Federal Budget 2014-15

Joe Hockey got at least one thing right in his budget speech last night, when he said that budgets are about more than numbers. Budgets, these days, are more about a government’s broader policy agenda than they are about numbers and calculations.

The first Federal Budget in 1901, put together by George Allen and a Treasury department of just five staff, was written up in a tiny ledger and itemised the day-to-day expenses of the new Commonwealth, including “delivery of luggage of Members of Parliament expense, about one pound per week”.

Since those simple times, the federalisation of tax and, with it, almost all policy areas has morphed the federal budget into something much more than an accounting exercise; it is now the vehicle by which governments announce new policies and reaffirm their commitment to existing ones. It is the opportunity for the government of the day to paint a picture for the Australian public of the kind of nation it thinks we should be.

For a new government, formed after the previous budget, this is the opportunity to finally set out its vision for Australia. After all, oppositions are disadvantaged in attempts to do this at an election, not having available the invaluable resources of executive government. But now, the Ministers have had plenty of time to get across their briefs, the Treasurer has had plenty of time to look over the books, and the Prime Minister has had the time to build his government’s agenda for the nation. So this, the Liberal-National Coalition government’s first budget, should tell us what our esteemed leaders think of Australia and where they want to lead us.

And this they delivered.

Here is what their vision of Australia is. It is not quite the poorer, nastier and more brutish Australia that the Commission of Audit report prescribed for us, but it is a shift away from the Australia we have known for decades.

Broken promises

Let's start in the obvious place. The government said and did everything it needed to in order to win government. Tony Abbott made the following commitments immediately prior to the election.

It is par for the course for new governments to reneg on commitments after finding the previous government had "cooked the books" (as though budget papers are not published for all to read). But, for three long years the Liberal-National opposition put itself on a pedestal of self-righteousness, claiming Labor had lied about the carbon price. They built a great deal of political capital (or, at least, anti-government sentiment) with this "holier than thou" schtick. Abbott, in particular made a number of hyperbolic statements about democracy crumbling down around us:

Nothing could be more calculated to bring our democracy into disrepute and alienate the citizenry of Australia from their government than if governments were to establish by precedent that they could say one thing before an election, and do the other afterwards. -- Tony Abbott

Now they have broken a range of pre-election commitments, it is not a good look.

But, in my opinion, we need to ask ourselves not "why do politicians break their promises after elections?", but, "why don't we allow politicians to tell the truth before elections?"

Ultimately, at this past election, the Australian public put their belief in a set of impossible promises. The Coalition promised to cut the carbon price and mining tax, while retaining the costly tax breaks and programs that these streams of revenue fund. They promised to cut the company tax rate. And, while committing to new spending on a range of initiatives (eg. paid parental leave) and increased funding for certain portfolios (eg. defense), they promised no new taxes to fund this spending, and the only cut they committed to was a downsizing of the federal public service by 14,000 jobs; barely enough to make a dent even in Australia's small budget deficit. And while promising less revenue and more spending, they also pledged to return to surplus quicker than Labor would. It simply doesn't add up.

As our parliamentarians traded blows in the lower house today, Labor repeatedly pressed the government on its broken promises. Mr Hockey complained that Labor's questions were all about politics over policy. Again, the hypocrisy is mind-blowingly electric. Question Time during the previous term of government was entirely absent of debate on policy, with the opposition using its questions to attack the Prime Minister for alleged scandals in her previous career, attack disgraced member Craig Thomson, and, of course, repeat its claims about broken promises on a so-called carbon "tax". Even a one-nostrilled Young Liberal could detect the stink of hypocrisy about all of this, and it will undoubtedly play out in the next round of political polls.

Fiscal position

The budget bottom line is far from everything, but the Coalition spent so long in opposition talking about Labor debt and deficit, and is still talking so much about "fiscal repair", that you would think this would be the one big objective of the budgetary changes.

But, after all the talk of a "budget emergency", the government has done nothing serious to improve the bottom line. Any new revenue or savings from cuts to existing programs are simply offsetting new spending. The proposed deficit tax, ironically, will do nothing to ameliorate the deficit (It would better suit the, admittedly less catchy, name of "temporary income tax increase on the wealthy to fund the government’s election commitments").

In fact, the deficit is looking bigger than Treasury was estimating in August last year.

In its Pre-Election Economic and Fiscal Outlook (PEEFO), Treasury revised downward the forecasts from the 2013-14 budget, due to a weakening terms of trade, declining commodity prices, and other economic factors. A small part of the drop was also policy changes. These revisions notwithstanding, PEEFO still showed an expected surplus in 2015-16.

The budget announced yesterday, however, shows larger deficits for longer, and a later return to surplus, in 2017-18.

The table below shows the difference in forecasts from the 2013-14 budget, to the PEEFO, and then the new 2014-15 budget.

Underlying cash balance ($ billions)

For the 2014-15 year, the PEEFO estimated a deficit of $24 billion (1.5% of GDP), whereas the 2014-15 Budget now shows a $29.8 billion dollar deficit (1.8% of GDP).

It is true that the Mid-Year Economic and Fiscal Outlook (MYEFO), released by the new government in December showed a slightly bleaker situation than announced yesterday in the budget, particularly from 2014-15 onward (see chart below), however, as the ABC's fact checker has confirmed, the massive increase in the forecast deficit between the August 2013 PEEFO and the December 2013 MYEFO was of the new government's own making. When government revises its forecasts, in its reconciliations with previous estimates it explains whether the revisions are due to changes in circumstances (economic conditions) changes in policy (government decisions). In this instance, the budget blowout was due to the new policy settings (that is, spending commitments) that the Liberal-National coalition brought to government, or, as the MYEFO carefully words it, "essential steps to address unresolved issues inherited from the former government". Simply put, new initiatives, the decision to hand the Reserve Bank an additional $8.8 billion in 2013-14, and the axing of revenue streams like the carbon price ($9.67 billion over next three years) and mining tax ($5.1 billion over next three years), hit the budget bottom line.

Underlying cash balance ($ billions)

Basically, any "fiscal repair" in this budget has been to address the budget black holes that the new government introduced.

What does this all mean? It means the government is not so intent, as they led voters to believe, on returning the budget to surplus. They are simply interested in spending a bit more here and a bit less there, with a similar timetable for a return to the black.

As with the broken promises, the irreconcilable differences between the government's rhetoric and inaction on the fiscal balance show them to be nothing more than charlatans. They will lie through their teeth to win government and stay there.

Federal-state relations

Until this budget, we have had decades of unending federalisation. In most recent times, under the Rudd-Gillard government, this included the national curriculum and schools funding, national health reform, the national disability insurance scheme, and so on. But last night the push stopped.

States and territories are set to receive around $80 billion less under the new government, mostly in health and education. Premiers have come out swinging. New South Wales Premier Mike Baird called the change a cost-shifting exercise. Queensland Premier Campbell Newman called a spade a spade, claiming the hit to the states is nothing more than "a wedge to get the states to get the GST to be raised". For a government that talks about lifting and not leaning, it appears to be leaning pretty hard on the states.

It may be tricky politics, but the debate over state and territory funding is one that needs to be had. Despite national agreements and frameworks and standards, the provision of schools and hospital services remains the domain of the states. So should they raise the money to fund it? It makes sense for the taxes to be collected centrally and distributed to the states. It is more efficient and promotes greater equality. This could be achieved simply by expanding the scope of items covered by the GST or by increasing the rate. Alternatively, the federal government could raise taxes otherwise, for example through increased income tax rates, and distribute funds to the states.

Expect this to be an issue at the next election. The hit to education funding will occur after the forward estimates, which is likely to bring a debate around the level and scope of the GST at the next election. Failing significant changes to the GST, states will have to increase or introduce less efficient taxes and duties to raise the money needed to fund essential services. This would particularly hurt the smaller states and territories.

Taxation

Apart from the GST, there is plenty that could be done to improve Australia's tax system. And there is plenty that could be done to more equitably draw greater revenue out of the tax system.

Our tax system, for example, includes nearly 400 “tax expenditures”. These are deductions, exemptions and concessions from taxation, for example, for charities, religious organisations, and scientific research bodies. The IMF has noted that, as a proprotion of GDP, Australia forgoes more revenue through tax expenditures than any other OECD country. Our tax expenditures add up to such a large amount that it could go a long way to addressing our structural deficit.

The single largest of all of these expenditures is the superannuation tax concession, which will cost the budget $32 billion in 2014-15 and rise to $48 billion in 2017-18. At a time when the government rabbits on about "heavy lifting", it is somehwat perverse that it gives no consdieration to removing this concession, which brings most benefit to the most wealthy, but instead looks at reducing the age pension, which goes to those most in need.

And what of negative gearing? No mention, of course.

There are some tax expenditures being cut, however they return little to the budget. The Mature Age Workers Tax Offset and the Dependent Spouse Tax Offset will both be abolished from 1 July 2014, for a saving of only $1.1 billion over the forward estimates.

In addition, the Temporary Budget Repair Levy, of an additional two per cent on individuals’ taxable income above $180,000, will add $3.1 billion over the forward estimates. Given the government is adamant that this increase will not present an impact on earning incentives, there is little argument for it being a temporary measure.

The environment

Tellingly, the environment did not rate a single mention in the Treasurer's speech (except for a reference to the "business environment"). The closest he came was in two mentions that the government would be abolishing the carbon pricing scheme, as promised.

The carbon pricing scheme is, of course, the ultimate paradox in this budget. New governments looking to fill the proverbial black hole tend to cut programs that are costly. Yet, here the government is cutting something that was estimated in the PEEFO to raise $9.67 billion over the next three years. The related cuts (The Climate Change Authority will be abolished, Low Carbon Australia Limited will be wound up and the National Water Commission will cease) won't even touch the sides of this loss. After losing this source of receipts, the government is continuing to pay the compensation that this program was to fund, and is replacing it with a program that will be funded out of the government's coffers.

There was no mention of the government's Direct Action policy in the Treasurer's speech. This is unsurprising, given the lack of funds allocated to it: $50 million over the forward estimates for planting trees, and another $525 million to fund the "green army".

The centrepiece of Direct Action, however, is the Emissions Reduction Fund. The Environment Portfolio Budget Statement describes it like this:

The Department contributes to the Government’s Clean Air policy through the implementation of policies and programmes that will reduce Australia’s greenhouse gas emissions and facilitate adaptation to the impacts of climate variability.

The centrepiece of the Government’s climate change policy, the Emissions Reduction Fund, will support practical actions by businesses to achieve real reductions in emissions, lower their energy costs and increase their productivity.

The Emissions Reduction Fund will help reduce Australia’s greenhouse gas emissions while delivering valuable co-benefits to Australian businesses, households and the environment. For example, revegetation will improve water quality, and reduce erosion and salinity. Replenishing the carbon content of soils will improve the health and productivity of Australian farms. Households and businesses will save money by improving their energy efficiency.

So how much will the ERS be funded? Over the next four years, the government will build the fund up to a total of $2.55 billion.

Analysis by the Australia Institute indicates that a spend of approximately $11 billion per year would be required to match the level of emissions cut by a $23 per tonne carbon price.

There is plenty of independent research, like this study by the CSIRO on soil carbon sequestration showing that the effectiveness of direct action in questionable, and Liberal ministers have publicly stated that direct action is ineffective, so there is no point going back over that ground. In an ironic twist, while touting the benefits of direct action, the government is cutting funding to CSIRO by $115 million, which the CSIRO has announced will force reduced spending on carbon capture and storage.

Health

Yes, there will be GP co-payments. Yes, this does seem at odds with pre-election commitments not to introduce new taxes and charges. The opposition will get plenty of mileage out of labelling this a "GP tax", which has a nice ring to it.

During his speech, the Treasurer explained the purpose of the co-payments:

Health services have never been free to taxpayers so patients are being asked to make a modest contribution towards their cost. ... Australians are always prepared to make a reasonable contribution if they know their money is not wasted.

And yet, the co-payments are not contributing to the cost of healthcare at all. Not only that, but the co-payments are being introduced at a time that funding to the states for hospital services is being cut. According to the budget, the revenue from this payment will go towards a fund for medical research. In his speech, the Treasurer touted the benefits of Australian research. Strange then, that the CSIRO will have $115m cut over the forward estimates, resulting in 420 job losses at Australia's premier scientific research institute.

Fairfax columnist Peter Martin posted about some interesting research on whether these types of fees adversely affect people's health. It's an interesting read.

Some have argued that charging a fee for GPs will clog up hospital emergency rooms. It's a little awkward then, that the federal government plans to reduce the planned funding for hospitals by $1.8 billion over the forward estimates, walking away from the established national health reforms. On top of the cuts, states will lose their reward payments fo reduced waiting times, to the tune of around $201 million over the next three years.

In other health savings, the government will gain nearly $1.7bn by pausing indexation of Medicare Benefits Schedule fees for two years from July this year and income thresholds for the Medicare Levy Surcharge and Private Health Insurance Rebate for three years from July next year.

In a trademark move for a short-termist government, preventive health has been hit, with the abolition of the National Preventive Health Agency (for a saving of $6.4 million) and axing of the national partnership agreement on preventive health (saving of $6.4 million). Right and centre-right governments hate preventive programs (those evil spawns on nanny states), whether in health or education or justice, even though they tend to produce savings through reduced need for the downstream services.

Social services and welfare

Welfare payments are to be cut. Of most significance, Newstart will be much harder to access and people with disabilities will have to again prove their eligibility for the Disability Support Payment.

Young people will now have to wait until they are 25 years old before they can access the unemployment payment, and will instead have to rely on the much lower Youth Allowance. People aged under 30 years will face a waiting period of six months before a claim for any unemployment assistance. This means young people with low incomes and little to no savings who suddenly find themselves out of work will struggle to pay the bills and cover their rent.

From January young people seeking Newstart or the Youth Allowance for the first time will be required to "demonstrate appropriate job search and participation in employment services support for six months before receiving payments". Once they qualify, recipients have to spend 25 hours a week in a Work for the Dole program. Payments will last for six months before ceasing.

Put simply, this blame-the-victim policy direction is a complete bitch. In the interests of stamping out a handful of "dole bludgers", the government is making it much harder for people out of work to get by while they search for a job. The government's attitude towards these important safety net features of our post-war welfare state are clear. Kevin Andrews summed up the changes, just prior to the budget announcements:

The message out of this is simply this: the days of easy welfare for young people are over. We want a fair system but we don't think it is fair that young people can just sit on the couch at home and pick up a welfare cheque. Those days are over.

Meanwhile, there is nothing in this budget that specifically aims for job growth. As the Australian economy enters an uncertain period, with resource investment falling and mining operations moving into production phase, the new budget gives no indication as to where the government sees economic growth and, with it, jobs coming from.

Family tax benefits are also set to shrink. At a time when families' medical costs are set to rise, fuel costs will rise, the GST may be expanded (making our tax system more regressive), the family tax benefit is any easy way to ensure that lower-income families are not disdvataged. And, despite the accepted myths about Australia's middle-class welfare, these cuts will do little to boost the budget numbers. As Matt Cowgill continually points out, Australia's spending on middle class welfare is actually quite low by international standards. Reducing the FBT-B threshold from $150,000 to $100,00 (for the primary income earner) saves under $400 million a year.

Education

Prior to the election, the government committed to matching Labor's schools funding over the forward estimate years of Labor's last budget, and appears to be honouring that pledge. However, from 2018, the government will tie school funding increases to the consumer price index, freezing school funding at the 2017 level in real terms.

Labor had committed to the biggest increases to school funding in the last two years of the six-year phase in period. This will dramatically undermine the effectiveness of the Gonski reforms. This could well be the end of need-based funding for schools.

Telecommunications

Tony Abbott made numerous pledges, prior to the election, not to cut funding to the ABC or SBS. The ABC is to lose $120 million and SBS $8 million. This will see the closure of the Australia Network and job losses at the national broadcaster.

Whether these cuts are designed to help the budget bottom line or emasculate Malcolm Turnbull is unclear at this stage.

Arts

In addition to cutting money from the public broadcasters, the government will cut $38 million from Screen Australia, which will hit the production of local content.

In all, cuts to the arts total around $87 million (mostly to the Australia Council) over the forward estimates. As a point comparison, the government has budgeted around $90 million to coordinate search efforts for a missing Malaysia Airlines aeroplane.

Arts is a soft target for government cuts, but when there is no discernable benefit to the budget bottom line, it begs the question why the cuts need to occur. If the dollars aren't shoring up the budget, then what are they being spent on? When Australians read about a government purchasing expensive war planes and bailing out chocolate factories, resentment towards cuts like these will erode the government's diminishing political capital.

Transport and infrastructure

The Shadow Treasurer Anthony Albanese took to a whiteboard to explain the government's "infrastructure" con to staff of the Guardian. What more is there to say?

A recent analysis by the Grattan institute casts doubts on whether this "infrastrcuture gap" that Abbott has been talking about wanting to fix even exists. The report notes that states and territories have spent more on infrastructure in each of the past five years than in any comparable year since the Australian Bureau of Statistics first measured infrastructure spending in the 1980s, and that this is one of the main causes of declining finances for state and territories governments - taking $109 billion from their budgets since 2006.

The fuel excise is set to rise. As the budget papers note,

Reintroducing the indexation of fuel excise rates. From 1 August 2014, fuel excise and fuel excise-equivalent customs duty will be indexed biannually in line with the consumer price index. This is expected to increase receipts by $4.2 billion over the forward estimates period, however taking into account the corresponding payments increases, such as to fuel tax credits, the net increase in the underlying cash balance is $2.3 billion.

The fuel excise has been frozen for too long and for no good reason. However, for all its howls in opposition against any kind of new or increased tax (or levy or duty or so on), the government has set itself up to have this labelled as a great big new tax on everything. It's a shame that the government didn't try to sell this as an environment measure. Yes, it will return around $2.3 billion to the budget, but by focusing on the cost saving alone, the government looks like they're just taking money out of people's pockets to pay for fighter jets.

Foreign Aid

Foreign aid has been an easy target for government's looking to rein in spending, including the previous Labor government. It is a cynical, short-term way to plug a hole, but leaves the world poorer.

As noted in the budget papers, changes to the way that foreign aid is indexed will see it cut by $7.9 billion over the next five years:

[Savings will be achieved by] maintaining official development assistance (ODA) at its nominal 2013-14 level of $5 billion in both 2014-15 and 2015-16 and growing it in line with the consumer price index from 2016-17. This measure is expected to decrease cash payments by $559 million in 2014-15 ($7.9 billion over the five years to 2017-18, which includes $2.0 billion in 2017-18 from extinguishing a provision for new ODA spending).

This takes Australia further away from its previous commitments toward the Millenium Development Goals.

These are the actions of an introspective, selfish nation - if we allow it to occur. We once considered ourselves "the lucky country", and we still very much are; benefiting greatly from our geographical position and abundance of natural resources. Yet we cry poor, complain about our position, and to hell with anyone else.

If you have any doubts about the purpose and benefits of foreign aid, consider reading the Bill and Melinda Gates Foundation 2014 Annual Letter, which dispels three big myths about foreign aid, these being: "poor countries are doomed to stay poor", "foreign aid is a big waste", and "saving lives leads to overpopulation".