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Budget 2017: Jargon buster – work through the waffle

Scott Morrison will have had to wade through plenty of jargon as he puts together his budget.

Scott Morrison will have had to wade through plenty of jargon as he puts together his budget. Photo: AAP

Bamboozled by bracket creep, no idea about negative gearing? Use our jargon buster to help wrap your head around some of the terms being bandied about this budget.

Debt vs. deficit

Politicians of all stripes are fond of comparing the budget to a family’s finances, but this often leads to confusion.

When a politician says they are balancing the books and returning the budget to surplus, it gives the impression that they are clearing the government’s debt.

The reality is that the deficit is just the amount of money the government spends beyond what it receives in a financial year.

Just because you return the budget to surplus does not mean that the debt incurred by the previous deficits disappears.

Any deficits, or shortfalls, instead are added to existing government debt, which is expected to hit $317.2 billion this financial year.

While $317.2 billion sounds like (and is) a lot of money, by international standards Australia’s public debt is quite low, sitting at 18 per cent of GDP – which is the value of what Australia’s economy produces each year.

While government debt can pose problems, it is not quite the same as personal debt and can often serve a purpose.

Governments take on debt by issuing bonds to investors who are paid a return, with ratings agencies allotting a credit rating to government debt. A high credit rating, such as the one Australia has, allows governments to borrow at very low rates, with investors trading profit for security.

Some economists argue this ability to borrow at a lower rate than the market should be used to fund infrastructure projects that are likely to make a profit, as well as boosting productivity.

Bracket creep

Bracket creep occurs when tax rates do not keep up with wage increases in the economy, pushing wages up to a higher bracket, and resulting in the government taking more tax revenue.

Tax brackets are designed to be indexed to account for increases in inflation; however, the indexes are usually set manually, and leaving them stationary while wages grow allows the government to increase the amount of revenue it takes from taxpayers without raising taxes.

Tax expenditures

Tax expenditures are sources of revenue the government goes without due to tax concessions. While they are not government spending, they represent significant losses of potential revenue for the government.

While some of this is offset by increases in productivity and increased spending, it remains a significant source of potential revenue the government is missing out on.

Among the most well-known examples of tax expenditures are superannuation concessions and the capital gains tax exemption on the family home.

Superannuation concessions

Super concessions are tax breaks designed to encourage people to put more money into superannuation, in theory saving the government money down the track by reducing the burden these people will have on the public purse when they retire.

Currently superannuation is taxed at 15 per cent, with super earnings not taxed at all once you hit 60 years of age. Employers are required to put a minimum of 9.5 per cent of an employee’s income into a super fund.

The superannuation concession allows people to voluntarily contribute more to their superannuation and still be taxed at the rate of 15 per cent (or 30 per cent if you’re really well off), well below the majority of tax rates.

The concessions have been criticised for disproportionately benefiting the wealthy, who get a much bigger discount on their normal income tax rates than those in lower tax brackets.

With many wealthy people likely to be ineligible for the pension on reaching retirement anyway, critics argue that the concessions cost the government far more in lost revenue than it would cost to support wealthy individuals with the aged pension.

Negative gearing

While the Coalition has directly ruled out changes to negative gearing in this budget, Labor’s negative gearing policy means the issue is sure to remain in the headlines.

Negative gearing allows property investors to write the interest costs of their mortgages off as an income tax deduction against other sources of income, and has been blamed for soaring property prices as it subsidises loss-making real estate investments.

Labor wants to restrict negative gearing to new properties, as well as reduce the capital gains tax discount. (Currently investors are only taxed on half of their investment profits from capital gains if they hold an asset for at least one year.)

Forward estimates

The forward estimates are a series of projections, released alongside the budget, which predict revenue and expenses for the next four financial years.

As they rely on assumptions about revenue and indicators, they are often subject to change – as the mining boom unfolded, the estimates often undervalued the amount of revenue, and since commodity prices peaked they have had to be revised downwards.

But the estimates are seen as a useful way of showing the government’s longer-term plans for spending.

GDP

The gross domestic product (GDP) is the annual value of goods and services produced by a country. GDP is generally recognised as one of the key indicators of the state of a country’s finances.

Nominal GDP

A version of the GDP that has not been adjusted for inflation. This means the GDP will appear higher than it actually is, as it fails to take into account the devaluing effect of inflation.

However, it is also the measure of GDP that is most closely related to government revenue and spending, as both are affected by inflation.

Terms of trade

‘Terms of trade’ measures the relationship between the prices a country receives for its exports and the prices it pays for its imports.

A rising terms of trade means the nation is getting better prices for its exports relative to what it pays for imports, and vice versa.

Australia benefitted from rising terms of trade during the mining boom as the prices of iron ore, coal, and other commodities surged, while the price of many imports such as electronics and clothes stayed steady or fell.

Economists are cautious about drawing too many conclusions from high or low terms of trade figures, but trends in the movement of the terms of trade are useful for predicting changes in the standard of living.

PEFO and MYEFO

The Pre-election Economic and Fiscal Outlook (PEFO) is released by the Federal Treasury shortly before the federal election, and represents Treasury’s and Finance’s predictions on the current and future state of the economy.

While budget bottom lines are often open to manipulation by governments, the PEFO is put together independently and is the only outlook signed off by the heads of Treasury and Finance.

The Mid-Year Economic and Fiscal Outlook (MYEFO) is an update to the budget that the government releases halfway through the financial year.

Parameter variations

Parameter variations refer to the budget’s assumptions about the economy (such as growth, inflation and unemployment) and how these will affect revenue and costs.

Structural deficit

A structural deficit refers to a situation where the current tax structures of a country will fail to cover the expenses under normal economic conditions.

Governments commonly run deficits in times of economic downturn as a means of insulating the economy and ensuring services are not impacted, with the understanding that surpluses during peak times will help pay down the debt incurred by going into deficit.

A government can still run surpluses but be in structural deficit – for example, towards the end of the Howard government terms, revenue from the mining boom allowed it to post surpluses – however, under normal conditions the budget would have been in deficit.

Working out whether a government has a structural deficit is complicated by the changing nature of sources of revenue and costs for governments, but governments and economic organisations try to remove the influence of temporary impacts on the budget bottom line to assess the long-term prospects for the economy.

-ABC

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