All businesses take the time to plan ahead. What goods should I sell and at what prices, how many customers am I likely to get, what are my costs, how many staff do I need… and how will all of this impact my financial position at the end of the year?
Our Australian Government is no different, except that in addition to profitability they also have to balance the needs of the electorate. Often this means providing core services no public company would ever want to be involved in, at (sometimes) loss making prices, providing fair treatment for all Australians, while not losing sight of the strength of the broader economy. It’s a delicate balancing act.
The second Tuesday in May is when the Australian Government announces their roadmap for the year/s ahead through the Budget.
Budget night
Apart from an election, Budget night is the biggest event on the political calendar. This is when the Government outlines how it proposes to spend and raise money over the next four years. Often it frames the debate for the next 12 months, and impacts every Australian, taxpayer or not.
The challenges
People like money being spent on the programs they like, but hate having to part with it through taxes.
Companies think the same way. With an increasingly global economy, levying any extra taxes on companies may actually see them restructure operations so taxes are paid in a more favourable jurisdiction, leaving Australia out of the equation altogether.
This means that Government has to tread carefully.
They have to, or at least should try to match their proposed expenditure with savings in other programs or new taxes. This has become more and more difficult in recent years for a range of reasons, and the Australian Government has been running deficits since 2008, spending more than they earn.
If you ran your business like that for too long, you could expect a knock on the door from your Bank.
Where does the money go and how much did we raise?
Last year’s expenses: 2014-15 Budget Papers
The Government’s largest area of expenditure is welfare; which for this financial year will be around $146 billion or 35% of expenditure. It dwarfs spending on health (15%), public sector wages, education and defence. It is an obvious target for any government looking for savings.
Government expenditure represents around 25.4% of Australia’s economic growth (GDP), but is fast becoming a problem when we only raise revenue of around 23.6% of GDP.
If our store was buying lollies to sell at 25.4c each, and continuing to sell them at 23.6c for 8 years – we’d accumulate a lot of debt.
Welcome to Deficit
The price fall in Australia’s number one export (iron ore) and our number one trade partner’s (China’s) economy weakening, have created sluggish conditions for our economy, putting pressure on revenues (tax). Simultaneously, unemployment has grown, and more broadly an ageing population putting pressure on the pension means more expenditure.
Access Economics has recognised these pressures and compared the Budget to a horror novel. Their recent report highlighted that the effects of the retreat of the Chinese commodity boom have been larger than the savings measures introduced by the Government. This is magnified when looking at the Government’s own estimates Budget time last year. They forecast a 2015 deficit of $29.8b, yet mid-year (December) this was upped significantly to $40.4b, and now $45b.
In light of our trading partners’ fortunes, and the dynamics for commodities not likely to change significantly any time soon, the Government is facing a real challenge to both simultaneously help stimulate the economy (which to date has largely been done via the RBA and the reduction of interest rates) and having to cut government spending. It is an absolute imperative that spending measures provide real benefits to the productivity of the economy this time around, not $1,000 gifts for plasma TVs.
Our triple A rating under threat
The result of continual government deficits is that Australia’s pile of public debt continues to grow. This puts our triple A credit rating under risk because of the increased (but still highly remote) chance that the Government could default on our public debt – think Greece.
Losing our triple A credit rating will increase the cost of borrowing for the Government. These increased interest payments will again put pressure on the Budget, and ultimately on every single one of us.
Rumored changes
We won’t know for certain which measures will be announced and what devil is in the detail until Budget Night.
One savings measure to shave $2.4 billion off spending over the next four years is to tighten the pension eligibility requirements. At the moment, couples can own $1.15 million in assets on top of their family home to qualify for the part pension. That threshold will now be reduced to $823,000 for couples meaning about 91,000 people will no longer qualify for the benefit, while another 235,000 will have their pension reduced.
Other ways include streamlining the childcare benefit and rebate calculations into one payment. Tightening up eligibility criteria, with stay at home mothers having more rigorous work activity tests. Removing “double dipping” of new parents getting paid parental leave from their employer as well as the Government’s scheme.
In terms of revenue raising, some proposals floating around are changes to superannuation tax concessions and the introduction of a bank deposit tax. There is also likely to be some announcements about changes to the way tax is calculated for online purchases (Netflix tax), and possibly multinational corporations.
In amongst all the Budget leaks, it’s been widely flagged that superannuation tax concessions and negative gearing will be left alone.
Given the state of the Australian economy, the Government has had to slip a little “stimulus” into the equation – $1.7b. Not a lot of detail has been announced, but $100m has been earmarked for northern cattle road upgrades. Transport costs can be up to 35% of the price of livestock, and improved infrastructure will make our farmers more competitive, and possibly help lift current exports.
Some “sugar” has been added to the mix, this time directly for rural and remote communities suffering under the crippling weight of drought. $330m has been allocated with $250m in drought specific concessional loans, and grants for infrastructure, feral animal management, and some social security.
The melting pot
This year’s Budget is being framed up as passing the ‘fairness’ test. Without a majority in the Senate, the Government needs to build consensus from Labor, the Greens, or do deals with the variety of independent senators.
Sounds a little messy?
Imagine your corner store negotiating with your customers about what price to charge for the lollies, or perhaps getting a better deal from the suppliers – oh wait… that’s a smart business!
