The government’s Mid-Year Economic and Fiscal Outlook was released this morning and, despite a further round of savings and tax increases totalling over $16 billion over four years, the government has had to shave its surplus for this year to a mere $1.1 billion and reduced its forecast surpluses over the forward estimates to cope with a further downgrade in tax revenue.
Treasury has downgraded its forecasts for GDP, employment growth and inflation for this financial year and next, with economic growth predicted to be 3% for both years (down from the budget forecast of 3.25% this year) but expects unemployment to remain as forecast in May.
To meet the revenue shortfall of $4 billion forecast for this year, the government announced a series of savings initiatives, including:
- Changes to the calculation and indexation of the private health insurance rebate, saving $700 million over forward estimates (FEs)
- Removal of the private health insurance rebate from lifetime health cover ($386 million over FEs)
- Increases in visa application charges, with over $500 million over FEs
- Changes to the treatment of fringe benefits ($445 million over FEs)
- A change to the treatment of lost superannuation accounts that will deliver an immediate windfall of over $550 million
- An increase in the tax levy on self-managed superannuation funds worth $319 million over FEs
- Savings from redirected grants programs, including pushing back some spending into later years
- Reduction in the Baby Bonus to $3000 for second and later children, saving $500 million over FEs from next financial year.
Against those savings, the government has had to spend $4.2 billion on its new dental scheme, starting next financial year, additional health spending in Tasmania ($325 million), an extra $490 million on its response to the Houston panel report and more on Afghanistan (an extra US$100 million in support for the Afghan government).
The biggest cuts to revenue have come from lower company tax ($2 billion this year), and a $1 billion annual fall (or around one-third!) in MRRT revenue due to declining commodity prices (and perhaps the reality check of the first instalments coming from the big miners). However, the states have had a little luck, with Treasury forecasting around a billion extra dollars in GST revenue over FEs.
While economic growth is generally forecast to be a little softer, for the first time in a while Treasury has lifted its expectations of the crucial housing sector, with growth next year expected to reach 4%, offset by lower-than-forecast levels of non-dwelling construction; forecasts of overall government spending across the economy have also been revised down. Our terms of trade are expected to decline 8% this year rather than 5.75%, and next year has been revised down as well. Treasury has revised down its forecasts for the growth in our region, with China and Japan revised down in growth forecasts, along with India.
Beyond the big savings that will garner attention, the government has presented a long list of additional small savings measures that wouldn’t be out of place in a budget statement. This is a genuine mini-budget, and with more real savings than usual for this government, which has tended to gloss over the difference between actual spending cuts and tax rises. There are, as always, a few tricks, including pushing still more spending into 2013-14. But for all the efforts among some in the commentariat to mount a campaign against its profligacy in areas like the NDIS and Gonski, the fiscal discipline of this government, now into its fifth year, remains strong.
The broader issue, however, is whether this obsession with surplus remains appropriate given the economy is now seen as softer than previously by both Treasury and the RBA. The government has handed full responsibility for maintaining jobs and economic growth to the RBA board, and indeed boasted about it. No longer are fiscal and monetary policy working in tandem, as Wayne Swan once boasted; rather the government emphasises the contractionary nature of its fiscal policy as the basis for further loosening of monetary policy.
Pretty solid MYEFO – nothing in the spending cuts/tax increases that will scare the horses too much (the reduction in the baby bonus is the only one that News Ltd stable will paint as an attack on ordinary Aussies).
The issue of should this budget actually be expansionary rather than contractionary is an interesting one and I would say in any other political circumstance a small deficit would probably be in order but with room to move on interest rates and given “confidence” is the big issue stopping consumer spending a small surplus isn’t going to damage the economy and could prove just as beneficial as a small deficit.
The other question is given the Libs constant calls of how will you pay for it, now that MYEFO is in will they tell us how they would pay for theirs?
Oh and if Geewizz is out there, are you still predicting 44-56 in tomorrows newspoll given todays NEilsen and last weeks Essential figures?
I think the focus on a surplus is good. Most of economics is more psychology anyway than anything else. Lowering interest rates from bupkiss to bupkiss less 25 basis points is only a psychological factor in borrowing now.
I think a Government that can send a strong message about being able to manage its own finances is going to do more good for the economy than splashing cash around like a drunken sailor in the hopes we’ll all just close our eyes and pretend what’s happening in Europe isn’t actually happening.
John64 – “I think a Government that can send a strong message about being able to manage its own finances is going to do more good for the economy than splashing cash around like a drunken sailor in the hopes we’ll all just close our eyes and pretend what’s happening in Europe isn’t actually happening.”
I agree in Australia’s current situation restoring confidence through a getting a surplus and lowering interest rates will be better than large scale stimulous, in europe large scale targeted stimulous would be in order, and if the global economy gloom drags Australia down much further in the near future Australia would be wise to repeat their efforts of 2008.
Interesting to see Wallace from the ACL brand the reduction in the Baby Bonus as a disincentive for having children.
Is he suggesting that Christians don’t have children out of some spiritual beliefs but to just trouser the cash. “Go forth and multiple (but only if there’s some cash in it for you).”
Labor are dropping trump cards knowing full well Liberals will bash the “spend thrift” Labor party rhetoric. The problem is the “It’s all about me” swinging voters will be soothed by this budget surplus rather than accepting the fact being in the red is not a corporate failing when it means building infrastructure when long term gains are visionary. Emperor Colin Barnett got into power at the peak of the mining boom and did a 3% cut across the board and is again cutting the budgets further all because he sees the average worker his tax windfall rather than super profits. When fed Liberals get into power the issues you see in WA and Qld will become a federal issue, and as conservative as we are, the cuts are deranged as more people are unemployed burdening the budget and the most heavily taxed people, the average worker and their family. Neither have any rationale in their policies for growth when we sell raw goods to then import it as high priced processed goods.