by Simon Benson, National Affairs Editor
Caption: Modelling found that Labor’s budget projections had not taken into account significant behavioural changes
Bill Shorten is facing a $10 billion black hole in his key savings plans to axe franking credit refunds for retirees, with a Treasury study confirming Labor had failed to calculate the expected changes in investment strategies among people hit by the tax changes.
The Treasury modelling, based on a two-month external review of the policy, revealed investors and retirees were likely to change their behaviour, resulting in $1bn less revenue being collected over the budget forward estimates than the opposition had banked on.
This immediate shortfall rises to a $9.9bn black hole over the 10-year period with Treasury calculating the policy would raise $45.8bn rather than the $55.7bn Labor claimed.
The modelling suggested people with larger refunds and self-managed super funds were likely to shift their investments into other income streams, including foreign equities.
The discovery of the funding shortfall in one of Labor’s key tax measures comes as the opposition this week will be forced to decide whether to back the government’s full $140bn 10-year income tax plan or face accusations of denying low-income earners a tax break from July 1.
As parliament resumes today for the final sitting fortnight before the July 28 by-elections, the government is expected to force a vote on both its income tax cut and company tax cut plans as well as passing key national security legislation.
The government will refuse to buckle to Labor’s demands that it separate the tax component for high-income earners, leaving the crossbench to break the impasse when a Senate committee on the tax plan reports back today, with debate due to begin immediately.
The opposition’s own tax and spending measures will be exploited by the government following the release of the Treasury costings of Labor’s franking credit policy. The modelling that would form the basis of Treasury’s advice to Labor if it won government was conducted externally by Treasury with independent advisers. It found that Labor’s budget projections had not taken into account significant behavioural changes.
It puts Treasury at odds with the Parliamentary Budget Office, which also provided costings for Labor’s policy, which the opposition has refused to release.
The behavioural modelling found self-managed super funds would rebalance portfolios away from franked dividend-paying shares to “other forms of income to compensate for the fall in after-tax returns on shares in the absence of refundability”. These were expected to include fixed-income assets, property trusts, managed funds or offshore equities.
“The main mechanism by which individuals are expected to respond is through rebalancing their portfolios away from franked dividend paying shares,” the report said.
The report said it assumed the behavioural response increased with SMSF wealth to reflect factors such as the quality of financial advice. “This response increases over time to reflect investors’ shift away from investments previously attracting refunds in favour of alternative investment strategies,” it said.
Labor had originally claimed that its policy to abolish franking credit refunds would amount to $59bn in savings over 10 years, which the government claimed was a tax grab on retirees.
Mr Shorten was forced to rewrite the policy within weeks of its release by exempting pensions and welfare recipients after it was discovered many would be caught in the tax net. This reduced the number to $55.7bn over the decade and from $11.4bn to $10.7bn over the forward estimates.
The Treasury modelling has shaved a further $1.1 billion off the costings over the forward estimates, reducing Labor’s real take to $9.6bn and potentially undermining its spending commitments. It also revised the longer-term numbers down to $45.8bn, leaving Labor’s policy with a $9.9bn black hole.
Scott Morrison accused the opposition of building its entire spending program on a “house of cards” and compared it with the previous Labor’s government’s mining tax, which failed to recoup a fraction of the revenue it was designed to.
“This just highlights the vagaries and uncertainty of Labor’s revenues,” the Treasurer said.
“Treasury’s costing of Labor’s retiree tax proposal confirms concerns raised at the time Labor announced their proposal that they had overestimated the revenue they expected to collect. Labor’s retiree tax is far and away Labor’s biggest revenue measure over the forward estimates.”
Mr Morrison said Treasury’s advice confirmed that Labor’s revenue estimates for the retiree tax over the medium term were “particularly unreliable”.
“Yet Labor will seek to bank these unrealistic estimates and will bake into the budget long-term spending commitments,” he said.
“The government requested the costing and is releasing it in the interest of the public debate because yet again Labor chose not to release the detailed costing of their proposal by the independent Parliamentary Budget Office.”
Labor Treasury spokesman Chris Bowen has admitted that the opposition always expected a “tough debate” over the policy.
Labor has stood by the numbers despite having to revise them down less than two weeks after the policy was first released in March.