Budget 2014: No pain, no gain as Treasurer Joe Hockey slashes spending in 'budget repair' job
Updated
The Abbott Government's first "budget repair" job will tighten the belts of most Australians, with tax hikes, tighter welfare rules, new GP fees, and cuts to health and education spending.
Treasurer Joe Hockey's "contribute and build" budget will bring about deep changes – the "structural reform" he says the Coalition was elected to do.
Handing down the budget in Parliament on Tuesday night Mr Hockey foreshadowed more cuts to come, saying "the budget we announce tonight is the first word and not the last word on budget repair".
Emphasising the government's aim to move people off welfare and into work, he told Australians: "We are a nation of lifters, not leaners".
Mr Hockey outlined an $11.6 billion road, rail and port package to boost jobs, and detailed plans to crack down on the unemployed and get those on disability support pensions into work.
Billions of dollars worth of cuts and increased taxes have put the budget on a "clear track to surplus" – projected to be well over 1 per cent of GDP in a decade.
This year's deficit of $49.9 billion will fall to $29.8 billion next year and is projected to drop to just $2.8 billion in 2017-18.
The unemployment rate is expected to peak at 6.25 per cent over the next two years.
But the path back to a budget in the black has come at a cost.
Schools, hospital funding to be slashed
Over $80 billion in Commonwealth funding will be slashed from schools and hospitals over the next decade, moving agreements with the states and territories to "more realistic" deals.
The government will dump the Gonski school funding plan in 2017-18, saving around $30 billion from the federal budget.
Hospital funding agreements, agreed with the states and territories under former Labor prime minister Kevin Rudd, will also be wound back from 2017, saving a massive $50 billion over eight years.
Health cuts will be used to build a new fund for medical research, expected to be worth $20 billion by 2020.
The budget has detailed the loudly flagged $7 patient fee for GP visits, which will also be charged for X-rays, scans and pathology services.
States and territories will also be able to charge the "co-payment" for GP-equivalent visits to hospital emergency departments.
Concession card holders and children under 16 will only have to pay the co-payment on their first 10 visits of the year.
Medicines on the pharmaceutical benefits scheme will also be more expensive, with patients paying a $5 fee – or 80 cents for those on concession cards.
Other health cuts include reducing the Medicare rebate for optometry, deferring a multi-million dollar dental program, and axing the national partnership agreement on preventive health.
The Government will also save $1.7 billion over five years by pausing the Medicare benefits schedule for two years from this July, and the income thresholds for the Medicare levy surcharge and the private health insurance rebate.
Pensioners will also be hit – but not until September 2017.
From then, rises will be tied to inflation, instead of the current link to the higher male average earnings. That will save $449 million over five years, but the Government will argue it is not a "cut" to pensions because the payment will still increase – just by not as much.
It will also argue it is not a broken promise, because the change is introduced after the next federal election.
No mention of PPL scheme amid changes to family tax benefits
The new indexation will also apply to single parent payments – but that change will kick in this July.
Some retirees will also be ineligible for Commonwealth seniors health card, because untaxed super will be included in the income test for the first time.
Families receiving tax benefits may also have to tighten their household budgets, with payment rates frozen for two years and income thresholds lowered.
Those receiving Family Tax Benefit B – which is for families with one income – will lose out when their youngest child turns 6.
But low-income single parents will receive an extra $750 a year for each child between 6 and 12.
Prime Minister Tony Abbott's "signature" policy - his $5 billion paid parental leave scheme - has been shunted into the budget's contingency reserve.
It is the only election promise not officially detailed in the budget books, along with the 1.5 per cent company tax cut that is meant to help pay for it.
Eligibility thresholds for all government payments will be frozen, including for the private health insurance rebate.
This will allow inflation to effectively do the cuts for the government by reducing the cut-off for benefits over time.
Those under 35 receiving the disability support pension will have their eligibility reviewed and, if kept on the DSP, will have to complete a "program of activities to build their work capacity".
"In welfare, it is not the end of the story, but it is the start," Mr Hockey told reporters inside the budget lockup, foreshadowing further measures to come.
No unemployment benefits for under 25s
The budget has fleshed out the Government's "learn or earn" rule for young Australians.
Under 25s will not be given unemployment benefits but will have to go onto the lower payment of Youth Allowance.
When they do hit 25 they will receive Newstart, but not for six months, and will have to participate in work for the dole programs for at least five years.
The tertiary education sector will be deregulated from July next year – a move the government says will allow universities to compete globally.
Financial assistance for students will be opened up to TAFES and colleges, but students will have to pay more, pay their fees back sooner, and pay more interest.
Existing students will be saved from the changes until 2020.
To "restart" the careers of older people receiving a benefit, businesses will be paid $10,000 if they give a job to a worker over 50. The measure will be available for 32,000 job seekers.
Fuel prices to rise; temporary high-income levy set at 2pc
From August 1, car owners will face higher petrol costs twice a year, with the Abbott Government confirming it will bring back indexation against the CPI for the fuel excise.
This will raise $2.3 billion - "every dollar" of which the Government says will pay for new roads.
It forms part of the budget's key jobs growth measure – its $11.6 billion infrastructure program to build new roads, rail, ports and airports over the next six years.
"Shovels will start moving within a matter of months," Mr Hockey told Parliament.
As widely touted, the Government will increase taxes for the nation's top earners, on incomes of $180,000 and above by 2 per cent for a Temporary Budget Repair Levy.
Raising $3.1 billion over four years, the tax will be paid for three years, with an end-date of June 30, 2017.
The Government is also abolishing the mature age workers tax offset and the dependent spouse tax offset from July this year, to save $1.1 billion over the four years of the forward estimates.
On the Coalition's key promise of "stopping the boats", the budget outlines a $2.5 billion saving because of an end to new arrivals of asylum seekers by boat.
The budget has also set up reviews into the possible privatisation of Australian Hearing, the Defence Housing Authority, the Australian Securities and Investments Commission Registry and the Royal Australian Mint.
It has also detailed the cost of searching for the missing Malaysia Airlines flight MH370 at $90 million over two years from the current financial year.
Reducing life gold pass entitlements for politicians will save $5 million over five years.
- Corporate welfare slashed, but company tax cut left out of budget
- Planets must align for Tony Abbott to reconcile tale of two deficits
- Family Tax Benefit cuts worth billions to hit families
- Axe falls on foreign aid spending
- Older Australian entitlements cut in Hockey budget
- Young unemployed to work for the dole, university students to pay more
- ABC, SBS funding cut, Australia Network contract cancelled
| Term | Definition |
|---|---|
| Deficit/Debt | The deficit is just the amount of money that the government spends beyond what it receives in a financial year. Just because you return the budget to surplus doesn't mean that the debt incurred by the previous deficits disappears. Any deficits, or shortfalls, instead are added to existing government debt, which currently sits at $319 billion. While $319 billion sounds like (and is) a lot of money, by international standards Australia's public debt is quite low, sitting at 21 per cent of GDP, the second lowest of the advanced economies - and that's just gross debt, which doesn't include the value of Australia's financial assets, such as the Future Fund. However while government debt can pose problems, it isn't quite the same as personal debt and can often serve a purpose. Governments take on debt by issuing bonds to investors that are paid a return, with ratings agencies allotting a credit rating to government debt. A high credit rating, such as the one Australia has, allows governments to borrow at a very low rates, with investors trading profit for security. Some economists argue this ability to borrow at a lower rate than the market should be use to fund infrastructure projects that are likely to make a profit, as well as boosting productivity. |
| Forward estimates | The forward estimates are a series of projections released alongside the budget predicting revenue and expenses for the next four financial years. As they rely on assumptions about revenue and indicators, they are often subject to change - as the mining boom unfolded the estimates often undervalued the amount of revenue, and after commodity prices peaked they have had to be revised downwards. But the estimates are seen as a useful way of showing the government's longer-term plans for spending. |
| Revenue collapse | Over the past few years there has been a significant drop in the amount of tax revenue coming into the government. There is some contention over the reasons behind the drop, but economists are united in saying that at least part of the problem facing the government in its quest to return to a surplus stems from a lack of revenue, rather than too much government spending. |
| GDP | The annual value of goods and services produced by a country. GDP is generally recognised as one of the key indicators of the state of a country's finances. |
| Nominal GDP | A version of the gross domestic product that has not been adjusted for inflation. This means the GDP will appear higher than it actually is, as it fails to take into account the devaluing effect of inflation. However it is also the measure of GDP that is closest related to government revenue and spending, as both are affected by inflation. |
| Terms of trade | Terms of trade measures the relationship between the prices a country receives for its exports and the prices it pays for its imports. A rising terms of trade means the nation is getting better prices for its exports relative to what it pays for imports, and vice-versa. Australia benefitted from rising terms of trade during the mining boom as the prices of iron ore, coal and other commodities surged, while the price of many imports such as electronics and clothes stayed steady or fell. Economists are cautious about drawing too many conclusions from high or low terms of trade figures, but trends in the movement of the terms of trade are useful for predicting changes in the standard of living. |
| Tax expenditures | Tax expenditures are sources of revenue the government goes without due to tax concessions. While they are not government spending, they represent significant losses of potential revenue for the government. In 2013-14 expenditures hit the budget bottom line to the tune of $115 billion, and while some of this is offset by increases in productivity and increased spending, it remains a significant source of potential revenue the government is missing out on. Among the most well-known examples of tax expenditures are superannuation concessions and the capital gains tax exemption on the family home. |
| Negative gearing | Negative gearing allows property investors to write the interest costs of their mortgages off as an income tax deduction against other sources of income, and has been blamed for soaring property prices as it subsidises loss-making real estate investments. |
| Superannuation concessions | Super concessions are tax breaks designed to encourage people to put more money into superannuation, in theory saving the government money down the track by reducing the burden these people will have on the public purse when they retire. Currently superannuation is taxed at 15 per cent, with super earnings not taxed at all once you hit 60 years of age. Employers are required to put aside 9 per cent of an employee’s income into a super fund. The superannuation concession allows people to voluntarily contribute more to their superannuation and still be taxed at the rate of 15 per cent, well below the majority of tax rates. The concessions have been criticised for disproportionately benefiting the wealthy, who get a much bigger discount on their normal income tax rates than those in lower tax brackets. With many wealthy people likely to be ineligible for the pension on reaching retirement anyway, critics argue that the concessions cost the government far more in lost revenue than it would cost to support wealthy individuals with the aged pension. According to the Australia Institute, superannuation concessions cost the Federal budget $35 billion in 2013-14 (with that number expected to rise to $50.7 billion by 2016-17), of which 30 per cent ($10.5 billion) goes to the top 5 per cent of income earners. |
| Debt Levy | The debt levy has been proposed as a possible means for the government to pay back the budget surplus, and is expected to hit people earning more than $80,000 or $180,000 a year, taking an extra 1 per cent of their annual income. The Government, including Prime Minister Tony Abbott, is claiming it does not constitute a broken promise, as the levy will not be permanent (and so is different from a tax), but widespread polling indicates this won't wash with the public. |
| Middle class welfare | Middle-class welfare is a term used by economists and commentators to refer to the increase in tax breaks and welfare payments for those on higher incomes that came in under the Howard Government. The private health insurance rebate for higher income earners has been singled out as an example of this. The majority of the policies labelled 'middle-class welfare' were maintained by the Rudd and Gillard governments, with any attempts to wind them back labelled "class warfare". But some economists have argued this has significantly contributed to the collapse in tax revenue. |
| Parameter variations | Parameter variations refer to the budget’s assumptions about the economy (such as growth, inflation and unemployment) and how these will affect revenue and costs. The parameter variations in the MYEFO were vastly different to those set out in the PEFO, leading commentators to question whether they were massaged to provide a worst-case scenario, giving the Government more freedom to implement unpopular cuts and space for a miraculous recovery in the upcoming budget. |
| The age of entitlement is over | A term first mentioned by Treasurer Joe Hockey in a speech to British Conservatives in early 2012 that has become the informal motto of his time as Treasurer. Despite following up his debut of the term with an attack on Labor’s attempt to wind back the health insurance rebate, Mr Hockey has signalled that in order to get the budget back to surplus, sacrifices must be made by all, from businesses to the man or woman on the street. Whether this commitment goes beyond political rhetoric to actual structural reform is a question many expect to be answered in Tuesday's budget. So far the government's unwillingness to bail out the car industry, and public speculation about a debt levy on high income earners, indicate this may be the case. |
| Efficiency dividend | A reduction in funding for Commonwealth government portfolios designed to drive efforts to increase efficiency. First put in place by the Hawke government, the dividend is based on the rationale that without market demands there is no pressure for government departments to find ways to save money through efficiency, and was originally labelled a dividend as it aimed to return revenue to the taxpayer. The dividend only aims to reduce expenses around the operation of a department, not the overall funding, and so is applied before budgets are indexed to account for increases in wages. There has been speculation an efficiency dividend will be applied to the ABC and SBS (which have previously been exempt) as a way of reducing funding to the broadcasters without breaking an election promise made by Tony Abbott that there would be no cuts to either organisation. |
| Structural deficit | A structural deficit refers to a situation where the current tax structures of a country will fail to cover the expenses, even when an economy is performing at its peak. Governments commonly run deficits in times of economic downturn as a means of insulating the economy and ensure services are not impacted, with the understanding that surpluses during peak times will help pay down the debt incurred by going into deficit. Working out whether a government has a structural deficit is complicated by the changing nature of sources of revenue and costs for governments, but governments and economic organisations try to remove the influence of temporary impacts on the budget bottom line to assess the long-term prospects for the economy. In the MYEFO the structural deficit was estimated at 2-3 per cent of GDP. |
| Fiscal drag | Fiscal drag refers to when excessive taxation or a lack of spending by the government puts a dampener on the economy. Bracket creep is a form of fiscal drag that occurs when tax rates do not keep up with wage increases in the economy, pushing wages up to a higher bracket, and resulting in the government taking more tax revenue. Tax brackets are designed to be indexed to account for increases in inflation, however the indexes are usually set manually, and leaving them stationary while wages grow allows the government to increase the amount of revenue it takes from taxpayers without raising taxes. Warnings from accounting firms KPMG and PwC have fuelled speculation that the government is planning on letting bracket creep do some of the heavy lifting when it comes to recovering revenue. |
| Bracket creep | Fiscal drag refers to when excessive taxation or a lack of spending by the government puts a dampener on the economy. Bracket creep is a form of fiscal drag that occurs when tax rates do not keep up with wage increases in the economy, pushing wages up to a higher bracket, and resulting in the government taking more tax revenue. Tax brackets are designed to be indexed to account for increases in inflation, however the indexes are usually set manually, and leaving them stationary while wages grow allows the government to increase the amount of revenue it takes from taxpayers without raising taxes. Warnings from accounting firms KPMG and PwC have fuelled speculation that the government is planning on letting bracket creep do some of the heavy lifting when it comes to recovering revenue. |
| PEFO | The Pre-Election Economic and Fiscal Outlook was released by the Federal Treasury shortly before the last election, and represents Treasury's and Finance's predictions on the current and future state of the economy. While budget bottom lines are often open to manipulation by governments, the PEFO is put together independently and the only outlook signed off by the heads of Treasury and Finance. |
| MYEFO | The Mid-Year Economic and Fiscal Outlook is an update to the budget that the government releases halfway through the financial year. The most recent MYEFO showed a major increase in the budget deficit from the PEFO, prompting speculation over whether the government was using a worst case scenario to strengthen the case for unpopular cuts and pave the way to a budget recovery. |
| Vertical fiscal imbalance | This refers to the fact that the Commonwealth raises the vast bulk of tax revenue, but the states have a large part of the spending responsibility. There is currently a large shortfall in the amount of tax the states receive compared to the cost of providing the services required of them, such as healthcare and education. This current imbalance is overcome by the Federal Government distributing money raised by the GST to the states, but this makes the states reliant on federal grants and subject to greater federal control. |
| Underlying cash balance | The benchmark measure of the government’s budget position: deficit equals less revenue than spending; surplus equals more revenue than spending; balance equals revenue matches spending. |
| Unemployment rate | Critical to the budget on both the revenue and spending fronts because a higher unemployment rate means less income tax revenue (and potentially less GST from consumption), while also meaning more money going out in unemployment benefits. |
| Consumer price index | Measures the inflation in the price of goods and services. Important to the budget because higher prices mean more GST revenue, although they also mean higher increases in government payments indexed to CPI and higher costs for government purchases. |
| CPI | Measures the inflation in the price of goods and services. Important to the budget because higher prices mean more GST revenue, although they also mean higher increases in government payments indexed to CPI and higher costs for government purchases. |
| Wage price index | Measures the change in wage levels paid to employees. Important to the budget because higher wage growth across the economy means faster growth in income tax revenue, which can be magnified by bracket creep – individual income taxes (which includes non-wage related capital gains tax) make up around 46 per cent of federal government revenue. Higher economy-wide wage growth may also mean larger rises in public service pay, but the income tax boost to the Government far outweighs this cost. |
| Corporate profits | Important to the budget because company tax makes up more than 18 per cent of federal government revenue. The faster corporate profit growth, the healthier are government revenues. A fall in company tax revenue, due to slower than expected profit growth and higher than expected deductions, accounted for a large proportion of the previous government’s revenue write-downs. |
| Consumption subject to GST | GST accounts for around 14 per cent of the Federal Government's revenue, although it is ultimately distributed to the States in grants. Not all goods are subject to GST, and the growth in consumption of exempt goods (such as fresh food, education and healthcare) has recently been much faster than the increase in purchases of goods subject to GST. Obviously, faster growth in the consumption of GST-levied goods means a greater increase in GST revenue for the government. |
| GP co-payment | The Government has introduced an upfront $7 co-payment for bulk-billed visits to the GP. After 10 visits, patients with concession cards and children under 16 will be exempt from the fee. |
| Fuel excise | This is a tax on petrol that currently sits at 39 cents per litre. The Government in the budget announced it would index the fuel excise twice a year to raise it in line with inflation, resulting in higher fuel prices. |
Topics: budget, government-and-politics, federal-government, federal-parliament, parliament, business-economics-and-finance, hockey-joe, welfare, tax, australia
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