Treasure Joe Hockey is attempting to pull off a tricky balancing act by reining in budget spending to attack the build-up of debt while ensuring a fragile economy does not fall into a hole. The task is made doubly difficult by the end of the mining construction boom which is sucking money out of the economy.
He has put the government reputation on the line with some big promises. The deficit, he says, will fall from $49.8 billion this year back to $29.8 billion or 1.8 per cent of GDP next year and to only $2.8 billion in 1917-18. That means cutting $43.8 billion from what was predicted as recently as February.
The government’s debt position was expected to be running at $687 billion or around 15 per cent of GDP, in 10 years’ time. It’s now predicted to be sliced by around 40 per cent to $387 billion which should push it back to only six per cent of GDP. Resulting interest saving are expected to be 16 billion over that decade.
How ‘Smokin Joe’ and his cabinet colleagues will manage to achieve all this is the big question. While Australia is not facing the “budget emergency” the government has been talking up in recent weeks as our net debt is relatively low by international standards and there is still scope for further spending if another crisis were to emerge.
However, there is a big imbalance that needs addressing in the medium term.
The legacy of tax cuts and spending promises implemented in response to the mining boom and global financial crisis have seen revenue cut and outlays jump. Prior to the budget spending was growing at 5.9 per cent above inflation while revenues in the current year are only growing at 3.5 per cent.
So to get the sort of turnaround the government is planning demands significant rebalancing. That will come through tax increases and spending cuts.
Savings through over the next four years are predicted to total $36 billion. That will be made up by the co-contributions for visits to the doctor and on prescription medicine, reductions to family tax benefits and pension benefits and reductions in the size and accessibility of unemployment benefits to under- 30’s.There will also be cuts to the generosity of the tertiary student loan system.
Some 16,500 public servants will lose their jobs , 230 government programs will go and 70 government organisations face the axe and a cut in the growth of the foreign aid budget will save $76 billion over five years.
On the tax side, the application of a 2 per cent debt levy for three years on those earning $180,000 or more. That covers about 400,000 people and will raise $3.1 billion. Fuel price excise will rise twice yearly with inflation pushing up costs for motorists.
The interplay of these spending reduction and taxing measures with the overall performance of the economy will ultimately determine whether Joe Hockey’s budget will be the game changer he craves.
Economic growth is currently about 2.5 per cent which is below the long term trend is tipped to reach trend levels of about three per cent in 2015-16. Unemployment is expected to climb slightly to 6.25 per cent by mid-2015.
While there is some emerging strength in areas like new residential construction, the economy is feeling the headwinds of the unwinding of the massive mining construction boom that has seen hundreds of billions invested in resource infrastructure.
The budget expects engineering construction to fall 13 per cent this financial year and 20.5 per cent next. That means a sector accounting for 10 per cent of the economy is on the skids and if the rest of the economy can’t make up for that then Mr Hockey’s budget might lose some lustre.