Deep and previously unannounced cuts to health and social services spending are expected to improve the fiscal position of the federal budget compared with the government’s mid-year forecast, with the government now expecting a deficit of $29.8 billion in the 2014-15 financial year.
Despite the rhetoric of a budget emergency, Treasurer Joe Hockey’s maiden budget revised the underlying deficit forecast from $33.9bn in the Mid-Year Economic and Fiscal Outlook, or 2.1 per cent of gross domestic product (GDP), to 1.8 per cent of GDP.
Cuts to health and social welfare spending embedded in the budget account for more than half of the improvement in the fiscal position in the 2014-15 year. The budget also included widely flagged cuts to the public service, cuts to boards, committees and councils, and a budget levy on high-income earners.
The government expects the deficit to shrink to $2.8bn by 2017-18, with a return to surplus tipped for the end of the decade. The government projects surpluses to build to over 1 per cent of GDP by 2024-25.
The budget forecasts remain pessimistic on the economic growth outlook, with lower forecasts than those of the central bank and well below trend.
The budget expects real GDP growth in fiscal 2014-15 of 2.5 per cent, at the lower end of the Reserve Bank of Australia’s most recent forecast issued in last week’s Statement on Monetary Policy, of between 2.25 per cent and 3.25 per cent growth.
GDP is seen increasing slightly the following year, 2015-16, to 3.0 per cent. That is also below the RBA’s expectation that GDP will pick up to an above trend pace in fiscal 2016.
Major economic parameters Source: Treasury
Treasurer Joe Hockey told reporters that the government could have made deeper budget cuts and did not adopt all of the measures recommended by the Commission of Audit, parts of which he said described as “punitive”.
“We could have gone much harder in the first two years, but our view was the economy continues to grow at below-trend growth and therefore if we had gone harder, it would have detracted from growth,” Hockey said.
Just last week the OECD warned the Treasurer against “heavy front-loading” of budget cuts and economists voiced concerns that public sector cutbacks could result in a blow to consumer confidence and threaten the recovery in economic growth.
The government expects inflation of 2.25 per cent, below the RBA’s forecast range in fiscal 2015 of 2.5 per cent to 3.5 per cent.
The rate is slightly above the 2 per cent rate tipped for fiscal 2015 in the MYEFO.
The government expects the unemployment rate will lift to 6.25 per cent by the end of fiscal 2015, and remain around that level in 2015-16.
Employment growth is forecast to pick up from an anaemic 0.75 per cent in the current year to June 30, to grow steadily by 1.5 per cent in fiscal 2015 and 2016.
Few surprises in deficit levy, fuel excise
The Coalition’s first budget since regaining office in September last year delivered on its promise to share the pain around. As had been already flagged, the budget included the introduction of a deficit tax -- or as the Treasurer calls it, a budget repair levy -- on incomes over $180,000.
The levy will come into effect on July 1 and run until June 30, 2017, with the government estimating it will raise $3.1bn over the forward estimates.
The government said the levy would also be reflected in a number of other tax rates that are based on calculations that include the top income tax rate. Specifically, the Fringe Benefits Tax rate will be increased from 47 per cent to 49 per cent as of April 1 2015 until March 31, 2017 -- to prevent high income earners from utilising fringe benefits to avoid the levy.
In addition, the government confirmed it will reintroduce biannual indexation of fuel excise from August 1, as a means of shoring up revenue for roads, as well as proceeding with the controversial Paid Parental Leave scheme, which has seen its cut-off trimmed back from $150,000 to $100,000, as had been widely expected.
The Australian Public Service will feel the pain of Mr Hockey’s first budget cuts, with 16,500 jobs to be cut in the four years to fiscal 2017. Throughout the election, the Abbott government committed to a 12,000 person reduction of the public service through natural attrition.
Further, the budget confirmed the government had abolished over 230 public service programs, as well as 70 bodies, boards, committees and councils.
It included measures to tighten eligibility for family tax benefits, tougher requirements for access to welfare payments for people under 30 and incentives for employers to hire over-50s.
In addition, the budget included the creation of an $11.6bn Infrastructure Growth Package, a reaffirmation of the government’s commitment to cutting the company tax rate by 1.5 per cent by July 2015, as well the establishment of a Medical Research Future Fund.