Treasurer Joe Hockey’s Budget horror show likely to spawn sequel

OPINION: Like any good horror movie, the really scarey part of Treasurer Joe Hockey’s 2014 Budget comes right at the end, says Jessica Irvine.

First step ... the real effects of the 2014 Budget will be felt in 2017-18.

LIKE any good horror movie, the real bloodshed in this Budget comes right at the end.

To give the plot away: pensioners, motorists, state governments and foreign aid recipients get it in the neck.

Sure, there’s some pretty gruesome scenes in the opening acts of Joe “The Ripper” Hockey’s first Budget.

High-income earners will start paying a debt tax of 2 per cent on everything they earn over $180,000 from 1 July this year.

Families will see their tax benefits frozen for two years and removed if they earn more than $100,000.

From the middle of next year, a trip to the GP will cost $7 more.

But these measured cuts in the first three years of Hockey’s Budget climax into spending cuts of chainsaw massacre proportions in the last year of the budget 2017-18.

Spending cuts... families earning more than $100,000 will have their tax benefits frozen for two years and removed.

Of $36 billion in total savings announced over four years, only $1.7 billion hit in the first year. This rises to $6 billion the year after, then $10.4 billion, then a whopping $17.5 billion in 2017-18.

That’s when the real pain of this Budget kicks in.

There are four things that really help to fix the budget by then: ongoing rises in petrol excise, growing cuts to foreign aid, less generous pension increases and the permanent shredding of the Rudd government’s hospitals and education agreements.

These are serious structural reforms that will help to repair Australia’s broken budget.

The real surprise is how stingy the government has gone on pensioners. More stingy, indeed, than its own Audit Commission. The commission recommended the age pension — the most expensive item in the budget — be increased at the rate of inflation — about 2.5 per cent a year — for a decade, before rising with wages again (about 4 per cent).

Budget pain ... pensioners are among the worst hit.

Instead, Hockey and Abbott have gone one step further, with an open-ended policy to limit pension increases to inflation, not wages. The change will apply to disability pensions too.

This will have serious repercussions for the generosity of Australia’s pension system, but it will produce serious savings for the budget too.

Given the fragile state of the Australian economy — coming off the highs of the biggest mining boom since Gold Rush days — it makes sense that these spending cuts are delayed.

Any weakness will be offset by Reserve Bank keeping interest rates on hold for longer.

And there’s another upside. If you don’t like this Budget, you’ll get a chance to vote out this government before the real cuts kick in.

Rising costs ... motorists have been slugged with rises in petrol excise — and there’ll be more to come.

But to do so would be consign the nation to budget deficits as far as the eye can see.

Without action, Australia’s budget would be in deficit from here until infinity.

Even with all these cuts, the budget will only be back in surplus in 2019-20. That’s two elections away.

Hockey and Abbott could have gone harder. According to Westpac chief economist Bill Evans, the first Howard government Budget delivered net savings over three years worth $54 billion in today’s dollars.

The 2014 Budget delivers savings by comparison of just $36 billion over four years.

But, if implemented, these spending cuts will go a long way to putting the budget back on a believable path back to surplus.

It’s a decent first step on the road to budget repair.

The next step is the government’s tax review, which must find ways to raise taxes more efficiently than simply slugging personal incomes.

As Hockey admitted: there’s more work to do.

“I want to emphasise that the Budget we announce tonight is the first word and not the last word on Budget repair. There is much work that still needs to be done.”

Didn’t enjoy Hockey’s first horror show?

Too bad.

Like any good horror movie, there’s likely to be a sequel.

Originally published as Treasurer Joe Hockey’s Budget horror show likely to spawn sequel