By business reporter Michael Janda
Tuesday 11 November 2014
Photo: Treasurer Joe Hockey is facing a budget black hole of $51 billion, according to forecasts. (AAP: Lukas Coch)
Treasurer Joe Hockey says the Government will not make further large cuts before Christmas in an attempt to plug a predicted $51 billion budget hole.
A report by a private economics consultancy Macroeconomics finds an estimated $51 billion deterioration in Commonwealth finances over the forward estimates between the budget and MYEFO.
Mr Hockey is due to hand down the Government's Mid-Year Economic and Fiscal Outlook (MYEFO) before Christmas, but has told 5AA radio in Adelaide that there will not be any significant changes that could slow economic growth over the key summer retail and tourism period.
"We are not going to turn our mid-year budget into a mini budget. We are not going to go down the path of trying to make up lost ground immediately," he said.
A combination of a Senate hostile to key savings measures and slumping commodity prices looks set to make Mr Hockey's festive season anything but.
The latest report from independent consultancy Macroeconomics finds savings worth $11 billion annually in four years' time are currently tied up in the Senate and unlikely to pass.
It also estimates the Commonwealth will lose up to $10 billion in 2017-18 from a deterioration in the economic outlook since the budget in May, particularly due to a further steep slide in the iron ore price.
The falling iron ore price has slashed Australia's terms of trade – the prices it gets for its exports versus what it pays for imports – and thus lowered national income, hitting both expected corporate and income tax revenues.
It is a budget problem that Mr Hockey this morning acknowledged.
"The truth is that iron ore prices are between 30-40 per cent less than they were when we first made our forecasts in the budget," he told radio 5AA.
"That has a direct impact on our budget bottom line - there is no doubt about that."
If Macroeconomics' forecasts are on the money, without further spending cuts or tax increases, the Commonwealth budget will be $24 billion in deficit by 2017-18, $21 billion worse than the modest $2.8 billion deficit that was forecast in May's budget.
Unfortunately, Treasurer Hockey has failed to galvanise broad public support for his budget because of the perception or reality that much of what he has planned is just plain unfair
Macroeconomics director of budget and forecasting Stephen Anthony
The worsening conditions and blocked savings will also have smaller, but increasing, effects on the deficits over this financial year and the two following, leading to a cumulative deterioration of $51 billion across the four years of the forward estimates.
Macroeconomics director of budget and forecasting Stephen Anthony observed that the budget did have almost $40 billion in savings over the four-year forward estimates, and would have been on track to return to surplus in 2018-19, if not for measures being blocked by the Senate and commodity prices falling further.
While he said Mr Hockey's first budget was an economically sound and overdue attempt at bringing the budget back towards balance, he added it had failed on the political front.
"Unfortunately, Treasurer Hockey has failed to galvanise broad public support for his budget because of the perception or reality that much of what he has planned is just plain unfair," he noted in the report.
"He has certainly placed much of the fiscal adjustment burden on the poorest members of the Australian and international community (the unemployed, students, low income pensioners and foreign aid recipients) up to 2017-18, whilst failing to rein in tax concessions for high income earners."
Dr Anthony told AM the Treasurer needs big changes to get close to a surplus in the outlook.
"If, for example, the dollar falls faster than we expect and provides a circuit breaker, if he can find a way to cobble together a confidence instilling savings package that does the work for him, he can get his savings through, possibly, by opening up a new front that addresses the fairness issues."
Unpopular measures 'not worth political pain'
Worse still argued Dr Anthony, a former Treasury official, many of the most unpopular measures do not actually contribute a large part of the savings.
"Many of [Mr Hockey's] budget cuts are just not worth the political pain, including the six-month qualifying period for unemployment benefits for persons up to 30 years of age, and the $7 co-payment for GP visits and tests ordered by GPs," he wrote.
"They divert focus from the passage of the few key structural reforms that were announced on budget night that could help to complete the fiscal repair job (age pension indexation, fuel indexation, state health and education grant indexation changes etc.)."
The political furore over many of the changes means that only around half of the savings and revenue measures announced by Mr Hockey on budget night have so far been passed into law, leaving a $20 billion hole in the Government's budget over the next four years.
The Government maintains it can still gets its savings through the Senate, although some ministers have conceded they will have to compromise.
Dr Anthony noted that lowering age pension indexation, tightening family tax benefit part B eligibility, reducing senior health card eligibility and reintroducing fuel excise indexation would cover about half this gap.
The Government has already moved unilaterally to reintroduce fuel excise indexation but will have to refund oil companies the increase if it does not receive Senate approval within a year.
The Macroeconomics report suggests the other half of the gap could easily be covered by removing high income superannuation concessions.
On its modelling, taxing all super contributions at the taxpayer's marginal tax rate would yield $12 billion per annum, some of which could even be returned in low and middle income earner tax cuts.
Alternatively, the report suggests tinkering with a range of other aged benefits – such as removing the senior supplement and including the family home in assets tests – and a range of efficiencies in medical spending, industry assistance and Government procurement and services to bridge the shortfall.
