Budget 2014: Planets must align for Tony Abbott to reconcile tale of two deficits

Updated May 14, 2014 11:50:53

Prime Minister Tony Abbott delivers a speech.

Photo: Prime Minister Tony Abbott now faces his own trust test, where this budget will be measured against his words. (AAP: Daniel Munoz, file photo)

Map: Australia

There is an intriguing scientific theory that we do not live in a universe but in a multiverse.

It holds that if the universe is infinite there must be an infinite number of Earths. And, if there are innumerable Earths, then events on a few must play out virtually in the same way as on our own planet.

Maybe on one of those unreachable earths the Abbott Government is handing down a budget. But perhaps there, in the months and years beforehand, the Prime Minister didn't leave a trail of declarations that jar with key elements of his financial blueprint.

Alas this budget was written for that planet, and it would be a more comfortable one for Tony Abbott to live on than this Earth in the coming weeks.

The Government can sell this plan, if it can convince the public it shouldn't dwell on the awkward disconnect between today's blunt prose and the election campaign's poetic licence.

Faced with the charge that the budget bulldozes pre-election pledges, the standard ministerial defence is to argue that "the most solemn promise we made was to fix the budget."

Clearly, in the Government's mind, there is such a thing as a hierarchy of promises. Intriguingly, for a document crafted by Jesuit students, that does sit neatly with Roman Catholic canon law: where a solemn vow is indissoluble but a simple one can be dispensed.

However, on this planet, measured by the words of this Prime Minister, failing to balance the books was not the greatest sin of the Rudd-Gillard years.

In his campaign launch speech in August, Mr Abbott said: "The worst deficit is not the budget deficit but the trust deficit. This election is about trust."

Leaving aside arguments that can be had on every policy decision; this budget does a reasonable job of trying to rebalance the books.

Chris Uhlmann

The Coalition now faces a war on two fronts: defending this budget's tough choices aimed at lowering the financial deficit; and dealing with a sharp rise in the trust deficit.

So, how does the budget stack up measured against the solemn pledge that it needed fixing?

There is a mountain of evidence that the Commonwealth's fiscal position is unsustainable in the long run and in need of repair. It might not qualify as an emergency, but doing nothing is not an option.

Leaving aside arguments that can be had on every policy decision, this budget does a reasonable job of trying to rebalance the books.

In the view of Chris Richardson from Deloitte Access Economics, this is the toughest budget since 1997.

Across the four years of the forward estimates there will be a net reduction in the size of the deficit - directly attributable to policy decisions - of $36 billion. Of that, $27.7 billion comes by way of spending cuts.

Another $8.3 billion is raised through taxes, especially the two new ones. The debt tax on high-income earners raises $3.1 billion and reintroducing the indexation of fuel excise raises a net $2.3 billion.

The cuts mean the Government has bought fights everywhere, with lots of large and powerful interest groups. That includes the states.

Chris Uhlmann

With everything in the mix, the budget repair job by 2017-18 adds up to about 1 per cent of national income.

But over three years in the 1990s, then-treasurer Peter Costello managed to improve the budget position by 3.1 per cent of GDP. Paul Keating did better again in the 1980s, with a 3.5 per cent turnaround.

So, measured against the standards of the past, this is a more modest correction, even though it contains a myriad of tough decisions that will hit some parts of the community very hard. It's a document that seems hamstrung by having to limit the number of broken promises and the damage to the economy that would be caused by a rapid cash withdrawal.

But the cuts mean the Government has bought fights everywhere, with lots of large and powerful interest groups. That includes the states.

There is some serious cost-shifting to the states in education and health. The Government will claw back $80 billion in payments over a decade by changing indexation arrangements and removing funding guarantees for public hospitals. If states are to pick up the slack, they will need more money from somewhere. Treasurer Joe Hockey says some will come through the new asset recycling program. But that hardly seems enough to bridge the gap.

The only obvious source for a large cash injection is lifting the rate and/or broadening the base of the Goods and Services Tax. The Commonwealth is silent on what it intends, beyond pointing out that there is a tax white paper in the offing.

A budget balancing act

The Coalition walks a fine line as it abandons some election promises but introduces necessary reforms, writes Lyndal Curtis.

Many of the hard yards in long-term savings lie after the next election. So, if nothing changes, the Coalition will go to the polls in 2016 running on a platform of lifting the pension age to 70 at the same time as it cuts the levy on high-income earners. That looms as a hard sell. Perhaps the Coalition hopes that, by then, Labor will see the merit in recasting retirement incomes and join it in a bi-partisan agreement. But that would be a big gamble.

The bigger gamble is that you can trash so many pre-election promises without inflicting permanent damage on the standing of the Prime Minister and the Coalition's hopes of re-election.

Mr Abbott was right when he identified that the heart of the problem with the Rudd-Gillard government was that it lost the trust of the community. And no opposition leader has ever been more skilled, or ruthless, at exploiting weakness. He gave no quarter when it came to holding his opponents to account, so he should expect none.

The Prime Minister now faces his own trust test, where this budget will be measured against his words.

And there are just so many that don't sit with it.

Some will be arguable like, "no cuts to education, no cuts to health, no change to pensions".

Others will be all but impossible to spin.

Responding to the budget last May Mr Abbott said, "If there is a change of government Australian families will be better off. Their weekly and fortnightly budgets will be under less pressure because the carbon tax will go and no-one's personal tax will go up and no-one's fortnightly pension or benefit will go down."

Twiddles or broken promises?

Welfare payments have been tightened and foreign aid brutally slashed, while education and health spending has at the very least been substantially rearranged, writes Annabel Crabb.

At other times Mr Abbott also said there were no plans for a Medicare co-payment and that family benefits would not be means-tested.

In the wake of this budget some families will be hit with a cut to benefits, rising health costs and a hike in the cost of fuel.

And this was supposed to be a government of "no excuses and no surprises".

There are many, many more quotes like that. You will hear them all re-run in the weeks, months and years before the next election.

The future is not written but the coming weeks will be a test by fire of the character of this government and, particularly, the Prime Minister.

Senior members of the Coalition expect that the polls will plummet and might well stay down until the next election is in sight. The gamble is that in the long run the community will start to see the sense at the heart of the economic road map and reward it with another term. That's the plan. Landing it is another matter.

The deepest irony is that Mr Abbott now finds himself walking in Julia Gillard's shoes. In the end she gave up trying to win the love of the mob and opted to try and gain its respect by making "tough choices".

Mr Abbott stands on more solid ground that Ms Gillard ever did so, if the planets align, he might just pull it off. If not he is in for a world of pain.

More on this story:

Don't know your structural deficits from your bracket creeps? Ahead of the Federal budget ABC News has decoded all the economic jargon to help you understand what is in store this year.

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.