The biggest savings in this year’s budget haven’t come from the sort of swingeing cuts of fiscal infamy but a few high-profile items, some unexpectedly productive nips and tucks and a very clever use of bracket creep to extend the means-testing of Family Tax Benefits.

Altogether, the cuts are twice as much as the Government managed in its first budget, yielding $15b over four years.

The biggest savings come from superannuation, where concessional contribution caps have been lowered, yielding more than $600m a year and quickly rising to over $800m by 2012 — although this is at the lowest end of the scale of possible super savings.

Controversially, the Government is also “temporarily reducing” its co-contribution to the superannuation contributions of low-income earners, which may be a prime target for blockage in the Senate. That will yield around $400m a year until it is restored to current levels in 2013.

The income-based tapering of the private health insurance rebate and the Medicare surcharge actually costs money this year but once fully implemented will provide nearly $700m a year currently going to private health funds and high-income earners.

The Government has also cleverly extended the means-testing of Family Tax Benefits A and B and the Baby Bonus by “pausing the indexation of thresholds”, meaning people around the $150,000 a year mark may find they are carried by pay rises over the eligibility threshold that would normally escalate each year — yielding the best part of $400m a year. The Government has also stopped the pension-linked indexation of Family Tax Benefit A, which will yield a rapidly-escalating return , up to nearly $500m a year by 2012 and getting bigger every year.

Those changes will have minimal political pain — and minimal initial returns — but they’ll compound each year and deliver an ongoing reward for future governments.

There has also been a fair bit of tweaking of income and small business tax arrangements that tax lawyers will be poring over tonight. They’re by no means small — they’ll generate about $2b over four years — again without much pain except from the targeted sectors, likely to be higher income earners.

The Government could pick up similar savings with such tweaks every year, but more substantial reform awaits the Henry Tax Review later in the year.

Peter Fray

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