Budget buzz; pensioners and health targeted; good news for some on costs. By Kirsty Simpson.

Federal budget talk all about when cuts will bite

Fears and expectations have been mounting for months about the shape of the first Coalition budget, and the size of its cuts. 

Treasurer Joe Hockey used a speech on Wednesday night to suggest a return to budget surplus in five years was possible if spending growth were cut to 1.75 per cent – well below the current forecasts.

The budget is expected to focus on spending cuts rather than expanding the tax base. With a little more than two weeks to go, and the government warning of the need to make cuts to rein in deficits, the treasurer has so far only committed to limit growth in spending to the previous government’s goal of less than 2 per cent. 

Here’s what some observers expect and advise:

 “It is important they make a start this year,” says Deutsche Bank economist Adam Boyton. Too many Australian governments announce spending cuts but put off their implementation until the following election, he says. He cites the Howard government’s first budget in 1996 as the last “credible fiscal tightening”. The cuts need to start in the budget year, he says, “and build to their maximum in the following year”.

Economist Chris Richardson, of Deloitte Access Economics, says “the main game will be what the government does around spending”. He is not so hopeful about the outcomes, however.

“My best guess is the government won’t do a lot – people shouldn’t be too scared about big cuts on budget night, simply because the government doesn’t have the mandate. We desperately need budget repair and therefore a conversation around that, however I suspect that the Commission of Audit will start that process and the government won’t finish it,” Richardson says on Deloitte’s website.

The hotly anticipated findings of the Commission of Audit will be released on Thursday. It will contain 86 recommendations, Hockey has said, adding that some would be rejected and others considered later. He stressed that the report would provide a framework rather than a blueprint, and identifies the 15 fastest-growing areas of expense: “predominately across welfare, health, education and defence. To put it simply – our biggest costs are also our fastest growing.”

Hinting at the budget’s priorities, Hockey warned about the “unsustainable” costs of the age pension, aged-care services, and the Pharmaceutical Benefits Scheme among others. However, the treasurer defended the introduction of paid parental leave – which along with childcare is identified as the fastest growing of all expenses in government in the next decade, at an average yearly rate of 11.5 per cent.

Macquarie Bank’s head of economic research, Richard Gibbs, believes changes will be incremental. And while he would rather see immediate action, he believes the government “does not have a 1996-style mandate for change”. 

Any dramatic change in the budget position would require significant reduction in middle-class welfare, which would probably be a bridge too far for the government.

1 . Pensioners and health targeted

The biggest expense in the budget is social security and welfare with about $1 in every $3 spent by the federal government spent here. And more than one-third of these expenses go on the age pension.

This is why recent discussions have focused on lifting the retirement age (again) to 70 and reducing the rate at which the pension rises; changing the rate at which superannuation is taxed; and limiting age and disability pensions.

The Australian Council of Social Service has warned that restoring the budget “must not be done at the expense of people struggling to survive on the lowest incomes … Before increasing the pension age, we need to increase other working age payments to a liveable level and improve the employment prospects of older people.”

The Australia Institute also added to the debate this week with a paper that argued that this 15 per cent flat rate is costing the economy about $35 billion in revenue forgone – approaching the yearly $39 billion cost of the age pension. This rate should be removed and superannuation contributions should be taxed at the same level as the rest of a person’s income.

Another big target for the government as it seeks to bring the budget back to surplus is families with children, and there are expectations the government will rein in Family Tax Benefit Part B, which is paid to single-income families earning up to $175,000.

The second most expensive part of the budget is health. Out of every dollar, 15.7 cents is spent is on health – an estimated $64.7 billion this year.

There has been much discussion of imposing a co-contribution for all GP visits after Health Minister Peter Dutton insisted there was a need to discuss whether it was reasonable for people “on reasonable incomes” to pay nothing when they visit a doctor. Media outlets this week reported the government had decided on a cost of $6 a visit, capped at 12 visits a year.

Macquarie’s Gibbs, who would welcome such a move, also warns it may have unintended consequences unless the states also take similar action in public hospitals. “This is the problem with perverse policy outcomes. Some people will just go to emergency rooms where they get services for free.”

2 . Good news for some on costs 

And in an otherwise quiet public holiday-laden week, Australia’s quarterly inflation figures rose 0.6 percentage points to a yearly rate of 2.9 per cent, doubtless a great relief in Canberra as Treasury puts the finishing touches on the budget. 

The cost of living is not growing at the level feared, after a spike in the previous quarter, and remains (just) within the Reserve Bank’s preferred levels. This reduces the chance of an imminent rate rise.

Amid the detail, smokers were the hardest hit, with the cost of tobacco rising 6.7 per cent in the first three months of 2014 after government excises rose. And a small relief for those tallying up the cost of school holidays: prices for domestic and international holiday travel and accommodation fell by 2.4 per cent.

The lower rate is good news for the federal budget on several fronts – first, many government fees are indexed against inflation, so the lower the CPI figures, the less fees rise. Second, the lower inflation rate prompted a fall in the Australian dollar, which had been rising in part on the back of expectations that interest rates might rise. Now that is less likely, the dollar has eased a little. A lower Australian dollar improves the position of exporters, which in turn means higher corporate tax revenues from sectors such as mining and others that make the bulk of their sales overseas.

This article was first published in the print edition of The Saturday Paper on April 26, 2014 as "Budget talk all about when cuts will bite".

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Kirsty Simpson is The Saturday Paper’s business editor.

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