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Federal budget 2014: the days of borrow and spend must come to an end

Treasurer Joe Hockey’s budget attacks the age of entitlement. AAP/Alan Porritt

Treasurer Joe Hockey has bought down a budget that hits middle Australia with swingeing cuts and price hikes, while lauding smaller government and pushing increased responsibilities onto the states.

Middle income families face tightened and frozen family benefits, a $7 co-payment when they visit the doctor, a price hike for pharmaceuticals and higher petrol costs.

Unemployed young people will have to wait longer for welfare and will be put on the youth allowance, rather than the higher rate Newstart; people under 35 on the disability support pension will face more stringent assessment; Family Tax Benefit B will no longer be available when a family’s youngest child turns six and the income threshold will be reduced to $100,000.

Hockey told parliament: “The age of entitlement is over. It has to be replaced, not with an age of austerity, but with an age of opportunity.” He said the government’s economic action strategy was about “spending less on consumption and more on investment so we can keep making decent, compassionate choices in the future”.

The budget presents a major challenge to the states, with the government refusing to renew three national partnership agreements and pledging to cut funding indexation rates sharply for schools from 2018 and hospitals from 2017-18 and removing funding guarantees from public hospitals.

This will leave rapidly growing funding gaps that the states will have to finance with their modest array of taxes - unless there are changes to the GST. The budget papers say, “ These measures will achieve cumulative savings [to the Commonwealth] of over $80 billion by 2024-25.” But this will be at the states’ expense.

By far the biggest budget cut will be to foreign aid with the government abandoning Labor’s commitment to lift Australia’s aid budget to 0.5% of national income. By 2017-18 this will save $3.5 billion a year.

The budget estimates the 2013-14 deficit at $49.9 billion, falling to $29.8 billion in 2014-15. The budget remains in the red throughout the forward estimates, with a $2.8 billion deficit in 2017-18, but projects a surplus of “well over 1% of GDP” by 2024-25. This takes into account the government giving future tax cuts at some unspecified time.

By 2023-24, debt will be nearly $300 billion lower than the $667 billion the government projected six months ago, according to the new projections. The budget estimates growth for 2014-15 will be 2.5%, rising in subsequent years to 3% then 3.5%. Unemployment for 2014-15 is put at 6.25% falling to 5.75% by 2017-18.

The clampdown on welfare is comprehensive, although reforms to the pension have been delayed until the next parliamentary term, to keep Tony Abbott’s election promise of no change to pensions. The government will index pensions, including the age pension and the disability support pension, to inflation rather than wages – which is the higher measure – from September 2017. At the same time eligibility thresholds will be paused for three years. The pension age will be raised to 70 by July 2035.

Hockey said there needed to be a change in business culture towards older workers. The government would pay up to $10,000 to a business that employed an Australian over 50 who had been on unemployment benefits or the disability pension for six months.

A large number of payments and programs will have their indexation “paused” for two to three years. These include eligibility thresholds for transfer payments, thresholds for the Medicare levy surcharge, the private health insurance rebate and Medicare benefits schedule fees – except GP services.

As widely foreshadowed, people on incomes of more than $180,000 will pay a 2% “temporary budget repair levy”. It will run from July 1, 2014 until June 30, 2017 and raise $3.1 billion over the forward estimates. The levy will affect about 400,000 taxpayers in 2014-15. A person earning $200,000 will pay $400, while someone on $300,000 will pay $2,400.

In a major change to higher education, universities will be allowed to set their own tuition fees from 2016, although for current students existing arrangements remain until the end of 2020.

Hockey said that Australia should have at least one university in the top 20 in the world and more in the top 100. The higher education sector at present was being “held back and could not compete with the best in the world”.

For the first time, the Commonwealth will provide direct financial help for all students studying diploma and sub-bachelor degree courses. While people with HELP debts will have to start paying them back earlier, one of the budget’s few new spending initiatives allows full fee paying students to take out government loans with no establishment fee.

“This is a watershed,” the Treasurer said. He described the overall changes to higher education as “once-in-a-generation” reforms, which would help build a sector that is “more diverse, more innovative and more responsive to student needs”.

All the revenue to the government from the new GP co-payment will go into a new Medical Research Future Fund that would build eventually to $20 billion. The fund would within six years be the biggest medical research endowment fund in the world, Hockey said. It would also receive money from the changes to the pharmaceutical benefits scheme and other savings in the health budget.

Doctors will get $2 of the $7 co-payment, which starts July 1 next year. For concessional patients and children, the contribution will be only for the first ten services each year. From January, pharmaceutical benefits scheme medicines will cost $5 more, or 80 cents more for those with health cards.

Infrastructure and defence do well from the budget, with an $11.6 billion infrastructure investment program that will fund extensive road construction, and $1.5 billion of defence equipment spending brought forward.

Hockey said the government spending would drive a wider infrastructure push across the continent, that over the longer term was expected to boost the economy by 1%. “Shovels will start moving within a matter of months,” he said.

The ABC and SBS will suffer a 1% reduction in their base funding (saving $43.5 million over four years) and the ABC has lost the Australia Network (saving $196.8 million over nine years).

In its quest for smaller government more than 70 boards, committees and councils are being abolished. “A smaller, less interfering government won’t need as many public service – 16,500 staff will leave over the next three years,” Hockey said.

Corporate welfare - including apprenticeship funding - has been trimmed, with the government abolishing a range of industry assistance programs at a saving of more than $845 million. “We will refocus our effort on innovation and self reliance,” Hockey said. The promised 1.5% company tax cut goes ahead but for big businesses it will be wiped out by a levy to pay for the Prime Minister’s signature paid parental leave policy, which will have a maximum payout of $50,000.

The reintroduction of petrol price indexation – scrapped by the Howard government – will raise more than $2 billion over the forward estimates. Revenue from the fuel indexation will be hypothecated for road building.

The Treasurer said that unless the budget was fixed, “we will leave the next generation a legacy of debt, not of opportunity.

"We must not leave our children worse off. That’s not fair. That is not our way. We are a nation of lifters, not leaners.”

Listen to our special budget podcast with Michelle Grattan and Tim Colebatch here.

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