THE baby bonus will be cut, access to dependent spouse tax benefits restricted, and the federal public service squeezed as part of new budget measures designed to keep the Gillard government clinging to its commitment to a return to surplus in 2012-13.
The surplus is predicted to be wafer thin just $1.5 billion and will come after a massive blowout in this year's deficit from $22.6 billion to $37.1 billion, according to yesterday's mid-year budget update from Treasurer Wayne Swan.
In addition to the savings worth a net $6.8 billion over four years announced yesterday, the government will have to bring forward some spending into this year, and defer some until after next year, to achieve a surplus in 2012-13.
The deterioration in the budget has been driven in part by the euro crisis, which has cost revenue $20 billion over four years compared with the May forecast and has prompted Treasury to downgrade expected growth to 3.25 per cent this financial year and next, a fall of 0.75 and 0.5 points respectively.
Treasury is significantly more pessimistic on the local economy than the OECD, which predicted this week that Australian growth would surge to 4 per cent in the 2012 calendar year.
Treasury's unemployment outlook has been revised up from 4.75 per cent in the budget to 5.5 per cent by the June quarter of next year.
The slowing economy has also triggered another slump in GST revenue that is set to punch a $670 million hole in the Victorian budget over the next four years, putting more pressure on Premier Ted Baillieu to deliver on his surplus promise.
Predicting a Europe recession, Mr Swan declared: "We are showcasing to the world the strong economic fundamentals of the Australian economy."
He highlighted yesterday's decision by Fitch Ratings to join the other two major ratings agencies in awarding Australia a AAA long-term credit rating.
By cutting spending, yesterday's package creates more scope for the Reserve Bank to cut interest rates if global conditions worsen. There has been speculation it could reduce rates again as early as next week.
Among the main savings measures announced yesterday:
The $5400 baby bonus, introduced by the Howard government, will be cut to $5000 from September and indexation will be "paused" for three years from July 1. This will save $320 million over four years and mean $34 a fortnight less for families.
The government has asked the public service for a one-off 2.5 per cent "efficiency dividend", including by reducing travel and hospitality, saving $1.5 billion.
The dependent spouse tax offset will be restricted to those with a spouse born before July 1, 1952, saving $370 million.
A crackdown on tax rorts, mainly by foreign workers and executives in Australia, is predicted to yield $682 million.
Changes in superannuation rules, with a reduction in the matching rate and maximum payment of the voluntary co-contribution, are designed to save more than $1 billion.
About $1 billion will come out of education, including cuts and delays to reward payments for universities, teachers and schools, and an end to the HECS concession for science and maths students.
The start of a standard tax deduction for work-related expenses is deferred for a year.
The projected surplus in 2012-13 is down $2 billion from the $3.5 billion expected in the May budget.
Mr Swan said Australia would return to surplus ahead of all major advanced economies, while government net debt had peaked "dramatically lower" than theirs. "Strong public finances and strong economic fundamentals are the best protection that we can provide for working people," he said.
Opposition Leader Tony Abbott said the government was imperilling Australia's ability to respond to the global slowdown making a bad situation worse by its new taxes and continuing waste. He said the baby bonus cut showed Labor "has never had much respect for the stay-at-home mums of Australia".
Economist Saul Eslake, of the Grattan Institute, accused the government of "accounting chicanery" in juggling spending between years, and said it was "remarkably insouciant" about the deficit blowout.
The Australian Chamber of Commerce and Industry welcomed the projected surplus, as did the Business Council of Australia, which called it "the right economic policy for the times".
Greens leader Bob Brown said the push by the major parties "to cling to a wafer-thin political surplus while advocating public sector job losses and cuts to services is contrary to reasonable, forward-thinking economic advice".
Independent MP Rob Oakeshott said he would fight the cuts to higher education funding.
The Community and Public Sector Union said it expected 3000 public sector jobs to be lost, but Finance Minister Penny Wong said "our expectation" was no need for forced redundancies.
The ACTU said the government must be prepared to delay its return to surplus and to stimulate the economy if necessary.
THE SAVINGS
HOW IT WILL BE DONE
HEALTH
$1.8bn saved in an expected lower than expected uses of medicines under the pharmaceutical
benefits scheme
$723m saved on changes to the hospital use rates and a fall in the five-year average growth of the health price index.
EDUCATION
$403m saved abolishing a discount for university maths and science units
$240m saved abandoning plans to pay bonuses to universities based on student satisfaction and learning outcomes
$153m saved delaying reward payments to schools for two years
$200m cut teacher performance bonuses.
LIVING-AWAY FROM HOME ALLOWANCE AND BENEFITS
$683m cut Includes limiting access for temporary residents to those have a home in Australia, which they are living away from for work purposes, such as fly-in fly-out workers.
DEPENDENT SPOUSE TAX OFFSET
$370m cut restricting it to those with spouses born before July 1, 1952.
TAX REFORMS
$2.1bn saved deferring tax reforms for one year including work-related expenses deductions, 50 per cent tax discount for interest income, a phase down in interest withholding tax for financial institutions, and the new tax system for managed investment trusts.
BABY BONUS
$358m cut Individual bonus will drop by $400 to $5000 from September, as well as a pause in indexation for three years from July.
VISAS
$613m to be raised Increasing the cost of some non-resident visas.
Frequently Asked Questions about this Article…
What were the key measures in the Gillard government's mid‑year budget update announced by Treasurer Wayne Swan?
The mid‑year budget update included a package of spending cuts and savings designed to deliver a return to surplus in 2012‑13. Major measures include a cut to the baby bonus and a three‑year pause to indexation, a one‑off 2.5% public service “efficiency dividend”, restrictions to the dependent spouse tax offset, changes to superannuation matching and co‑contributions, a crackdown on tax rorts, deferral of some tax reform measures for a year, education funding cuts and delays, and increases in some non‑resident visa costs. The package was billed as delivering around $6.8 billion in net savings over four years and aiming for a wafer‑thin $1.5 billion surplus in 2012‑13.
How will the baby bonus cut affect families and what exactly is changing?
The government announced the baby bonus will be reduced from $5,400 to $5,000 from September, and indexation will be paused for three years from July 1. The change was estimated to save about $320 million over four years and, according to the update, equates to roughly $34 less a fortnight for families receiving the payment.
Who will lose access to the dependent spouse tax offset under the budget changes?
The dependent spouse tax offset will be restricted to taxpayers whose spouse was born before July 1, 1952. That change was projected to save around $370 million.
What does the budget update say about Australia returning to surplus and the economic outlook?
Treasury forecasted a return to surplus in 2012‑13 of about $1.5 billion (down $2 billion from the May budget expectation of $3.5 billion). The deterioration in the outlook reflects a deficit blowout this year from $22.6 billion to $37.1 billion, a downgrade to growth of about 3.25% this financial year and next, and an unemployment outlook revised up to roughly 5.5% by the June quarter of next year. The update also cited the euro crisis as a factor that reduced revenue by about $20 billion over four years.
What changes were announced for the public service and could there be job losses?
The government asked the federal public service to take a one‑off 2.5% “efficiency dividend” which includes reduced travel and hospitality, estimated to save about $1.5 billion. The Community and Public Sector Union said it expected around 3,000 public sector jobs could be lost, while the Finance Minister said the government’s expectation was there would be no need for forced redundancies.
What education and health savings were included in the mid‑year budget update?
Education measures were estimated to save about $1 billion and include cuts or delays to reward payments for universities, teachers and schools and an end to a HECS concession for science and maths students. Health savings included around $1.8 billion from lower than expected pharmaceutical benefits scheme use and about $723 million from changes to hospital use rates and slower growth in the health price index.
Which tax reforms were deferred and what anti‑avoidance measures were introduced?
The government deferred several tax reform measures for one year—saving about $2.1 billion—including the standard tax deduction (work‑related expenses), a 50% tax discount for interest income, a phasedown in interest withholding tax for financial institutions, and a new tax system for managed investment trusts. Separately, a crackdown on tax rorts—mainly by foreign workers and executives in Australia—was forecast to yield about $682 million.
How will the GST revenue slump affect state budgets, particularly Victoria?
Treasury warned of a slump in GST revenue linked to the slowing economy that is expected to create about a $670 million shortfall in the Victorian budget over the next four years. The update said this puts extra pressure on state leaders—specifically noting Premier Ted Baillieu—to meet their surplus commitments.
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