What’s the bottom line?

The federal budget will continue in deficit over the next four years, with no major changes to the bottom line in Treasurer Scott Morrison and Prime Minister Malcolm Turnbull’s first budget.

The coming year’s deficit is expected to be $37 billion.

“This budget is a case of fiscal groundhog day,” says Urbis chief economist Nicki Hutley. “We are seeing the Government move the pieces on the chess board but not actually make significant inroads into the budget deficit.

“There’s nothing in here that inspires a vision that is going to fundamentally change the Australian economy for the better.”

Chief economist for Industry Super, Stephen Anthony, says the budget is “piecemeal”.

“At best the structure of the budget continues to deteriorate and we’ve left no wriggle room for a global slowdown,” says Anthony.

Are there any major tax cuts or tax hikes?

“The Government is saying that they’re not increasing the tax take, but they are,” says Hutley.

The Government proposes to raise the tax on tobacco in 2017, and hoping that will improve tax revenue by $4.7 billion over the next four years.

Higher scrutiny on the profit movements of multinational corporations is pegged to raise another $3 billion over the next few years.

“If they can enforce this with those additional staff for the Tax Office that they’re hiring, then this is a very positive and necessary step,” says Hutley.

They’ve upped the tax on superannuation for higher income earners, so people earning over $250,000 a year will be taxed at 30 per cent for any extra super contributions over $25,000.

As far as tax cuts, the big changes are happening through the Ten Year Enterprise Tax Plan, which delivers a small income tax cut for middle-income workers and tax cuts to businesses over the next decade.

This is a staggered tax cut for medium-sized businesses with turnover of less than $10 million; the medium-size businesses will also get the best of a bunch of tax concessions made to smaller businesses in the last budget.

Hutley regards this as the centrepiece of the budget, due to a welcome one per cent increase to the GDP over the long term, but takes that rise with a grain of salt. “The idea of trickle-down economics has of course not been supported by the evidence,” she says.

How much are we spending?

The Government will spend more than $450 billion in the next year on general government services, which is about a quarter of the GDP.

This puts Morrison’s budget at the same level of government spending as Wayne Swan’s 2010 election-year budget.

This budget demonstrates the reality of trying to cut expenditure at a time when our economy demands more for ageing, for health, education and for infrastructure.

“After spending like drunken sailors in the past decade, we have not addressed controlling or cutting spending, and until we do so we are not going to get this budget under control,” says Anthony.

“The Government has made a very strong point about responsible expenditure and yet this budget demonstrates the reality of trying to cut expenditure at a time when our economy demands more for ageing, for health, education and for infrastructure,” says Hutley.

“It’s interesting because they’ve pushed quite a few of the expenditure items out over the forward estimates period.”

What are the biggest spending cuts?

The biggest spending cut is actually a diversion of funds already in the Social Services portfolio to save money for the future of the National Disability Insurance Scheme.

So the saving will eventually become expenditure, but beyond the forward estimates.

Stephen Anthony says; “most of it is rabbit out of a hat stuff. We’re talking about savings to a program that doesn’t exist yet.”

Cuts to universities announced by the Abbott/Hockey partnership that did not get through the Senate are included in this budget. This is a $2 billion ‘saving’ starting with a $100 million cut in the next year, increasing to half a billion for each of the following two years, and nearly $800 million a year by 2020.

In the forward estimates, the Government will increase the public service efficiency dividend, so that will mean further job losses for public servants in the coming years.

The public sector and the Canberra economy will take another significant hit if these changes are brought about.

“If you look at what they’re doing to the individual portfolios – they’re quite savage,” says Hutley. “The public sector and the Canberra economy will take another significant hit if these changes are brought about.”

Another saving is deferral of the child care subsidies promised in the last budget, they’ve been pushed backward another year pending approval of cuts to family benefits.

Further cuts include Work for the Dole, with the whole model being reworked into a new youth employment program.

What do we spend the most on?

The top programs do not tend to change, year by year, as they are the big ticket items in the budget.

The largest spend is the revenue assistance paid to states and territories, mainly generated via the GST.

The aged pension is the next big ticket item and is more than double that of the next largest spending program, Medicare.

What about any new spending plans?

The biggest spend in the next four years is the new contributions to schools and hospitals, which was negotiated in the April meeting with the state and territory leaders. The funding does not kick in straight away, with the first funds coming through mid 2017, and the biggest increases kick in 2019.

The Government has included a combined half a billion dollars for next year’s military operations in the Middle East (Operations Okra and Accordion), but has not budgeted for that level of funding over the long term.

Another cornerstone in new spending is the new youth employment package, which restructures the Work for the Dole program into more youth funding including an internship program.

Hutley says this is a welcome initiative considering the need to support young people finding work in a very different job market to their parents, however says that subsidised employment has been ”fraught with difficulty” in the past.

“Often it hasn’t led to greater employment. It has been a cheap employment scheme for small businesses.”

What’s the outlook for economic growth?

Within the budget papers, the Treasury stated that Australia is growing faster than other developed economies, which is a reason for optimism in the economic forecasts.

Hutley urges caution: “Above trend growth in the back half of the forward estimates is very optimistic given that the global economy remains fragile and given that there’s no strong evidence that the transition away from mining is not happening as quickly as we need… The 2.5 per cent increase is reasonable. But I think the 3 per cent could be difficult to achieve.”

Stephen Anthony says that there are great risks around the optimistic budget outlook, especially as part of the outlook relies on China’s own optimistic forecasts.

“The budget is still ‘made in China’,” he says. “Australia is the most exposed economy to a China downturn as around one third of our merchandise exports (by value) flow to China.”

What’s the outlook for employment?

Tiny changes to the percentiles of employment growth, unemployment rates and wage growth can hugely affect the budget bottom line.

Jobs growth is certainly something that the Turnbull/Morrison partnership is celebrating, as it’s one of the few positive economic outcomes they could reasonably mark as an achievement during their term.

The stronger growth in employment forecasts over the next two years is due to stronger growth in the service industries like financial services and tourism.

What is striking about the employment forecasts is the optimism up until 2018, when the Treasury then pares back employment growth.

“Presumably the stronger growth in employment forecasts over the next two years is due to stronger growth in the service industries like financial services and tourism,” Hutley says.

“This won’t continue forever and so the pace of growth in employment will also slow to a certain amount in the out years.”

What’s the outlook for inflation?

When inflation is lower, there are lower profits to tax, and therefore less money for the government coffers. For the economy to remain buoyant, it’s best for inflation to hover around the 2 to 3 per cent growth mark.

Recently, inflation has been surprisingly sluggish and dipped for the first time since the Global Financial Crisis. While prices are not actually decreasing, they’re not in that ‘comfortable’ increasing range.

For this budget, the Treasury has predicted inflation will get back into that comfortable range in the hope that tweaks to stimuli, like the Reserve Bank reducing interest rates, will push it back up within the desired range.

“We have entered a deflationary era so it’s going to be very difficult for the Reserve Bank to achieve its inflation target,” says Anthony.

Hutley says: “Given the Reserve Bank lowered interest rates on budget day, specifically due to much weaker than expected inflation, it may be that inflation is lower than forecast over the next two years.”

What’s our debt position?

Net debt is nearing $326 billion, which is 19 per cent of GDP.

Australians net debt position is not a problem at the moment.

“Australians net debt position is not a problem at the moment,” says Hutley.

“We compare extremely favourably by international standards, but if we don’t address budget deficits we will find ourselves slipping down the list very quickly.”

We will not be cutting that debt down significantly until our underlying cash balance returns to surplus, with no indication of a surplus occurring in the next four years.

Debt has not been at those levels for 20 years.

“The last time debt was at the same level was in 1995-96 financial year,” says Hutley.

“The important thing to remember is that after that period, through economic growth and the mining boom, we were able to repair the budget. Looking forward though, we’re highly unlikely to see either those strong levels of growth or obviously another mining boom.

The task ahead now is much more difficult, we can’t rely on economic growth to solve the problem.”

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