Budget 2014: Tony Abbott and Joe Hockey walking fine line on broken promises
Updated
This budget might show it is possible to pat the Government on the back for making some long-called-for economic changes while taking it to task over not doing exactly what it said before the last election.
The budget released by Joe Hockey last night seeks to be economically responsible. Cutting, but not too much in the early years when the economy is still relatively fragile, and including an assault on the largesse handed to the middle class when times were really good.
But it does so by breaking some promises, cutting benefits for some, and raising costs for many.
Almost a year ago, in his budget reply speech, Tony Abbott told Parliament that "the carbon tax will go, but no-one's personal tax will go up, and no-one's fortnightly pension or benefit will go down".
It's true the pension changes that will see lower increases won't happen until after the next election.
But income taxes for the rich are going up for three years, and family payments are being squeezed on top of a rise in petrol tax and higher medical costs for GP visits, some tests and medicines. All eat away at the "cost of living" savings the Coalition promised would flow from scrapping the carbon tax.
More public servants than promised will lose their jobs (although the Government sheets most of the blame for that to Labor's cuts to the bureaucracy); states and territories lose some Commonwealth payments; any commitment to the Millennium Development Goals on foreign aid has been ditched in what is one of the largest long-term budget savings; and higher education students could face bigger fees for some courses.
There is much in this budget for Labor to attack. And attack it will, throwing Mr Abbott's many pre-election promises back in his face.
Lyndal Curtis
The growth in payments to schools and hospitals will slow, and funding guarantees for public hospitals will go. It will save the Commonwealth $80 billion over the next decade, and the Federal Government is challenging the states and territories to make up the difference.
There is much in this budget for Labor to attack. And attack it will, throwing Mr Abbott's many pre-election promises back in his face.
But there are swings and roundabouts in this budget.
Far from hitting the budget hard early, the savings task starts off relatively slowly, and only really grows in the final years of the four-year forward estimates.
The money people have to pay to see a GP will be directed in large part towards a new fund to help pay for a big boost to medical research over the long term. And the extra money paid at the petrol bowser will help fund road spending.
There are also smaller "gives" to go along with the "takes". While some family payments are tightened, low-income parents will get a new $750 payment. While some tertiary students will face higher fees, part of that money goes to a scholarship fund for the disadvantaged.
And the Government, which perhaps sensibly hasn't said when it can get back to surplus, is making much of the money that will be saved by paying down debt and holding out hope of tax cuts down the track.
It hasn't touched the National Disability Insurance Scheme; the family home hasn't, as recommended by the Commission of Audit, been included in assets tests. The Government didn't shrink the Medicare safety net, and actually went in the opposite direction. It has left the door wide open to future tax cuts.
It's begun the task of structural repair to a budget in need of it.
The Government has begun the task of structural repair to a budget in need of it.
Lyndal Curtis
Schools and health savings are two of the big saving changes that make a longer-term contribution to budget repair.
Making it harder to be on welfare when someone is young, cuts to foreign aid growth, family tax benefit cuts, changes to the indexing of age and disability pensions, and earlier repayments of higher education loans are the other structural savings that will benefit the budget in the longer term.
And the cuts to welfare have just begun. The Government will pursue those, as it will also pursue the outsourcing of government functions. And it hasn't yet begun to look at future superannuation or tax changes.
The reality is Tony Abbott and his Treasurer are following a well-worn path in abandoning some election promises.
Paul Keating abandoned tax cuts he legislated.
John Howard introduced the concept of core and non-core promises.
And Kevin Rudd and Julia Gillard paid for reverses in their promises on carbon pricing.
If Tony Abbott hadn't made so much of keeping all of his commitments, of the centrality of trust in his pitch to be PM, if he'd made more of his promises conditional on budget repair, the Government would be in a more comfortable place.
That's not to say it is an easy budget for the Government to sell to voters. It does include pain now, and into the future. And the longer-term burden is being felt by low-to-middle-income earners rather than high-income earners who face a temporary increase in tax.
Mr Abbott and his Government will be hoping voters look at the national good, and reward it for being harsh now to be kind to the overall budget later.
He'll be looking for a verdict on what he did in his first term rather than what he promised in the campaign before it.
- 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, federal-government, federal-parliament, government-and-politics, australia
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