Budget pain and Senate strife

New modelling is a reminder of just which Australians will bear the pain of the 2014 budget. It may also intensify opposition to the Abbott government's plans.

If the federal government manages to pass most of its new initiatives it will prove devastating for lower-income earners -- particularly those with children. According to new research, single parents with children could see their household income cut by over 10 per cent by 2017-18.

The National Centre for Social and Economic Modelling (NATSEM) has released new modelling on the economic and distributional effects of the 2014-15 federal budget. They find that the impact of the budget “falls most heavily on low and middle income families with children.” The impact is significant but manageable in 2014-15 but blows out considerably by the 2017-18 financial year.

By comparison, higher income families with and without children are relatively unaffected by the budget in the short and long-term. In fact for this cohort, the federal budget largely leaves them better off by 2017-18 than under the previous Labor budget.

At present there are obviously some question marks regarding the Coalition’s agenda and they still face a hostile Senate. The realised impact of the 2014-15 federal budget will largely depend on whether the Coalition can pass their budget and what sacrifices or compromises need to be made to get it through.

As such, these estimates from NATSEM work as a good indication of the potential impact -- rather than what is likely to be realised.

As it stands, it is important that households realise that most of the budget savings come towards the end of the forward estimates. Most of the pain for lower-income earners will not be experienced this year or even really next year but in 2017 and 2018.

For 2014-15, the total cost to households from new Coalition initiatives is expected to be $2.1 billion and reduce disposable income for families in the bottom 20 per cent of the income distribution by around 1 per cent. The cost for households at the top of the income distribution is expected to be 0.3 per cent.

As the graph below shows, most of the burden falls on families with children -- particularly of the lower income variety. Singles and couples without children come out of the budget in reasonably good shape, with the exception of those in the bottom 20 per cent of the income distribution who are set to take a big hit from the Coalition’s attack on welfare recipients and unemployed.

In assessing these estimates it is important to highlight that there is no clear pattern among the various groups. Beyond the fact that poor people bear a greater share of the burden, the effect of the budget is more random among the other income groups.

But there is only so much that can be gained by assessing the budgetary impact in the 2014-15 financial year. To ease the burden and spread out the financial pain, the budget delays some of their biggest savings until later in the forward estimates.

According to NATSEM, the losses for low and middle-income families with children will between $2,500 and $3,800 by the 2017-18 financial year.  Household disposable incomes for low-income couples with children are expected to decline by 6.6 per cent on average; while for single parents the effect will be larger still at 10.8 per cent of income.

By comparison, high-income families with children are modestly better off in 2017-18 and in many cases their budget pain proves only temporary -- highlighted by the temporary nature of the debt tax.

It goes without saying that the federal budget proved to be controversial -- it still is. But it is important to quantify the effects on various household types and determine the winners and losers from the government’s agenda.

The federal budget has been criticised for being unfair and placing too much of the burden on those least able to bear it. The research by NATSEM only strengthens those concerns and reminds us that the true impact of these policies will not be felt for a couple of years.

More broadly, readers should be wary of two important points: many budget initiatives remain uncertain given a hostile Senate and the deficit is all but certain to be larger than estimated for 2014-15 and over the forward estimates.

Owing to an underperforming economy and the sharp decline in the terms-of-trade, the federal government will be forced to introduce further cuts in May next year to stop the deficit from blowing out. Tough choices will have to be made and it will be difficult to rein in the deficit unless higher-income earners take a bigger hit.