News & Current Affairs
What happened to the Coalition's budget emergency?
For a government apparently dealing with a fiscal crisis, it doesn't seem overly concerned with a blowout in the deficit
Joe Hockey's one-off grant to the Reserve Bank, as well as tax changes, will add at least $10bn to the 2013-14 deficit.
At the start of a new sitting week and Australia's new parliament it is worth remembering how much things have changed in the four and a half months since politicians last held court in Canberra.
The biggest economic change will be the size of the deficit.
On 27 June, the previous Labor government was dealing with a projected 2013-14 budget deficit of approximately $18bn. The economic statement and the pre-election economic and fiscal outlook (PEFO) released in August have increased that deficit by two-thirds to around $30bn due to declining tax revenue. A year ago, treasury predicted tax revenue for 2012-13 would be $371bn, by the May budget it was down to $354bn, and by the PEFO statement it was a mere $348bn.
Yet when Tony Abbott stands at the dispatch box on Tuesday neither he nor his treasurer will talk of a $30bn deficit. They will instead imply the deficit is even bigger.
In his speech last week to the Centre for Independent Studies, rather than suggest there has been a blowout in the deficit since this year's budget, Joe Hockey oddly compared the current state of affairs to last year's budget. He noted that since May 2012 there has been a $95bn deterioration in the bottom line across the forward estimates.
When he referred to the Mid-Year Economic and Fiscal Outlook (MYEFO), to be revealed next month, he anticipated: the story will be even worse.
This is not news, for we already know the story of this year's 2013-14 budget will be at least $10bn worse because of decisions taken by Hockey in the past few weeks.
The big one is the one-off grant of $8.8bn given to the Reserve Bank for its 'reserve fund'. This payment adds nearly $9bn to the deficit, yet has zero economic impact. It won't boost demand as $9bn spent on infrastructure would. Nor will it impact inflation or employment.
It will, however, impact the budget bottom line, which is its purpose.
Because it is a one-off payment in 2013-14, it means even before he sits down to write the coming 2014-15 budget, Hockey will be spending $9bn less than he is this year. That's a rather sweet outcome for someone suggesting he is better at cutting spending than his predecessor, especially if, as Hockey also does, he suggests that extra $9bn is really part of the true state of the books.
Hockey argues the former government should have provided the RBA with this money, and yet neither the RBA nor the market believed it needed such a large payment. Moreover, treasury actually advised the former treasurer, Wayne Swan, not to make such a payment.
When Joe Hockey finally does reveal the mid-year economic and fiscal outlook, any extra deficit will overwhelmingly be due to his own choices.
But it is not just the amount of government spending that has changed since the last time parliament sat. Revenue and tax measures have also changed. Last week Hockey announced he was restoring integrity to Australia's taxation system.
Hockey confirmed the government would proceed with 18 taxation measures,15 of which were announced in the May budget or the pre-election economic statement such as the increase in tobacco excise and the removing access to the R&D tax incentive for large companies with incomes of $20bn or more.
However, the biggest changes were the seven taxes Hockey announced the government would axe.
The costliest of these is an amendment to fringe benefits for cars which means people who buy cars using salary sacrifice schemes will not have to keep log books to prove they are actually using the car for work related purposes. The treasury projects this to cost $1.79bn over four years. It also suggests Hockey is in favour of subsidising the motor industry, he just prefers doing it through tax rorts.
The other big change was the government's decision not to proceed with changes to superannuation tax that would have been more beneficial for low rather than high income earners. The former government introduced a low-income superannuation contribution which meant that workers earning up to $37,000 per year (around 3.5 million people) paid effectively 0% tax on their superannuation, compared to the 15% they otherwise would have paid.
The Gillard government also announced in April that it would raise the tax on superannuation for those earning over $300,000 (around 128,000 people) from 15% to 30%, bearing in mind that the marginal tax rate on their income at that amount is 45%. This would reduce the taxation concession on superannuation for those earning over $300,000 from 30% (45% minus 15%) to 15% (45% minus 30%).
Not only is the Abbot government not proceeding with taxes on high earners, it is also axing the low-income superannuation contribution, meaning the lowest earning workers, those who earn under $19,000 who pay 0% income tax will now have to pay 15% tax on their superannuation contributions.
For a government apparently dealing with a budget emergency and determined to cut down on handouts and waste, its first budgetary offerings suggest that it doesn't mind an entitlement so long as it is at the right end of the income scale.
It also doesn't seem to mind a bit of grandiose spending, so long as it can blame the ALP for it.
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