Keeping the cuts in the family

Joe Hockey’s first budget is a hesitant first step towards fiscal responsibility but the age of entitlement hasn’t ended yet. In some areas, particularly family payments, growth in spending has been met with substantial changes. Yet in other areas, such as industry assistance, too much wasteful spending remains.

For all the rhetoric about tough cuts, the path back to surplus charted by the government relies troublingly on significant increases in revenue. Despite the government partially backing down on its deficit levy, now only imposed on incomes over $180,000 and barely raising a billion dollars a year, revenue is predicted to increase by more than $100 billion from 2013-14 to 2017-18 (an increase of nearly 2 per cent over GDP).

Resuming indexation of fuel excise accounts for some of this, raising $4 billion across the forwards estimates, but the bulk of revenue comes from rising income tax revenue (averaging increases of more than 7 per cent a year over the forward estimates), rising company tax revenue (rising 5.6 per cent a year across the estimates despite a rate cut for some companies) and GST revenue increasing by an average of 6 per cent a year.

Expenses on the other hand, fall by 0.8 per cent of GDP in this budget (helped greatly by the decision to provide one off funding for the RBA in the previous financial year) but after this year they fall only a further 0.1 per cent of GDP to 2017-18.

In some areas the government has been weak. Industry assistance of nearly $10 billion a year has been cut by less than $1 billion a year; even the automotive industry retains large portions of its assistance to 2018 ($1 billion). The government books savings from Holden leaving, but it doesn’t reduce automotive tariffs, continuing to protect an industry that will cease to exist.

Pension changes too are largely delayed until after the next election, and the family home is still not included in the asset test (though growth through excessive indexation may be slowed). As superannuation has mostly been left alone and the pension changes modest, this budget seems unlikely to solve the problems of our ageing population.

By contrast, the government has taken action on long-term unemployment, trying two quite different approaches to the problem. Job seekers over 50 now have the benefit of a substantial wage subsidy ($10,000 paid over two years). In contrast, young job seekers are facing restrictions on benefits, and additional support for apprenticeships and training.

Access to Newstart Allowance will be restricted for people under the age of 25, while unemployment benefits will only be available for six months out of 12 for those under 30 without a history of employment.

This is not a perfect solution; shuffling young people into ineffective training may not be the silver bullet the government is hoping for. However, this is clearly aimed at fixing a longer-term problem.

The government is banking that changing the incentive structure and pushing people into “earning or learning” will be at least a partial solution to the problems of long-term welfare dependence. The potential lifetime disadvantage suffered by those who fall out of the employment system in their late teens and early twenties is a serious issue.

One positive step for smaller government is the introduction of Medicare co-payments. A $7 co-payment for GP visits, diagnostic imaging and pathology (key areas of spending growth), limited to 10 payments a year for concession card holders and children under 16, will take some pressure off the health system if they pass in face of likely stiff opposition in the Senate.

The benefits of co-payments are not merely budgetary; they are the first step in a long process of ensuring sustainability in the health system. This sustainability can only be achieved if people who can afford it pay more of their own healthcare costs.

Last, but not least, the government has moved to substantially curtail the Family Tax Benefits (FTB) system, with the emphasis being placed on moving parents into work and reducing middle-class welfare.

FTB Part B will only be available for people with children aged six or under, and the income threshold is reduced to $100,000. While the government will compensate single parents with kids between six and 12 for the loss of FTB Part B with a new low income payment of $750 a year, FTB A and B payment rates are frozen for two years and income eligibility thresholds are frozen for three.

If the government had applied the same approach that it applied to family benefits and youth unemployment to all areas of spending, it’s likely that they would be less dependent on rising economic growth lifting revenue to get to surplus. If the world economy turns down, the path to spending sustainability may be very rocky indeed.

Simon Cowan is a research fellow at The Centre for Independent Studies