“This’ll be an easy budget to criticise,” Treasurer Joe Hockey told journalists after the ritual budget morning walk up to the ministerial doors clutching a folder. Labor’s reaction would depend on whether it was thinking about “self-interest or the national interest”, he said.
Points for honesty from the Treasurer, at least, basically saying his budget would be a gift for the opposition. But mere seconds later he had found yet another way of denying there would be any broken promises. “The most significant promise we made was to fix the budget,” he said, which seemed like a complete rewrite of the entire pre-election period. “Was that your core promise?” a journalist yelled in response.
Anyway, in tune with yesterday’s piece about not listening to what is being said by the government and instead focusing on whom the budget will benefit, here are the key questions to keep an eye out for in the budget tonight …
What are the economic forecasts?
Joe Hockey’s Mid Year Economic and Fiscal Outlook predictions — 2.5% growth this financial year and 2.5% growth next — already look shaky, with growth hitting 2.8% at the end of 2013 and unemployment seeming to have peaked. Earlier this month, the Reserve Bank predicted 3% and 2.25%-3.25%, i.e. an average of 2.75% growth. The MYEFO forecasts, and particularly the dramatically lower nominal GDP forecasts, were primarily intended to jack up the deficit levels Hockey claimed to have inherited from Labor. The extent to which Hockey claims to have fixed the “budget crisis” he inherited will heavily depend on GDP, nominal GDP and the resulting tax revenue forecasts.
How much will the budget detract from growth?
The Reserve Bank has repeatedly noted that public demand — spending by governments — is very soft at the moment as the federal and state governments rein in spending. A cut in the overall deficit will represent a further tightening of spending, on top of whatever psychological effect the budget has on consumers — which potentially could be substantial. As Michael Pascoe noted yesterday, AMP’s Shane Oliver has already tipped the budget to reduce growth by 0.3% in 2014-15, with more to come in following years. That’s the austerity effect that we’ve seen constantly in Europe: you accelerate your deficit reduction program, you undermine economic growth. On this basis, perhaps Joe Hockey can have more confidence in his pessimistic forecasts, since his own budget cuts will keep Australia at below trend growth.
Who will contribute the most to ‘fixing the deficit’?
A key political issue for this budget is the impression of fairness. Voters may not like having to help out on the budget, but any impression of unfairness will be more politically toxic than broken promises. Cutting government spending a priori cuts low- and middle-income earners more than high-income earners, because the latter tend not to receive expenditure (as opposed to tax concessions). The “deficit levy”, i.e. temporary income tax rise targeted at high-income earners, is an effort to address impressions of unfairness, but as noted below, superannuation tax concessions would make a substantial real contribution to equity.
The brutal politics of budgets are that those who are least able to fight back tend to be targeted, starting at the very bottom with overseas aid recipients (unless they become asylum seekers, in which case they have a lot more money per capita spent on them), then low-income earners, particularly people without jobs, either because they’re unemployed or because they have a disability. The more onerous requirements already flagged for disability support pension recipients fits this template, but the extent to which the government resists this temptation and directs the pain at the areas that will deliver maximum bang for the buck will be a key test not merely of the budget’s equity but its effectiveness as well.
Has superannuation been touched?
The most sensible and fairest revenue measure for the government to pursue would be to continue the winding back of superannuation tax concessions that Labor began, which can yield billions without removing the incentives for Australians to save more for their retirement. Inexplicably, last November Hockey walked away from a measure that Labor had already announced before the election to tax superannuation earnings over $100,000. Will he have the courage to upset high-income earners and the retail super industry by revisiting that error of judgement?
What about infrastructure and hypothecation?
Infrastructure is at the centre of this budget in terms of both what few positives the government can point to and its broader claim that it is providing some stimulus to the economy. The only net stimulus to the economy will be if the government increases the overall deficit; if it spends more on infrastructure but it is all funded by an increase in fuel excise indexation, there is no stimulus effect unless you’re a Lend Lease or Leighton shareholder. Indeed, its net additional infrastructure spending may be minimal by the time you take out the re-announcements, new projects funded by petrol excise and new projects funded by axed spending elsewhere.
See you on the other side, when all of these, and many more, questions will be answered.