Treasurer Joe Hockey takes risk and rolls dice on Federal Budget
THE Coalition is walking a political highwire with the toughest budget in decades, writes Jessica Irvine.
NSW
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AN IMPASSIONED Treasurer Joe Hockey thumped his fist on the lectern. “We need to start building things now.’’
“Because if we do not, in two to three years’ time there is going to be a growth gap and unemployment will rise,” he warned while delivering his first post-budget address to the National Press Club in the Great Hall of Parliament House on Wednesday.
Fresh from delivering the toughest budget Australians have witnessed in almost two decades, Hockey pleaded with Australians to wear some budget pain today to fund the necessary infrastructure investments needed for future economic gain
“We are asking Australians to contribute,” he admitted.
But it’s proving a hard political pill to swallow.
Australians want a budget back on course for surplus. But what price are they prepared to pay? Tuesday’s budget revealed $36 billion in proposed savings over four years. Family support will be slashed, petrol excise hiked, GP trips taxed and health and education funding slashed. Election promises are falling like dominoes in the quest for budget balance.
The howls of political pain rang throughout the nation this week. Parents, pensioners, motorists, students and state Treasurers were up in arms.
Hockey’s hard-hearted economic rationalism has collided with people’s day-to-day financial reality with potentially politically disastrous effect for the Abbott government.
How to convince a complacent nation that the budget is broken? That fixing it will require breaking promises and resetting the bone entirely?
“If you do not fix the budget and fix the economy there will be fewer jobs,” Hockey insisted in Wednesday’s address.
Economists agree, giving Hockey’s first budget a big tick, impressed by his plan to return to surplus by decade’s end and have net debt peaking at 14.6 per cent of GDP three years.
If anything, they thought the government could have gone further, describing Tuesday’s cuts as “modest”. “The austerity delivered is relatively modest, as it fails to deliver a budget surplus over the forward estimates period,” observed JP Morgan chief economist, Stephen Walters.
Sharemarket traders largely shrugged off Hockey’s “tough” budget, causing barely a flutter on financial markets. The Australian dollar finished the week much where it started — a bit below US94 cents.
Economists don’t think Hockey’s cuts are big enough to derail economic growth or justify any interest rate cuts by the Reserve Bank. “We don’t see anything here to change our assessment that the pick-up in the non-mining parts of the economy will broaden and deepen, allowing the Reserve to start lifting the cash rate … later this year,” an economist at Commonwealth Bank, Adam Donaldson, predicted.
With all its budget cards on the table, Hockey and Abbott must now negotiate a hostile Senate if any of its painful medicine is to have any effect.
Labor has already flagged its opposition to the fuel excise hike, the limiting of family tax benefit B to families with children under 6, the increase in the age pension to 70 and the proposal to deny the dole to people under 30 for six months after they lose their job.
“How are people under 30 looking for work supposed to survive for six months on nothing?” Opposition leader Bill Shorten asked in his budget reply speech on Thursday, branding it the “single most heartless measure in this brutal Budget”.
Shorten offered no clues on how an alternate government would find the savings needed to fix the budget. But for now, the political focus is firmly on the fairness of the budget measures announced.
“We suspect that the government may find it difficult to persuade the public that the budget is ‘fair’,” the chief Australian economist at Bank of America Merrill Lynch, Saul Eslake, warned this week.
A debt tax on people earning over $180,000 will raise just $3 billion — a fig leaf of fairness when low and middle families will see their family tax benefits slashed by twice as much.
“The fact is that this [debt levy] is a temporary measure … in contrast to the permanent nature of most of the expenditure saving measures,” Eslake observed.
Elsewhere, high income earners have largely escaped the budget scalpel, with their generous tax breaks on superannuation, family trusts and investment properties still in place.
Budget documents reveal the value of those tax concessions on super will drain the budget by $171 billion over four years — dwarfing savings announced in this budget of $36 billion. Because super is only taxed at 15 cents in the dollar, high income earners, who would otherwise pay a much higher tax rate, see the biggest benefit, while low income earners see little or no benefit.
The budget’s increase to fuel excise, too, will hit lower income families hardest because they spend more of their weekly budget on petrol, according to the chief economist at CommSec, Craig James. “The increase can be justified on revenue raising grounds, its ‘green’ credentials in boosting demand for public transport and lifting infrastructure spending. But it is regressive in nature,” Mr James said.
Even the Business Council of Australia’s chief executive, Jennifer Westacott, has questioned the fairness of the budget. “We are very concerned about the risk that savings are falling too heavily on some families and young people to find work,” she said.
After a painful bout of spending cuts, the government will lead a national discussion on tax reform with its tax white paper due later in the year.
A GST increase is now firmly on the table, as state premiers seek to fill the gap left by budget cuts to health and education budgets.
Backed into a corner, Tony Abbott promised before the last election that there would be no increase to the GST, ever. But pre-election commitments are dropping like flies.
Having broken a promise not to increase taxes in this budget, Abbott’s political hopes now rest on securing a ‘grand bargain’ with the states to raise the GST and use some of the revenue raised to fund tax cuts for low and middle income earners to take to the next election.
Despite frenzied talk of a snap double-dissolution election this year if the government cannot get its budget through the parliament, it is still likely Australians will have over two years before they return to the polls.
The Coalition is hoping its short-term political pain will have translated into longer term economic gain by then.
The clock is ticking.
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