Brace yourself: Coalition’s first Budget to be toughest in nearly two decades

OPINION: The Abbott government’s moment of budget truth has arrived and they are not after your love, so hold on to your hip pockets.

Budget is in their hands ... Prime Minister Tony Abbott with Treasurer Joe Hockey during Question Time in the House of Representatives in Parliament House Canberra.

THE Abbott government’s moment of budget truth has arrived.

Next Tuesday evening, Treasurer Joe Hockey, will stand at the dispatch box in the lower chamber of parliament in Canberra and attempt to convince voters why they should receive less benefits and pay higher taxes.

But it’s not love this government is after. As Prime Minister Tony Abbott told a Sydney Institute dinner two weeks ago: “I don’t expect politicians to be more popular the day after the Budget but I hope that we might have earned a little more respect.”

So hold on to your hip-pockets.

According to economists, this will be the toughest budget Australians have seen since the Howard government’s first budget in 1996, and, before that, the Hawke government’s post 1980s recession tightening.

Howard’s budget was so tough it prompted the Reserve Bank to slash interest rates by two percentage points. The Aussie dollar fell US19 cents over the following two years.

Voters have good reason to be concerned, warns Saul Eslake, the chief Australian economist at Bank of America Merrill Lynch.

“There seems little doubt that next Tuesday’s federal budget will be the most contractionary since the first budget of the Howard Government in 1996,” Eslake says.

But economists are divided on whether it will be “too tough’ — denting a fragile economy — or not tough enough to fix Australia’s long term budget crisis.

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According to Westpac chief economist, Bill Evans, Howard’s 1996 budget delivered savings worth about 3 per cent of GDP over three years — or about $54 billion in today’s dollars.

By contrast, Evans only expects “quite modest” savings in this budget of about $17 billion over three years — a third of Howard’s budget medicine.

“Sentiment could clearly stage a ‘relief rally’ if the budget is not as bad as feared,” Evans says.

Others are less sanguine.

Tough love ... the Prime Minister Tony Abbott with the Treasurer Joe Hockey in the Prime Minister’s office chatting about the upcoming Budget for 2014. Picture: Gary Ramage

UBS chief economist Scott Haslem has done the political calculus, and expects tough love now to fund future vote-buying tax cuts: “With the Coalition flagging its desire to cut taxes in the future, doing some ‘heavy lifting’ on the budget now, and announcing tax cuts into the 2016 election, if achievable, would appear the more politically astute path to take.”

But the fuore over the government’s proposed deb levy — and its moves to water it down in the face of a voter backlash — has some economists questioning the Coalition’s mettle.

“We are not particularly confident about how quickly the government will return to surplus given that it has been significantly modifying policies at the last moment,” Barclays economist, Kieran Davies, wrote in a note to clients this week.

HSBC’s chief economist Paul Bloxham has similarly reassuring words for Australians concerned about feeling Hockey’s budget lash: “We do not expect aggressive fiscal austerity measures in the short run,” he said. Nor would this be necessary, argues Bloxham, pointing to Australia having the third lowest level of government spending as a share of the economy across developed nations.

But as Hockey has been at pains to point out — Australia’s budget is heading in the wrong direction.

Big spending programs like disability care and education reforms have set Australia on a collision course to have the fastest growth in spending of 17 developed nations.

While our problem over the half decade has been softer tax revenue coming out of the GFC, the problem ahead is on the spending side, according to ANZ’s chief economist Warren Hogan.

“The real budget problem is medium to long term in nature,” says Warren, “as expensive new spending programs and an ageing population work against the budget position from 2017-18 onwards.”

While he also expects a “much milder” budget than Howard’s first, Hogan is also urging the government to cut deep. “The first budget of a new government is its best opportunity to implement politically difficult adjustments.”

Already, voters can expect some pain.

Hockey has confirmed that from 2035, workers will have to work until they are 70 to access the age pension.

Family benefits are also within his sites, with families on more than $100,000 to see their benefits wound back.

Going to the doctor is about to get more expensive, with a new GP co-payment of $7.50 widely expected.

High income earners will be slugged a debt levy of about 2 per cent on every dollar they earn over about $180,000.

The only question remains: what more?

Governments traditionally leak bad budget news ahead of time to allow the good news to shine on budget night.

But with a budget deep in red, there is likely to be little such relief.

The only silver lining for homeowners is that a tough love budget will likely see the Reserve Bank keep interest rates on hold at record lows for longer than otherwise. Any interest rate hikes seem further away.

Amid signs of a stronger economy and jobs growth, economist have given Hockey the green light to cut hard.

Says Hogan: “We are precisely at the right time of the economic cycle for a modest fiscal consolidation. Indeed, improving government finances may even support business and consumer confidence and encourage private investment.”

There is political pain for the government either way.

Cut too hard or break faith on its promise not to lift taxes, and the Coalition could wear the pain all the way to the 2016 election.

But don’t cut hard enough, and the kitty will be bare when it comes time to lure voters in 2016 with promises of tax cuts.

Worse still, according to Hogan: “If the government does not tighten fiscal policy enough, it will damage its own credibility as an economic manager and leave the budget open to deterioration over the long term.”

Budget is in their hands ... Prime Minister Tony Abbott with Treasurer Joe Hockey during Question Time in the House of Representatives in Parliament House Canberra.

Australia’s long awaited day of budget reckoning has arrived, according to Deloitte Access Economics director Chris Richardson.

Australians are about to awake from its fantasy that expensive new reforms, like disability care and education reform, can be funded from nothing.

“It was group denial at its most astounding,” says Richardson of the 2013 election promises of both sides of politics.

Yes, a debt tax is second-best policy, says Richardson, but at least it shows the government is serious. “The government will have hated having a deficit levy, which says to us they are serious about budget repair.”

Australia’s simmering budget crisis — a decade in the making — is about to come to its painful, but inevitable, conclusion. “The nation’s politicians — both sides — took the temporary boom of the past decade and spent it all on an orgy of permanent promises such as family benefits and tax cuts.”

But the party’s over, says Richardson.

It’s time to give it all back.

Starting next Tuesday.

Originally published as Brace yourself: Coalition’s first Budget to be toughest in nearly two decades