Deficit of $29.8bn, 1.8% of GDP in 2014/2015
Fiscal policy: the path to surplus
The Government projects that the underlying cash balance will be just $2.8bn in deficit in 2017/18, while the fiscal balance will be $1bn in surplus in that year. How has this been achieved? Principally by limiting the growth in nominal outlays through a number of indexation changes that favour the government, while turning indexation back in its favour on the revenue side. It isn’t quite that simple of course - see below - but it is undeniable that the Government’s deus ex machina in this budget has been that when push comes to shove, they can hold down the rate of inflation in their major outlays, while turning inflation in their favour on the other side of the balance sheet.
Savings
The Government plans to slow the real rate of growth in payments to 2.6% over the forward estimates, stating that this will save $20.3bn over five years. The Government’s major innovation here, if we can call it that, is to freeze or lower indexation on its outlays. There will be a ‘pause’ to the indexation of eligibility thresholds for family payments, allowances (for example single parent payments) and the private health insurance rebate. This concept also flows through to Local Government Assistance, the Foreign Aid budget and 112 other government programs. The pause will be either 2 or 3 years. Another move in this spirit has been to introduce the CPI as the reference index for the pension, replacing wages. These measures work to control the nominal growth in government payments over the course of the forward estimates. Direct changes to eligibility for family tax benefit B have also been introduced, with the income threshold moving from $150k to $100k, and the youngest child needing to be less than 6. Elsewhere, the pension age is increased to 70 in 2035 (from 67 from 2023 and 65 today). Medicare is also contributing to the saving (see health below).
Taxation
A "Temporary Budget Repair Levy" on incomes over $180,000 for the three years from 2014-15 ($3.1bn over four years). The reintroduction of indexation of fuel excise from 1 August 2014. Like the freezing of indexation the levy is a short term fix rather than providing long term structural reform. In contrast the restoring the indexation of the fuel excise is a long overdue structural improvement.
Defence & border security
The Government has outlined a target to increase Defence spending to 2% of GDP. They have brought forward $1.5bn in spending from 2017/18 to earlier years. In 2014/15, the Budget delivers $0.14bn for overseas operations, and $0.06bn to contribute to securing Australia’s borders, including Operation Sovereign Borders. The government has committed $0.7bn over six years to enhance border management. From 1 July 2015 the existing border protection services will be consolidated into the new Australian Border Force. It has abandoned the target to increase foreign aid of 0.5% of GDP, while leaving open the option to review this position when the budget is in a stronger state.
Education
The Government has a dual objective here – make higher education cheaper for them and to boost the international competitiveness of the sector. Their answer for both is to deregulate fees, with institutions free to set their own from January 1, 2016. HELP loans will now be repayable when the borrower earns $50k. The interest rate is to be lifted to no more than 6%. The "Gonski" school funding commitments are to be scrapped from 2017-18 with school funding to be indexed to CPI from 2018.
Health
The introduction of a $7 co-payment for visits to the GP, pathology and imaging. The Government is also establishing a Medical Research Future Fund to be funded by $5 from the $7 co-payment. Pharmaceutical prices will increase with general patients paying $5 more for prescription drugs.
Infrastructure
The Government is directly allocating $10.1bn to infrastructure (WestConnex was already committed - if included, this number rises to $11.6bn), which they claim will contribute to $125bn in new projects. This estimate relies on asset sales and ‘asset recycling’, principally at the State level.