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Federal budget 2014: economists react

Some pain, but the nation will benefit: Hockey’s first budget. AAP/Lukas Coch

The Abbott government has laid out its path to reach a budget surplus near the end of the decade in the face of continued below-trend growth.

Stopping short of making deep cuts in the coming years, Treasurer Joe Hockey said the government could have “gone harder in the first two years”, but it would have detracted from economic growth.

The underlying cash deficit will hit A$49.9 billion in 2013-14, with measures in this budget expected to reduce it to $29.8 billion in 2014-15, below the A$33.9 billion projected in the mid year economic and fiscal outlook.

Promising a surplus of “well over 1% by 2024-25”, the government will take the axe to public hospital and education funding, abolish a multitude of government agencies and programs, introduce a Medicare co-payment of $7, reduce foreign aid, remove $845 million of industry assistance, reintroduce fuel excise indexation, and require higher income earners to pay $3.1 billion in additional tax over the next three years.

Joe Hockey, like the National Commission of Audit before him, has told Australians “doing nothing is not an option”, and that it was time for everyone to contribute in order to protect living standards and prepare for an ageing population.

Key economic forecasts

  • Real GDP to remain weak, growing by 2.5% in 2014-15 and 3% in 2015-16

  • Unemployment to grow to 6.25% in 2015

  • Consumer Price Index to rise to 2.5% in 2015-16

  • Wages growth to hit 3% in 2014-15

  • Terms of trade to continue to decline, falling by 6.75% in 2014-15, with iron ore prices expected to continue to fall further over the next two years, somewhat cushioned by rising LNG export prices

  • Current account deficit to widen from 3.25% of GDP in 2013-14 to 4% in 2014/15, before narrowing to 3.75% in 2015-16.

  • Workforce participation rate to decline from 64.7% to 64.5% in 2015

Committing to offset any new spending measures with reduction in spending elsewhere, the government argues the structural reforms in the budget will facilitate growth in living standards while not placing additional near-term pressure on the economy.

Measures taken by the government will contribute to reducing the budget deficit by $36 billion over the next four years. Net debt is expected to remain at around 14% of GDP over the forward estimates, but come in around $278 billion lower than forecast in MYEFO at A$389 billion in 2023-24.

The government will proceed with a company tax cut of 1.5%, and the abolition of the mining tax and carbon tax, moves likely to be welcomed by big business.

With workforce participation expected to decline in coming years, the government has cited “earn or learn”, as well as its mature aged worker subsidy for employers and its paid parental scheme as measures to help encourage people to work and work longer.

In line with its decision to increase the pension age to 70 by 2035, the government will introduce a new wage subsidy of $10,000 over two years to be paid to employers who hire people aged 50 and over. The paid parental scheme will also proceed, with an income cap of $100,000 per annum, including superannuation, financed by a levy on big business.

The government will also change the schedule for increasing the superannuation guarantee, with it now set to rise to 9.5% on July 1 this year, and remain at this level until 2018, after which it will grow by 0.5% each year until it reaches 12% in 2022-23.

The privatisation agenda of the government will continue, with plans for scoping studies on selling the Mint, Defence Housing Australia, Australian Hearing, and the registry services business of ASIC. Together with the proceeds of the sale of Medibank Private, money received as a result of sales would be re-invested in the government’s asset recycling fund.

Richard Holden, a professor of economics at the University of New South Wales Australian School of Business:

The deficit levy is a disaster. It’s adding to the most inefficient form of tax – income tax. It’s raising the top marginal rate to 49%, which puts us in the top 10 in the world, and that’s not a nice top 10 to be in. That puts us at a higher marginal tax rate than Norway, of all places.

Once these things come in, they are much harder to take out. So if the government decides they are willing, in changing circumstances, to change their commitment, then who knows in three years’ time what people will be able to justify in terms of keeping that levy in place.

The further you go out, the easier it is to have growth projections – which are always a bit of a crystal ball gaze – do a lot of the work.

In terms of being pro-business, if it’s a one-to-one trade from industry assistance to cuts in company tax, then from a pure efficiency point of view that’s a good idea. But we need to look at the detail.

Sinclair Davidson, Professor of Institutional Economics, RMIT University

There is a lot to like in this budget. A lot of the heavy lifting in returning the budget to surplus comes from reductions in spending. The changes to universities are significant and will lead to greater competition in the sector and drive change within individual Universities. At the same time there is a lot to dislike in the budget.

Comparing the Budget fiscal balance to the MYEFO fiscal balance (Table 6 page 3-27 in Budget Paper 1) we see that the improvement is mostly driven by parameter variations – in other words by changing assumptions and circumstance. It looks like a lot of spending has been cut but little of it comes from changes in actual policy.

Then there is the Medical Research Future Fund. This verges on the incoherent. The government will invest all the money from the GP co-payment, increased medicine payments, and savings from medical expenditure into the fund which will then finance research. In other words, the GP co-payment and increased medicine prices will not be used to reduce debt or deficit. So why have it all? Clearly there is no urgent need to introduce these higher prices and co-payments; they are driven purely by ideology. The Medical Research Future Fund exists to detract attention from that decision. Why deprive people of actual medical attention in order to finance research when there is no guarantee of any actual benefit?

Then there is the broken tax promise. Tony Abbott consistently and persistently promised no new taxes. This promise has been shattered by an increase in the top marginal tax rate above $180,000 and the reintroduction of petrol indexation. In time petrol indexation will generate a lot of income, but not in the next financial year. Similarly the increased tax rate (only for three years, we’re told) won’t raise much revenue either. So why break a promise for little revenue gain? This is form above substance measure to share the pain. Most notably, however, while high-income earners are being asked (Hockey really means “compelled”) to pay higher taxes for three years, politicians’ salaries are only being frozen for one year.

Finally, of course, the budget and the forward projections all remain in deficit. Joe Hockey has not produced a surplus and over the foreseeable future isn’t forecasting a surplus either.

Lawrence Abeln, Dean of the Business School at University of Adelaide

The debt tax will have three main consequences. First, it will reduce consumer spending and consumer sentiment and this will have a negative impact on our retail sector. Second, the debt tax will hurt small business including family businesses who need discretionary income to grow and to innovate. Third, it will slow GDP. While we may see lower interest rates and lower inflation we will unfortunately also see lower spending and that is reducing our GDP is a high cost to pay for the debt tax which is guided by too much preoccupation on the public debt.

There is no concern for a structural deficit in Australia and therefore no need for such repairs. The Australian national deficit is among the lowest of our G20 peers. There is too much preoccupation with the public debt in this federal budget, and we should focus instead on using debt as an instrument of growth rather than employ measures to reduce spending. Relative to our G20 competitor nations, Australia has one of the strongest economies in the world.

Our inflation is relatively contained, our unemployment is low relative to Europe and the US and we have among the lowest public debt ratios to gross domestic product (GDP) of any industrialised country in the world. Our public debt is 30% of GDP. It is three times that in France and the UK, two and a half times in the US and seven times in Japan. So we as a nation have a very strong balance sheet and our public debt is already under control. Because of our favourable balance sheet especially compared to others, we have capacity to borrow and to use some of the funds to invest to promote further growth.

Neither Australians nor big business are winners in this budget. We are not going to grow GDP by this year’s federal budget which reduces spending by consumers, taxes individuals through the deficit levy and the fuel tax and decreases public expenditures including public sector employment. Pension age increases, higher co-payments for government services, fuel taxes, deficit levys, reductions in many benefits do not help hard working Australians. Many small and medium sized businesses and consumers have less money to spend and this can hurt consumer sentiment.

Ben Phillips, Principal Research Fellow, National Centre for Social and Economic Modelling (NATSEM), University of Canberra

My overall impression is it’s not really sharing the pain, the pain is largely going to lower and middle income families, and quite fundamentally, when you look at the forward estimates to 2017-18.

High income families generally won’t be hit all that hard, especially once you get to 2017-18 where they won’t be hit at all when the deficit levy is gone.

They’ve got a bit of pain with the fuel excise levy but that will be offset by the removal of the carbon price. The carbon price and the excise tax largely just cancel each other out.

On the deficit levy if they were genuine about spreading the pain they would have started a little bit lower. You could start it around the $100,000 mark and you would generate a lot more revenue and spread the pain. Ideally you’d have more permanent tax reform covering fringe benefits tax for cars, family trusts, etc.

What you’ve effectively got is all the cuts in terms of family payments and unemployed people are there to cover the cost of the paid parental leave scheme, so you’ve got a lot of pain for only a very small gain. It will only go about 150,000 people each year, mostly middle and high income families.

The family payments freezing is an extraordinary move going out to 2016/17 and particularly the single income families, so with single mothers or couples with only one income losing Family Tax Benefit B, it’s easy to see how families could be losing $4,000-$6,000 a year when on a low income.

If you’re a mother already working 20 hours a week you may not have a lot of options in terms of working more hours.

I give them full marks for being bold, which governments have not wanted to be, but there will be consequences for it and a lot is to pay for paid parental leave.

When you consider the three Ps of economics – population, participation and productivity – I’m yet to see any evidence paid parental leave will deliver any dividends in those regards.

The obvious place to look is childcare expenditure. If you want to give women the option of being in the workforce, then childcare is how you would deliver those three Ps.

Deborah Ralston, Australian Centre for Financial Studies

It’s only sensible (to raise the pension age to 70), in that since the aged pension was introduced in 1908, with an eligibility of 65 years, our life expectancy has increased by about 25 years. So it’s only common sense that we need to be in the work force longer because we’re living longer, healthier lives.

However it’s also true that around 40% of people don’t make it to the current official retirement age, so we need to recognise that there will be, for many people, some real difficulties associated with that policy.

We have a whole lot of structural and attitudinal issues to older people in the workforce which are really long-term issues that need long-term policy attention. The subsidy for people employing workers over 50 I think is a short-term policy and in the short term I’m sure it will be well received by people over 50 who are looking for work. However, we have to recognise that it’s a short-term policy and it will be good as long as that incentive lasts.

The issue of older workers in the workforce needs a much more sophisticated approach than that. Things like creating more flexible work arrangements for people in their later working life, allowing them to move to fractional positions, and to have longer leave periods is something we really need to address. And to ensure people have quality of work too - for those of us who are white-collar workers we like the idea of working longer, but if you’re in a menial task that has a high physical demand it may not be as attractive.

Remy Davison, Jean Monnet Chair in Politics and Economics at Monash University

Three messages from this year’s budget: new taxes, new taxes and new taxes. Howard’s battlers have been consigned to the dustheap of history. They won’t seen again until 2016, when the government needs them to get re-elected.

Conversely, small and medium enterprises receive a significant 1.5% business tax cut. Moreover, the repeal of the mining and carbon taxes will also deliver increased profits to the resources sector.

Working mothers are also winners in this budget, with the revamped-but-still-generous paid maternity leave scheme (up to $50,000).

The Commonwealth has also dumped the final year of Gonski, cutting $30 billion, jeopardising schools funding. The total cuts to the states will be $80 billion. Without additional Commonwealth funding or, possibly, a future increase in the GST to finance the states’ expenditures, there could be some very deep black holes in the states’ fiscal futures, affecting hospital and school services.

In order to bring the budget closer to plausible surplus in 2017, the Abbott government has merely reiterated its commitment to spending 2% of GDP on defence. But the items of major expenditure have been held over until the government delivers its 2015 Defence White Paper (the second White Paper in three years). Defence personnel will also see the end of the Defined Benefit scheme for new Defence employees, reducing Commonwealth superannuation liabilities.

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