Highlights Of Hockey's 2014 Budget

Joe Hockey’s first budget is strong on the rhetoric of sacrifice. “It is time for all of us to contribute and build,” he said in his speech.

There are few spending announcements, and big cuts to the social safety net in areas like health and family payments.

Many of the announcements that had been foreshadowed were indeed in the budget, such as the 2 per cent deficit levy for high-income earners, and a $7 co-payment for patients seeing a doctor or getting a blood test.

There were some surprises, however, like the decision to create a new $20 billion medical research fund, that would use the returns on its investments to fund medical research. This announcement was offset by cuts to other parts of the science budget, such as the Australian Research Council and the CSIRO.

Higher education gets a major makeover. University fees will be completely deregulated, allowing universities to charge students what they like. Students are also slugged extra in lower thresholds for HECS repayments, and in lower Commonwealth funding for each university place. Several scholarship programs have been slashed or abolished.

A strong tone of moral obligation underpins this budget, born out in Hockey’s speech and in comments during the media conference this afternoon. The budget was about Australians “paying it forward”. Cuts to welfare, such as a nasty new measure to prevent under-30s from accessing the dole for six months after claiming it, were presented in terms of putting an end to a culture of entitlement. The word “contribute” was a repeating leitmotif.

Business largely escaped the cost-cutting. A corporate tax cut of 1.5 per cent will flow to 8000 companies. There were no changes to big tax breaks for business and wealthy individuals, such as negative gearing, capital gains tax, and superannuation exemptions.

The hardest hit will be the sick and those on low incomes. Everyone will have to pay the $7 GP fee, regardless of income. Medicines and pharmaceuticals will be more expensive, owing to higher co-payments in the Pharmaceutical Benefits Scheme. There are cuts to dental care, to public health, and to hospitals funding given to the states.

Those relying on family payments will also suffer. The government is tightening the rules around Family Tax Benefit B, and freezing the payment rate, in measures that will save around $7 billion over the forward estimates. For instance, families will no longer receive Family Tax Benefit B when their youngest child turns six.

Seniors will also take a hit. Concession card holders will receive less generous access, and the Seniors Supplement will be axed. In the longer term, the rate of the pension will be frozen in real terms, undoing some of the gains in the rate of the pension made under Labor.  

The economic analysis in the budget papers suggests that the economy will remain reasonably weak, as Australia transitions from the souped-up years of the commodity boom to an economy driven by other sectors, like housing investment and household consumption.

Nominal GDP will remain weak, growing by 4 per cent in 2013-14, and only 3 per cent in 2014-15. The Treasury says that “the weakness in nominal GDP growth reflects the sharp fall in prices for Australia’s key commodity exports since the start of the year and a further expected decline in Australia’s terms of trade”.

The budget papers also nominate medium-term challenges, like an ageing workforce and falling labour force participation.

“Confronting these challenges will require faster productivity growth,” the budget states.
 

The budget at a glance

• A $29.8 billion deficit in underlying cash terms, or 1.8 per cent of GDP.
• Spending in 2014-15: $414.8 billion (25.4 per cent of GDP)
• Revenue in 2014-15: $391.3 billion (24.0 per cent of GDP)
• Budget does not return to surplus over the forward estimates: there is still a $2.8 billion deficit in 2017-18.
• “A path to surplus” with the surplus to equal at least 1 per cent of GDP by 2023-24.
• The government claims it has prevented a disastrous blow-out in spending that would have occurred under Labor.

 

Economic indicators:

• Real GDP growth: 2.75 per cent.
• Employment growth: 0.75 per cent.
• Unemployment: 6 per cent.
• CPI: 3.25 per cent.
• Wage price index: 2.75 per cent.
• Nominal GDP growth: 4 per cent.

 

The Treasury’s remarks on the economy:

“The Australian economy is in the midst of a major transformation, moving from growth led by investment in resources projects to broader-based drivers of activity in the non-resources sectors.” The budget papers highlight the following key factors:

• An improving outlook for housing
• Households are responding to low interest rates: spending is returning
• Declining resources investment is still a significant drag on growth
• Unemployment is expected to creep higher
• Weakness in the labour market means wages are subdued
• Inflation will stay “well contained”, owing to moderate wage growth and removal of carbon tax
• While the US economy is picking up, commodity prices will stay subdued. This will hurt the terms of trade and keep nominal GDP and tax receipts down.
• Upsides: “non-resources business investment could pick up”
• Downsides: falling resources investment could be “lumpy”

 

Revenue measures

Taxes are not lower, as claimed by Hockey. The budget papers say that “policy decisions” since the 2013-14 MYEFO “are expected to increase the total receipts by $700m in 2014-15 and $5.4b over the four years to 2016-17.” But Hockey is using the fact that revenues are lower than forecast by Labor to argue that this is a lower-taxing budget.

The big new revenue measure is the deficit levy, called the Temporary Budget Repair Levy. This 2 per cent hike on income tax for individuals earning above $180,000 will raise $3.1 billion over the forward estimates period.

As foreshadowed, petrol will also get more expensive. The government will reintroduce indexation for the fuel excise from August. This means that petrol taxes will start to increase again, after a decade-long pause after indexation was abandoned by the Howard government. The fuel excise indexation will raise $2.2 billion over the forward estimates.

 

Infrastructure

$50 billion in investment will flow by 2019-20 (although little new money in this budget). The government is creating an “asset recycling initiative” to provide incentives for states and territories to privatize existing assets and reinvest the proceeds in new roads and infrastructure.

 

Higher education

The government is fully deregulating student fees. The Commonwealth’s funding of new student places will also be slashed by 20 per cent, although existing enrollments will be grandfathered out to 2020. This will exert huge upward pressure on HECS fees.

 

Health

There will be a new GP co-payment of $7, and also a $7 co-payment for imaging and pathology services like X-rays and blood tests. PBS co-payments will also increase. The money from these fees will be redirected to a new “Medical Research Future Fund”, expected to reach $20b. The fund’s capital will be reserved in perpetuity, and “distributed to support medical research including through the NHMRC”.

 

Newstart

It’s tough times for job-seekers. The government’s mantra is “either learn or earn”. Newstart requirements are to be tightened. Newstart eligibility age will increase to 24. Jobseekers under 30 will not be able to receiver a payment for six months.

 

Family Tax Benefits

More than $7 billion in savings will result from tighter eligibilities and lower rates. A freeze on payment rates for two years will also save money. Families with children over 6 will no longer receive Family Tax Benefit B.

 

Foreign Aid

Australia is slashing our foreign aid budget. Our Millennium Development Goals have been abandoned. $7.6 billion will be cut from foreign aid over the forward estimates.

 

Arts

There are significant cuts to arts agencies, including $79 million over four years in cuts to the Australia Council, Screen Australia and other arts programs. Back-office amalgamations for the national cultural institutions are also expected to result in savings.

 

Clean energy

The government’s war on the environment continues, with the Australian Renewable Energy Agency abolished, at a saving of $1.3 billion. A number of other, smaller programs related to clean technologies and the environment were also slashed or axed.

 

Science

As mentioned, a new Medical Research Future Fund will be set up, using revenue from the $7 GP payments. Once it reaches $20 billion, its earnings from its investments will be returned to medical research through the National Health and Medical Research Council.

The Future Fellowships will be continued with $140 million of new funding.

However, there are cuts to other areas of the science budget. The CSIRO, Australian Institute of Marine Science and the Australian Nuclear Science and Technology Organisation will receive $146.8 million in funding cuts over the forward estimates, including $111.4 million from the CSIRO. $850 million will be cut from innovation and research and development funding, with a slew of commercialisation programs abolished.