The AFR is reporting today that:
The federal government is scrambling to find more than $3 billion of additional savings in the two weeks before the budget after Treasury halved the projected price of carbon when Australia links to the European scheme.
The government plans revise down the projected price of carbon in 2015-16 from $29 a tonne to around $15.
…As a result, the government is seeking additional savings from across government in 2015-16 and 2016-17 in the remaining weeks before the budget, adding to the difficulties posed to the bottom line by falling revenue and big- spending commitments on disability and schools.
That’s going to be a challenge all right.
Just as concerning, in fact more so given the lack of coverage and the liklihood of regime change, is an excellent analysis by David Uren of The Australian looking at Tony Abbott’s much larger spending promises.
Uren lists the paid parental leave scheme, cutting the carbon tax but effectively keeping the tax cuts, carbon direct action, a commitment to lift defense spending “by 3 per cent a year until it reaches 2 per cent of gross domestic product – an annual lift of $7.5 billion”, removal of means testing for the private health insurance benefit and improvements to the indexation of military superannuation pensions, along list of state infrastructure projects plus 100 dams and development for northern Australia.
These can be weighed against the abolition of the school kids’ bonus and the rebate of superannuation contributions tax for low income earners, and $1 billion from winding up the the Clean Energy Finance Corp plus vague gesture at cutting 20,000 public servants and “stopping waste”.
The firm commitments to spend to date far exceed the firm commitments to save.
Paired with its determination to reduce and abolish taxes, there are grounds for concern that the Coalition’s strategy would weaken the budget bottom line.
The Coalition gives little indication of recognising the severity of the budget challenge it would face.
Commonwealth taxes averaged 24 per cent of GDP in the last six years of the Howard government. They slumped to just above 20 per cent in the two years following the GFC. That translates to a shortfall of about $45bn a year. If that had to be covered by taxpayers, it would be $6000 per household.
Yes, revenue is growing, but nowhere near fast enough to return it to its former share of the economy. It will only be 21.4 per cent of GDP this year.
…Even if commodity prices fall only very slowly from their current peaks, the economy is trapped in a long-term trend of weak growth in the total value of the goods and services it produces – the so-called “nominal GDP” which provides the basis for taxation.
The last line is the problem. As I’ve said, modest deficits are part of the solution for Australia in the years ahead. But the Coalition is showing no sign of understanding the constraints they will face.
I am not doing the Uren piece justice and suggest you read it yourself.