “plan” does contain some bold and worthy initiatives – it is also in some ways a surprisingly unambitious document, especially for a government which came to office pledging to “stop the debt” and fix the “budget emergency”. This year’s Budget Paper No 2, in which all the different policy decisions taken in the lead-up to the budget are listed and costed, ran to only 172 pages, the smallest number since 1998-99.

More seriously, perhaps, the net impact of all the policy decisions taken since December last year on the budget bottom line amounts to just A$1.5bn over the four years to 2019-20. This is the smallest such figure in five years, and equivalent to just 0.02% of GDP over the forward estimates period. And more than all of that amount is contained in “decisions taken but not yet announced” in 2019-20, according to a line item on page 61 of Budget Paper No 2.

And because this relatively small amount of net savings is more than offset by another $11bn of adverse “parameter variations” – chief among them the impact of slower wages growth on personal income tax collections – the combined budget deficit over the next four years will be $6bn more than envisaged six months ago. It will be $40bn more than projected in last year’s budget, and almost $84bn more than foreshadowed in the 2014-15 budget (see Chart 1).

Successive estimates of the ‘underlying’ cash balance’

As a result, the government’s net debt is now expected to peak at 19.2% of GDP in 2017-18 – more than a percentage point above the previous peak in the last year of the Keating government, and almost 8 percentage points above the peak erroneously forecast for 2014-15 in Wayne Swan’s last budget, which the Coalition characterised as putting Australia in a fiscal position not far from that of Greece (see Chart 2).

Successive estimates of net debt

The longer-term projections still envisage the budget returning to surplus in the 2020-21 financial year – although the surpluses beyond that point fall well short of the government’s stated long-term objective of 1% of GDP. And it would appear that more than half of those surpluses are attributable to the inclusion, from 2020-21 onwards, of the net earnings of the Future Fund, something which was slipped quietly into the long-term projections in last year’s budget.

These projections rest on economic assumptions which, though not at all implausible, nonetheless appear to have more downside risk to them than upside. In particular, it assumes real GDP growth will average 3% pa from 2017-18 through 2022-23, and that Australia’s terms of trade stop falling after 2019-20.

The government has clearly been conscious of the need to ensure the measures contained in this budget can be portrayed as being “fair”. Certainly the changes to superannuation, including reducing the generosity of the taxation treatment of superannuation contributions, pass that test. And so do the “integrity measures” directed at ensuring multinational companies operating in Australia pay an appropriate amount of tax on the profits generated by their activities in Australia.

And although some will no doubt continue to portray it as “unfair”, I have no quarrel with the government’s decision to allow the 2 percentage point temporary deficit repair levy on taxpayers in the top income tax bracket to expire, as scheduled, at the end of the 2016-17 financial year.

There is no long-term good that can accrue to Australia by persisting with the English-speaking world’s second highest top marginal personal income tax rate. Especially given the rate cuts in at the second lowest top marginal income tax threshold in the English-speaking world. And when there are so many avenues open to people in that top tax bracket to avoid paying it on some, or all, of their income. There are much more effective ways of extracting more tax revenue from high-income households – if governments want to do that – than imposing punitive top marginal rates.

Why favour small business over big?

The government sees its program of annual reductions in the tax rate paid by companies, with the eventual reunification of the tax rate for “small” and “large” as the core element in its “plan” for “jobs and growth”.

There is now a large – though by no means uncontested – body of evidence to support the contention that reductions in company tax rates can support faster rates of GDP growth and higher wages (by stimulating higher levels of investment and hence higher levels of labour productivity).

But there is very little evidence supporting the favouring of small businesses over large in this regard. The significant preference which both this budget and its predecessor have extended to small businesses appears to owe much more to a desire to bow before small business than to any unambiguous economic rationale.

It is almost an article of faith among the Liberal and National parties that small businesses are the “engine room of the economy”. The Treasurer in his budget speech asserted that “small and medium businesses are driving jobs growth in Australia and must continue to do so”.

While it’s true that small businesses – defined in ABS statistics as those employing fewer than 20 employees – accounted for 44% of total employment in 2013-14, they have accounted for only 18% of the increase in employment over the most recent five years for which data are available in this form (ie from 2008-09 through 2013-14). By contrast, firms with more than 200 employees – which the ABS defines as “large” – have accounted for 52% of the increase in total employment over the past five years, despite accounting for less than 32% of total employment. Likewise, ABS statistics show that large businesses are more likely to engage in “innovative activities” than small ones, especially ones with four or fewer employees.

In other words, if the government wanted to cut company taxes in a way that was most likely to result in increased job creation or higher levels of innovation (assuming that cutting company taxes would have that effect), it should have cut company taxes for large companies ahead of small ones. But that would have been exceedingly difficult, politically, in the current climate.

It’s also worth noting in passing that a significant proportion of the budgetary cost of cutting the company tax rate – especially for smaller companies – will be “clawed back” through a commensurate reduction in franking credits.

‘If you want to pay less tax, get yourself a negatively-geared property investment’

The new youth jobs program seems much more effectively directed towards creating jobs than the myriad tax breaks for small businesses. This is a welcome reversal of the punitive approach to long-term unemployed young people taken in the 2014-15 budget.

The other key element of the government’s ten year enterprise tax plan is the increase in the tax threshold for the second-top marginal rate from $80,000 to $87,000, effective from July 1 this year. The government says this will prevent “average full time wage earners … from moving into the second highest tax bracket”.

As it does when talking about who does and who doesn’t benefit from negative gearing, the government here fails to distinguish between “gross” and “taxable” incomes. Average weekly total earnings for full-time adults are indeed now over $80,000 per annum. But that is a gross figure. People on those incomes claim deductions for work-related expenses, charitable donations, medical expenses and – as the government and the property industry constantly remind us – for interest on negatively-geared property investments.

Average taxable income in 2013-14 – the latest year for which figures are available – was $57,552. If that has increased since then at the same rate as average weekly total full-time adult earnings, then it would now be about $59,500 – a long way below $80,000.

The budget seems to be saying to people with taxable incomes of less than $80,000 – if you want to pay less tax, get yourself a negatively-geared property investment.

Negative gearing still the elephant in the room

The budget is also arguably saying the same thing to people with taxable incomes of over $250,000, people who have already contributed $500,000 to superannuation over the course of their lifetimes, or people who already have at least $1.6 million in their superannuation accounts. The message is if you put any more into superannuation, we are going to tax you more, but if you put it into a negatively-geared property investment, we won’t touch you, because (in the words of the Treasurer’s budget Speech), “that would increase the tax burden on Australians just trying to invest and provide a future for their families”.

Of course, we are not talking about a large number of people here: and the ones we are talking about are extremely well-off. We are actually also talking about people who are much more likely to have a negatively geared property investment (or indeed, more than one), than people with taxable incomes of less than $80,000 per annum.

The budget’s proposed changes to superannuation arrangements make sense. But I can’t see why people – even wealthy people – who are “just trying to invest” through superannuation should be singled out for less generous tax treatment, while people who are doing exactly the same thing through negatively geared property (or other) investments remain unscathed.

The Treasurer reportedly toyed with the idea of limiting “excesses and abuses” of negative gearing, with caps on claims. This would have more or less exactly paralleled what the budget seeks to do with regard to superannuation.

The decision not to go down that path was reportedly “a political – and not an economic – move”.

But it has, and will have, economic consequences.

Combined with the Reserve Bank’s latest cut in official interest rates, the budget’s decisions and non-decisions with regard to income tax cuts, superannuation and negative gearing are likely to encourage more Australians to borrow more money in order to invest in the property market. As if Australia didn’t already have one of the developed world’s highest ratios of household debt to GDP or personal income, and amongst the developed world’s most expensive residential real estate. And as if we might not be near the bottom of the interest rate cycle and the peak of the property price cycle.

Is it really consistent with building a “stronger, more diverse, new economy” – as Scott Morrison’s budget speech proclaims – to encourage still more Australians to bet, with borrowed money, that property prices will continue to rise at a faster rate than their incomes?

By the standards of previous pre-election budgets, this was a sober, responsible effort on the part of the government. The government has rightly sought to focus support for superannuation on its stated purpose, and to ensure that multinational companies pay a more appropriate amount of tax.

But the government is unnecessarily, and perhaps dangerously, blinded by its allegiances to its belief in the inherent nobility of small businesses, and to the property industry. Both have prevented it from delivering a better budget.

Saul Eslake does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.