Australia Institute says lost tax revenue and increased welfare demands could add up to a significant hit to the budget

This article is more than 3 years old

This article is more than 3 years old

Penalty rate cuts could cost the commonwealth budget $650m over four years, according to progressive thinktank the Australia Institute.

Last month the Fair Work Commission decided to cut Sunday and public holiday penalty rates for workers covered by four awards (fast food, retail, pharmacy and hospitality).

The impact on workers will be diverse, with different workers employed at different levels under each award, though not all workers will be affected.

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But the Australia Institute warns the cut in penalty rates will see personal income tax receipts decline – and a rise in claims for welfare payments – with the budgetary impact worth hundreds of millions of dollars a year.

The institute’s chief economist, Richard Denniss, has written a briefing note, seen by Guardian Australia, estimating the budgetary impact of the decision.

He has modelled different scenarios, but his central scenario assumes 285,000 workers will lose an average of $2,744 a year from Sunday penalty rate cuts (the impact of lower penalty rates on public holidays has not been estimated).

He assumes those workers will be in the 19% tax bracket (where they earn between $18,201 and $37,000 a year, and get taxed 19 cents for every dollar earned over $18,200).

He choose the figure of 285,000 workers to match the government’s lowest estimate.

“To simplify the estimate of the impact of the FWC decision on the budget, the scenarios used assume that a smaller number of people experience all of the loss of income rather than the more realistic assumption that a larger group of people share some of the loss of income,” Denniss says in the report.

Denniss warns the Sunday penalty rate cuts will necessarily flow through to income tax receipts, with a reduction in tax revenue for the government worth $164.2m per year, or $656.8m over four years.

He says the cutting of wages for low paid workers may also lead to a significant increase in welfare spending.

He estimates if 20% of those 285,000 workers already receive welfare payments, the increase in welfare spending could be $78.2m a year.

He said his estimates of the budgetary impact could be conservative because they did not include a number of possible economic effects, such as: state government payroll tax revenues declining with lower wage payments; a possible fall in consumer spending in line with the cut in disposable income and the related decline in GST revenue; and a fall in labour productivity.

Regarding the argument that Sunday penalty rate cuts would boost employment, Denniss said it was possible the total wage bill would remain steady if there was a large increase in employment.

“It is even theoretically possible that the wage bill might rise,” he said. “However, not even the supporters of the cut in penalty rates have argued that lower wages will lead to a large increase in the number of shifts offered to workers.”

Peter Strong, the chief executive of the Council of Small Business Australia, has said it would be hard to estimate how many jobs would be created.

“There will be more jobs. It might not be a lot, it might be 10,000. We don’t know how many but we’ll find out,” he said last month.



Jim Chalmers, the shadow minister for finance, told the ABC’s Insiders on Sunday morning that he knew the Australia Institute was going to be releasing an analysis of the penalty rate cuts.

“These penalty rate cuts won’t just cost people up to $77 a week, they will also cost the budget hundreds of millions of dollars,” Chalmers said.

“I think it speaks volumes about Malcolm Turnbull that he is so keen to attack the take-home pay of ordinary people around Australia, that he is prepared to smash the budget to do it,” he said.

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Malcolm Turnbull has repeatedly reiterated the government’s support for the independent FWC, saying it is “reckless” for parliament to set penalty rates.

He said he supported the FWC’s decision because it supported small business. “I have been very clear about that,” he told radio 3AW interviewer Neil Mitchell this month. “The Fair Work Commission decided to back small business and we back small business.

“It is important to remember this was not a decision from the government, it was an independent considered decision of the independent umpire of the Fair Work Commission, every member of which was appointed by a Labor government, three of who were appointed by Bill Shorten.”