In its second budget, the Abbott government has abandoned any serious effort to return to surplus in favour of supporting a flagging economy with big-spending programs aimed at families and small business, and they’ve thrown in some traditional national security hysteria for good measure.

With an economy now forecast to be weaker than was forecast last year, deteriorating terms of trade and persistently high unemployment in 2015-16, the government will pump a larger-than-expected $35 billion into the economy via the deficit, only slightly down on this year’s $41 billion. As Joe Hockey said weeks ago, it’s therefore “mildly contractionary”, but a little less contractionary than the 2014-15 budget planned.

Government spending will remain at or above the levels of the Labor years (and for the same reason, to stimulate the economy), while the government is forecasting a steady rise in tax receipts to over 23% of GDP — an outcome that looks wholly implausible given recent years’ outcomes and the government’s reluctance to adopt sensible tax measures like curbing super tax concessions.

But even in 2016-17, when the government forecasts a return to trend growth of 3.25% and an end to plummeting terms of trade, the deficit will still be $26 billion. As Joe Hockey told his colleagues, a return to growth won’t fix the deficit, but at the moment the government isn’t interested in taking other steps to accomplish it. The traditional list of major budget initiatives and savings has a very thin list of savings compared to last year’s schedule of savagery — just $11 billion of rats-and-mice savings measures across forward estimates.

For a government that came into office insisting that it was the fiscal fire brigade ready to bring the debt-and-deficits crisis under control with its mere presence, it’s a humiliating abandonment of fiscal rigour, with even Joe Hockey’s 2014-15 approach of aiming for long-term savings abandoned in favour of pretending that the Coalition taxes less than Labor.

Instead, the budget emphasises an array of initiatives already announced: the multibillion-dollar child care and early-education package announced on Sunday, a $5.5 billion homage to small business (“heart of a strong economy”, etc) involving the expected 1.5% small business tax cut (extended to non-incorporated businesses) and accelerated depreciation deductions up to $20,000. The small business package is intended to boost employment, but despite whatever benefits will flow from greater small business spending, unemployment is forecast to remain at 6.25% through until 2017.

The budget also boasts a $1.2 billion package alternately titled “Keeping Australia Safe” and “Investigating Threats”. The government will spend $750 million fighting Islamic State, and another $450 million on dealing with the increased threat of terrorism caused by fighting Islamic State, including $300 million to help security agencies yet again upgrade their IT systems to better monitor Australians.

It remains unclear exactly what the government intends to do on multinational tax avoidance, although the tone of the budget papers is somewhat more promising than Joe Hockey’s announcement yesterday, which said:

“A new Multinational Anti-Avoidance Law will target multinationals that artificially structure to avoid a taxable presence in Australia. This will mean that tax will now be paid on profits from economic activities undertaken in Australia. Approximately 30 large multinational companies are suspected of diverting profits using artificial structures to avoid a taxable presence in Australia and pay little or no tax worldwide.”

This seems to suggest there will actually be some tightening up of tax laws to compel the payment of taxes on profits earned in Australia, rather than simply greater powers for the ATO to pursue tax evasion under existing law, but much remains to be clarified, including just how serious the government is about taking on Australia’s biggest tax dodgers, which include close government allies like News Corp and the mining industry.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey