Budget Balances

The 2014 budget predicted a deficit of $29.8bn for the 2014-15 financial year. The 2015 budget reveals the deficit will actually be $41.1bn. That makes the budget shortfall a whopping 38 per cent larger than expected only a year ago. And, given we are still a month and a half away from the end of the 2014-15 year, we may yet see some further detorioration.

The government gives two reasons for the blow-out: worsening economic conditions and a hostile Senate. Both of these reasons are valid, however both reflect poorly on the government.

On the first reason, that revenues have been hit by "economic headwinds", we need to start questioning why Treasury, under both Labor and Liberal governments, continues to model its estimates and projections on such laughably optimistic assumptions.

On the second point, that the government is struggling to get its savings measures through the Senate, we need to ask how the government expected to get such unfair and unpopular measures through both houses. Negotiating and compromising with the Senate is reality for most Australian parliaments, and the curent one is no exception. Mr Abbott and Mr Hockey, when in Opposition, certainly didn't give Labor any credit for the difficulties it had with the Senate in the previous parliament. Our bicameral parliament is part of a democratic system, and governments shouldn't blame the democratic process for its inability to pass unpopular budget measures.

Given how poor this, and previous attempts, to estimate the budget bottom line have been, we should be asking serious questions about the Treasurer's expectation of a balance of -$35.1bn in 2015-16 and his supposed "path back to surplus". The core economic forecasts underpinning the forward estimates are hard to believe: GDP growth rising above 3 per cent from 2016-17, the unemployment rate peaking in 2016-17 and then showing a sharp decline, gradually improving wage growth. Despite years of below-expectation performance, the budget tells us to keep our expectations high.

Have a look at some beautiful graphs we put together in November to show how badly progressive budgets have estimated future balances.

To improve a budget's balance, one needs to either increase income or reduce expenses. For the Australian Government, a path back to surplus (expected in 2109-20) requires an increase to its revenue or a reduction in its expenditure, or both. Let's explore how the government expects to achieve this.

Revenue

On the revenue side, the government has some serious problems. As repeated throughout the budget papers, the sharp drop in iron ore prices (to less than half of the price forecast in the 2014 budget) has had a big impact on the government's income, estimated to reduce revenue by $52bn over the next four years.

Another large part of the government's income comes from personal income taxes. Much has been made of the fact that the government expects an increasing collection of taxes throughout a period when wage growth is weak and unemployment is expected to continue trending up. In these conditions, how can income tax collections possibly increase? The short answer is bracket creep. Australia has a progressive tax system, meaning that the more you earn, the higher the proportion of your income you pay in tax, as shown below.

Rates of tax as proportion of income

Source: Australian Tax Office.

Bracket creep occurs because, as wages grow to keep pace with the costs of living, workers are pushed into higher tax brackets and end up paying more tax as a proportion of their income, making them worse off overall. The result of this is more money in Treasury's coffers, but the effect is a tax system that gradually becomes more regressive. If the government wants to raise more money off the back of personal incomes, it should uphold the progressive nature of our system and increase taxes for those who can most afford them, rather than relying on bracket creep.

The Prime Minister, Mr Tony Abbott has recently been accusing Labor of wanting to increase taxes . His, and his Treasurer's, alternative, however, is to passively allow taxes to increase in such la way that pushes the burden further down the income ladder.

Expenditure

As we showed in our previous post, this government is certainly not attempting to return to surplus through a reduction in expenditure, with this year's spend the biggest since Labor's GFC stimulus spending.

The budget papers make it very plain that the government does not intend to return to suprlus on the back of cuts:

This Budget does not seek to offset the deterioration in receipts by dramatically reducing Government spending or hiking taxes.

Despite this assertion, the budget papers also tell us that the decision to shelve the paid parental leave scheme promised at the last election will save the government $1.6bn. While it could be argued that this is not a genuine cut because the scheme never commenced, the budget papers tell us that it was fully funded from 2015-16 and nominates this as a budget saving.

And, indeed, there are a number of other serious cuts in this budget. Foreign aid is one area that has been in the Treasurer's crosshairs in both budgets. The cuts are savage, as Stephen Howes from ANU spells out:

The Coalition came to power promising that aid would increase in line with inflation. Instead, the government is now cutting aid by one-third after inflation. This financial year alone the aid budget will tumble from A$5.0 billion to A$4.0 billion, which is a cut of exactly A$1 billion, the biggest cut to the aid program ever.

Further cuts are promised for 2016-17. When it is all done, our aid-to-GNI ratio, or generosity index, will plummet to 0.22%. That puts us in the bottom half of the league of OECD donors and well below the average.

For a government that has been so intent on refusing asylum seekers entry to our country and turning back asylum seekers to their country of origin, it is not doing very much to improve the situations in the countries that people are fleeing from.

More budget coverage to follow in the coming days.