ARDR Analysis

Mixed picture with ugly streaks

Dr Gerd Winter on the federal budget 2017-18

The budget has surprised many commentators in being far less austere than its recent predecessors while the fundamentals of  Australia's economy have actually not significantly changed.

However, there is optimism that global economic conditions are picking up, and in its wake will boost Australia's performance.

According to IMF forecasts, global growth will increase to around 3.5% in 2018 and 3.75% by 2019, reversing a trend decline over recent years.

This outcome relies on China and the US performing as expected, which is far from certain.

In Australia, for all the talk of the Australian economy transitioning towards non-mining sectors, mining and agriculture continue to be the base of our prosperity - and both are notoriously volatile sectors. 

...mining and agriculture continue to be the base of our prosperity - and both are notoriously volatile sectors...

Despite commodity prices having falling from record highs, export income from resources rose strongly in recent years, doubling over the past decade. According to the budget this trend will continue over the forward estimate, while the decline in mining investment is also coming to an end.

Optimism for the resources sector - the decline in investment is coming to an end, and the value of resources exports continues to grow
image adapted as presented in budget papers

So, if all goes as planned (and when has that ever happened?), the Australian economy will rebound to growth of 2.75% in 2017-18 and 3.0% in 2018-19, and the Governments estimated deficit of 1.6% of GDP in the underlying cash balance in 2017-18 will improve, potentially returning a small surplus by 2020-21.

Taking a U-turn from previous policies, the Government has decided to deliver on big ticket items such as health and education - including a full funding of the National Disability Insurance Scheme and support of the Gonski needs-based funding model for schools. This has been widely welcomed, with popular items also including a $600 million National Rail Program.

"Science has largely flown under the radar in a restrained Budget..."

But for science and innovation, just a year ago put forward as central to Australia's future prosperity, there are few new investments, and the reactions from the sector have been reserved.

As Professor Les Field, Secretary for Science Policy at the Australian Academy of Science succinctly put it: "Science has largely flown under the radar in a restrained Budget, with no big spending measures and no major cuts apart from the university funding changes ...".

A similar message is given by Kylie Walker, CEO of Science and Technology Australia, who described the budget as largely business-as-usual for science and technology.

Astronomists have reason to be pleased, though, as Australian scientists will gain access to telescope facilities in Chile through a $26.1 million commitment towards a 10-year strategic partnership with the European Southern Observatory (ESO).

And the health and medical research sector can look forward to a $65.9 million installment from the Medical Research Future Fund supporting measures across preventative health research and translation, advanced health translation centres, clinical trial and other research investments.

In addition, $5.8 million will be provided for research into childhood cancer. And there will be $15 million targeting research in mental health, including for a new Centre for Research Excellence in the Prevention of Anxiety and Depression by the Black Dog Institute and the Hunter Institute of Mental Health.

Climate change and renewable energies hardly receive a mention...

But there are also ominous omissions. Climate change and renewable energies hardly receive a mention, indicating a business-as-usual approach. The Snowy Hydro 2.0 scheme, recently announced as the big game-changer in Australia's electricity generation, is at present just a feasibility study by  ARENA.

In fact, the project, which if realised will cost several billion, is not an item in the budget papers at all - meaning, there is no money allocated for it.

Also astonishing is that the Review of the R&D Tax Incentive gets no mention - but maybe, as a commentary by FB RICE put it, "no news is good news". Changes to the program most likely would aim to reduce ballooning costs.  (A contentious recommendation of the review is that the refundable component of the expenditure should be capped to $2 million with the remaining R&D expenditure to be carried forward.)

Regrettably, what is included in the budget is a renewed cut of $300 million to foreign aid. As with the previous year's budget, when foreign aid reduced by $224 million, following a savage cull of $1 billion in 2014-15, this isn't just about lacking generosity.

"Foreign aid is also smart policy..."

Foreign aid is also smart policy, especially from the perspective of a country that is geographically isolated, sparsely populated and struggling to make its mark in world markets.

It's alsonotably different to the approach taken by the world's most competitive and most innovative countries, among them Sweden (1.4% in 2015) and the UK (0.71% in 2015).

We have now slipped down to spending just a bit over 0.2% on foreign aid, while many of the world's most innovative countries either are exceeding or closing in on the target of 0.7% of GDP that is recommended by the UN..

Whether we like it or not, Australia is developing some image problems on the world stage. With our harsh policies against refugees and our dismal record on greenhouse gas emissions, we also continue pulling back on our responsibility to help other less fortunate nations in their development.

Thus the picture of an open and caring society has now some ugly streaks, which we keep pushing into the conscience of existing and emerging trading partners. It's a pretty lousy business strategy.

Another such "smart" move is the 7.5% in additional contributions higher education students will have to make to their studies, phased in over three years from 2018. It is part of an ambitious higher education reform package that is to improve the budget's bottom line by $2.8 billion over the forward estimates.

The Government says its plan better reflects the lifetime benefits reaped by higher education graduates. However, this argument can easily be turned on its head. Obviously, if students have such benefits, they have them because they present a value employers are prepared to pay for.

Some may point out that on average the amount students will have to pay more for their education isn't huge, just a few thousand dollars. However, the trend is the problem, and the underlying ideology that fuels it.

An editorial in the New York Times has recently commented on the situation in the US:

"After decades of rising college costs and tepid income growth, student debt has become a drag on graduates’ hopes and a threat to economic growth."

The Government is painting higher education as an individual's luxury, when in fact having a more educated workforce is a necessity to our future's prosperity and society.

This is not to say that universities aren't "inefficient bureaucracies, with bloated administrations and over-paid vice chancellors", as recently eloquently put by Fairfax columnist Ross Gittins. But students shouldn't have to pay for the waste.

In a nutshell: Budget items targeting science and innovation

Research infrastructure: The Government will spend $26.1 million over four years ($120 million over 11 years) on a strategic partnership with the European Southern Observatory (ESO), and on maintaining Australia’s optical astronomical research and instrumentation capabilities.

Manufacturing: A package of initiatives worth in total $100 million, of which half will support businesses in South Australia and Victoria in adjusting to the wind-down of car manufacturing. Initiatives include:

Energy:  A $265 million energy package is supporting the transition of Australia's electricity generation. It includes up to $110 million for a solar thermal plant in Port Augusta in South Australia, and up to $36.6 million over two years targeting energy infrastructure in South Australia.

Australia's gas industry is another major target with a package of around $90 million. It includes:

A CSIRO Energy Use Data Model will be supported with $13.4 million to improve energy market forecasting.

Higher education reform:  The Government had another crack at higher education reform, after shelving the former Abbott Government's policy proposals in 2015. 

Its new attempt has three overarching objectives: 

The Government says that the reform of the $21.8 billion sector, Australia's third largest export industry, is necessary as funding increases outpace economic growth - by 71% since 2009. The proposal will better target Commonwealth support through the Commonwealth Grants Scheme (CGS) and provide better support for students, fairer access for underrepresented groups, and will meet future needs of the sector.

In the first instance, though, it will provide savings for the taxpayer - improving the budget's bottom line by $2.8 billion over the forward estimates. The reforms will also mean that on average, just 54% of university course costs will be supported through the taxpayer.

With the changes, students will have to face an increase in their maximum contribution to the cost of their courses. The Government will also lower the threshold of the income above which they have to repay the debt to the Higher Education Loan Program (HELP), and it will align HELP debt indexation to the Consumer Price Index  instead of the current link with Average Weekly Earnings.

Among the measures that aim to improve the choices for students is the allocation of  $15 million for eight community-owned, regional study hubs. The Government will also introduce a 'student-centred' model for the distribution of postgraduate coursework places.

In 2018 and 2019, the Government will also apply  a 2.5% efficiency dividend across its CGS subsidies of student tuition costs. 

Greater transparency and accountability is the objective of a series of measures including through a performance-based element to the CGS, worth 7.5% of total CGS cluster funding.

Agriculture, water and environment:  The Government will invest  $1.1 billion over 5 years in the National Landcare Program (NLP), which includes $100 million the Government negotiated as part of a deal with the Greens in December 2016 for their support of the backpackers tax.

The NLP is the Government's primary funding mechanism to support conservation projects, and sustainable land management, with a focus on improving issues such as soil health, erosion management and water quality.

As part of the package, the Government is establishing a Centre for Invasive Species Solution in Canberra with $20 million. This will deliver on an election commitment and is to continue the work of the former Invasive Animals Cooperative Research Centre.

The Great Barrier Reef continues to be a major focus, with the implementation of the Reef 2050 Long-Term Sustainability Plan, and together with the Clean Energy Finance Corporation delivering the $1 billion Reef Funding Program

As part of implementing the Australian Antarctic Strategy and its 20 Year Action Plan, the budget has committed funding of $49.8 million over 11 years from 2016-17 to provide year-round access to Macquarie Island, which contributes to a range of international scientific monitoring and Southern Ocean research programs. 

The Government will contribute around $300 million in 2017-18 to research, development and extension across agricultural industries. It includes $2.32 million over four years for R&D in the Australian thoroughbred industry ($1.6 million) and the emerging tea tree oil industry ($0.72 million).

The Government also announced an additional $8 million for water infrastructure upgrades across the Great Artesian Basin (GAB) for two years to 2018-19. It will extend the Great Artesian Basin Sustainability Initiative, which will cease 30 June 2017.

The GAB is the largest and deepest artesian basin in the world, underlying 22% of Australia, housing around 65 million megalitres of fresh water.

A major initiative targeting the agricultural sector is a $4 billion Regional Investment Corporation, a national body to streamline and approve farm concessional loans for farm businesses and administer the $2 billion National Water Infrastructure Loan Facility.

Business innovation:

Broader access for crowd-equity funding proposed

Together with the budget the Government has released draft legislation to extend crowd-sourced equity funding (CSEF) to proprietary companies.

Opening crowd-equity funding to businesses, allowing entrepreneurs to raise funds of up to $5 million per year, was part of the National Science and Innovation Agenda, and in March, the Australian Parliament passed legislation to implement CSEF to public companies.

However, Marina Nehme, a Senior Lecturer from the Faculty of Law at the University of New South Wales pointed out In The Conversation that the legislation's safeguards restrict the CSEF to public unlisted companies that are limited by shares, and with less than $25 million in gross assets and annual revenue. This would exclude 99.7% of companies accessing this new way of funding. 

The new proposed legislation to amend the Corporations Act 2001 would widen the scope of access. The draft legislation is open for comment until 6 June 2017.

Fintech: An enhanced regulatory sandbox 

The Government is introducing a legislative financial services regulatory sandbox to enable businesses to test a wider range of new financial products and services without a licence, including providing more holistic financial advice, issuing consumer credit, offering shortterm deposit or payment products, and operating a CSEF intermediary.

Development of Northern Australia: There were no new announcements in the budget but confirmation of the almost $7 billion the Government will invest in developing infrastructure in the North, most of which ($5 billion) will be in concessional loans from the Northern Australia Infrastructure Facility.

More information:
The image shows the top 10 countries ranked in the 2014-2015 WEF Global Competitiveness Index and the 2015 Global Innovation Index; shaded are the countries that also spend the most on foreign aid relative to their gross national income, according to a report recently released by the OECD on the 29 members of the Development Assistance Committee (DAC).
Data and graph drawn from: WEF Global Competitiveness Index 2014-15 report; Global Innovation Index, and the OECD DAC 2016 report.