Last night Wayne Swan handed down his fifth Australian federal Budget. You can find his speech here. It was very much a labor Budget with the focus on middle and low income earners, but framed in the context of a push for surplus in one year from a deficit position of over $40 billion. If you have a spare week or two the full Budget documentation is available here.
Families and the ageing were definitely the winners while the big back-flip was on the company tax reduction. Defence, foreign aid and the public service take a fair whack and there appears to be a strategy of deferring payments in order to make this year look better than otherwise.
A full list of announcement follows:
- $5 billion cut from Defence, including deferral of the delivery of the first Joint Strike Fighter aircraft and scrapping of plans to equip the Army with new self-propelled artillery
- About 100,000 parents affected by cutbacks to parenting payments and shifting of single unemployed parents onto the Newstart allowance once their children turn eight; budget saving of about $700 million over four years.
- Tax rate on superannuation contributions doubled from 15 to 30 per cent for people earning more than $300,000 a year
- Around 3,000 public service jobs already gone under increased efficiency drive
- $1.8 billion from July 2013 so 1.5 million families can receive increase to Family Tax Benefit A, with nearly half taking home an extra $600 a year
- $1.1 billion over four years to create new Supplementary Allowance of up to $210 a year for students, jobseekers and parents with young children on income support
- Approx 1 million households claiming Tax Benefit A to receive cash payment of $820 for each high school student and $410 for each primary school student under School Kids Bonus, replacing the Education Tax Refund
- $1 billion over four years to roll out the first stage of a National Disability Insurance Scheme expected to cover 10,000 people from 2013-14 and 20,000 people from 2014-15
- $515 million to treat 400,000 people on the public dental waiting list and to help dentists relocate to rural and remote areas
- $700 million over four years to allow small businesses to “carry back” past profits to offset current losses by up to $1 million
- $475 million for 76 new health infrastructure projects to upgrade regional hospitals and doctor training support
- $3.2 billion aged care package over five years including measures to almost double home care assistance and improve pay and conditions for aged care workers
- $2 billion saved by not proceeding with standard tax deduction on work-related expenses that was due to begin in July 2013
- Commitment to lift spending on foreign aid to 0.5 per cent of gross national income to be met a year later than promised
- Around $1 billion could be saved by crackdown on living-away-from-home allowance for executives interstate or overseas
- Tightening of Pharmaceutical Benefits Scheme and some natural therapies to be removed from private health insurance coverage
- $2.5 billion saved by changes to Medicare levy surcharge and means-testing of private health insurance rebate;
- $923 million saved over forward estimates by scrapping of 50 per cent discount on interest income
- Recipients of Family Tax Benefit A & B and disability support to have payments cut if they travel overseas for more than six weeks a year
- $1,000 payment to companies for each worker they hire aged over 50 for at least three months
- $50 million to extend bowel cancer screening program so people aged 50 to 70 will be offered free tests every five years
- $3.56 billion for duplication work on the Pacific Highway in New South Wales on condition of matching state funding
- Flood levy exemption extended to victims of 2012 flooding across eastern Australia
- $6 million over four years for suicide prevention measures in Western Australia’s Kimberley
- $56 million to expand in-home tutoring program for children in up to 100 disadvantaged areas
- Tax cuts for small business promised under the mining tax redirected to households because measures unable to garner enough support to pass Parliament
- Planned tax breaks for green buildings will not proceed, saving $405 million over the forward estimates
- 80 per cent cut to inbound duty free allowance reduced to 50 cigarettes or 50 grams of tobacco; $600 million saving over forward estimates
- Passenger movement charge up $8 to $55 from July 1, 2012
- Reduction in tax breaks for golden handshakes to save $196 million over forward estimates
- Phasing out of mature age worker tax offset to save $255 million over forward estimates
- Increased heavy road user charge to raise $166 million in 2012-13; almost $700 million over forward estimates
I’m not going to comment on any of these things individually, you can make your own mind up about each of them. Obviously your opinion will be somewhat effected by your own personal and financial circumstances. Some measures are the basis for longer running challenges , certainly in the area of age care, infrastructure and training, the cuts in foreign aid and defence spending are likely to have limited impact on the local economy, but IMHO a number of these come across as a bit of pork barrelling to offset the governments poor handling of recent economic policy. According to recent comments by the Treasurer the government appears to believe that a surplus position is an economic imperative because economy is returning to trend growth and is important for global confidence in the Australian economy.
The Budget forecasts a very sharp turn around in the deficit position from $44.4bn ($3.0% of GDP) for 2011-12, to a very small surplus of $1.5bn for 2012-13. This prediction is based on overall growth and household expenditure returning to “normal”. Back in November the Mid-Year Economic and Fiscal Outlook the deficit was forecast at $37.1 billion however there continues to be weaker than expected revenues based on a number of factors. These include:
- a large amount of capital losses dampening Capital Gain Tax receipts;
- Weaker GST receipts due to “disleveraging” consumers and the high AUD
- Mining capital expenditure writeoffs and a weak non-mining economy which has lowered company tax receipts.
The outcome of this is that tax receipts have fallen by $6.1bn over recent estimates. New policy decisions also added $2.7bn to the deficit. This was offset somewhat by an underspend on existing programs by $1.5bn. Since the MYFEO the overall position of the budget has sunk another $2.9bn. This would have been worse if the government hadn’t reduced GST payments to the states by nearly $3bn dollars over its estimates.
The budget overview document (available here ) contains the budget aggregates table.
And once you compare it to data from a similar table produced in early 2011 you can see just how much difference the last 12 months has made with the underlying cash balance for 2011-12 off by a whopping $29bn dollars.
The government is now aiming for a massive $45.9bn reversal in the underlying cash balance in the next year which represents 3.1% of GDP. This is one of largest one-year fiscal tightening ever and given the current trends appears optimistic. The figures are based on a return to trend real growth with mining, and associated taxes, underpinning revenue growth. Households are also expected to make a “at trend” contribution to the government balance-sheet. If the government manages to pull it off then net government debt will peak at 9.6% of GDP.
The Government has acknowledged some downside risks to the global economic outlook. These include:
- a continuation of the Eurozone sovereign debt crisis
- the potential for a lift in global oil prices
- the ability for the US to stay on course of an economic recovery
Those risks, however don’t seem to have flowed through into a downgrade of Australia’s growth potential. Back in November last year while commenting on the Mid-Year Economic and Fiscal Outlook I made the observation that:
The forward estimates were actually only predicting a shrinkage of the deficit by $12.4 billion in 12-13 and that was when GDP was predicted at 4%. With the GDP now predicted to be 3/4 lower, again overly optimistically in my opinion , the Treasury is somehow forecasting a $42 billion dollar turn around.
Once again it would appear that Treasury has under-estimated the effects of the disleveraging public while overestimating the offsetting strength of the capital investment boom. However, unlike my previous assessment, this now seems to have been made worse by some highly optimistic predictions for the future.
As commented on yesterday by H&H, GDP looks to be under-shooting those bold estimates, but that doesn’t seemed to have stopped treasury keeping hold of the optimism with just a 0.5% shave off the 2012-13 GDP growth estimate even though this FY is likely to disappoint with over a 1% fall between estimate and actual GDP. From Appendix H:
You can checkout the sensitivity of budget estimates to economic developments section of the budget if you are interested in the estimated flow-on effects to the budget in the case of lower GDP.
Over the last 12 months I mentioned numerous times that I thought the Treasury was continually under-estimating the effects of the disleveraging public while overestimating the offsetting strength of the capital investment boom. There isn’t much in last night’s Budget to suggest that they have adjusted their forecasts that much. My assumption is that there is now an expectation that the lowering of interest rates and some focussed fiscal stimulus will get middle Australia back on the “borrowing path”, but this is quite big ask in my opinion. Although Treasury has somewhat acknowledged the global environment in its estimates it doesn’t seem to have acknowledged the effect of its own fiscal tightening. A 3.1% GDP turn-around in budget will not be without flow-on effects.
As I have stated previously:
It must also be noted that at a time when the private sector is showing signs of an attempt to deleverage an attempt by the public sector to do the same in the absence of a current account surplus is likely to be counter-productive.
The saving in the budget are quite strategic, with major spending cuts focussed on overseas payments while low-to-middle income earners get a bit of stimulus, which, ironically, may actually delay some of the rate cuts that also assumed in the Budget. Ultimately if the households and businesses of Australia aren’t willing to pick-up the fiscal slack then it is quite possible that the next MYFEO will be as disappointing as the last.