The recent highlights of the budget included forecasted 2016/17 underlying cash deficit to be of the order of $37.1 billion, while underlying cash deficit is expected to fall to $6 billion in 2019-20. The federal budget indicated that the deficit over the upcoming four years would continue indicating that the Australian economy’s fundamental conditions are likely to remain soft in the near term.
Budget Aggregates (Source: Budget 2016-17 – Budget Paper No. 1 – Statement 3: Fiscal Strategy and Outlook)
As per the latest Federal budget, starting 2017 tax on tobacco is to be raised in order to improve the government’s tax revenue by $4.7 billion for the upcoming four years. Also, the budget seeks for higher scrutiny on multinational corporations profit movements which is thus targeted to raise a further $3 billion spread over the years. A significant change by the budget was increasing tax rate on superannuation for higher income earners. Under this item, people earning higher than $250,000 per year will be taxed 30% for any extra super contributions over $25,000.
Positively, the Federal budget introduced a tax cut through the Ten Year Enterprise Tax Plan. Under this plan, the government has implemented a small income tax cut for middle-income workers and tax cuts to businesses over the upcoming 10 years. Spread over a period of time, this tax cut is for medium-sized businesses with turnover of less than $10 million. Similar to the bunch of tax concessions for smaller businesses in the previous budget, the medium-size businesses will also enjoy the same.
Impact of tax cuts/hikes
Despite high income earners being hit by tighter superannuation tax concessions, an analysis from the Australian National University indicates that the Federal budget impacted the Australian households by an average $345 per year. Post the superannuation charges, the lowest 20% of income earners are likely to face a loss of 1.5% of their disposable income, compared with the top 20% of households whose loss would be a marginal 0.2% of their income. With the increase in tobacco excise, bottom income population lost 0.5% of their disposable income to higher tobacco tax, but for high income earners just 0.1% was lost on this measure. Moving of the 37% tax bracket from $80,000 to $87,000 had the third largest impact, with average gains of $118 for families, which almost entirely benefit the top 40% of income earners.
General government services spending would account for almost a quarter ($450 billion) portion of the GDP in this year’s federal budget spending. The Government has made a very strong point about responsible expenditure and thereby a lot of expenditure items have been removed and included in the estimated expenditure for upcoming years. A major change in the spending structure of the budge is the funds diversion from the Social Services portfolio to save money for the future of the National Disability Insurance Scheme.
Earlier announced university cuts by the Abbott/Hockey partnership are included in the budget as they could not be passed through the Senate earlier. A saving of $2 billion is expected from this in the beginning with a full year $100 million cut in 2017. Furthermore, this will increase to half a billion for the upcoming two years and almost $800 million annually by 2020.
There is no major change in the composition of the federal budget spending in the past few years. The largest spend is towards the revenue assistance paid to states and territories, mainly generated via the GST. The aged pension is the next big spending program followed by Medicare benefits program.
New spending plans
As negotiated in the April 2016 meeting with state and territory leaders, a major portion of the spending is planned for the new contributions to schools and hospitals starting mid-2017. Further, increases to the same will be in 2019. Also, there is a spending plan for the new youth employment package restructuring the Work for the Dole program and including higher youth funding with an internship program. On the other hand, Federal budget has also allocated $500 million for military operations in the Middle East (Operations Okra and Accordion) in 2017.
Under cyber capacity building projects in the Indo-Pacific region, the budget includes spending of $4 million spread over the upcoming four years. Although, this year’s federal budget did not include any allocation for climate change Australia plans to contribute $2.3 million for partnership with Germany’s aid agency GIZ in order to support Pacific island countries in preparing business cases for the Green Climate Fund.
In the latest Federal Budget, Australia highlighted that it is investing heavily in Antarctica on projects that will strengthen the nation’s presence in the region. The oil rich country is expected to become an increasingly important strategic theatre. An estimated $55 million will be spent over 10 years on infrastructure in the region, along with $83.1 million over four years to support Australia’s presence there. Also, a significant $413.1 million is earmarked for investment starting from 2020‑21. Overall, the new funding in the budget, according to the environment department, is $2.17 billion, which includes $200 million over 10 years in new spend, which the government says will provide long-term certainty for the Australian Antarctic programme.
Economy debt position
The Federal budget highlights net debt of the economy is nearing $326 billion, almost 19% of the GDP. The economy does not plan to cut down the debt significantly until its underlying cash balance returns to surplus, with no indication of a surplus occurring in the next four years. In 1995-1996 when debt levels were at similar levels, the economy could repair the problem through economic growth and mining boom. However, currently looking forward, opportunities of strong levels of growth or another mining boom look slightly bleak.
Net Debt Projections (Source: Budget 2016-17 – Budget Paper No. 1 – Statement 3: Fiscal Strategy and Outlook)
As per the latest Federal budget data, the Treasury states that Australia is growing faster than the other developed economies which implies optimism in the economic forecasts. Economists believe that with global economy remaining fragile, an above trend growth is very difficult to achieve. Also, the transition of the Australian economy away from mining is not happening as quickly as the government expected it to be. A growth rate of 2.5% sounds reasonable amid the current conditions wherein the country has high reliance on China’s growth and forecasts. Australia’s merchandise exports (by value) flow to China forms almost one third of its total exports.
With stronger growth forecasts for the next two years in service industries like financial services and tourism, Australia’s employment outlook is optimistic. Until 2018 when Treasury plans to trim employment growth, these positive conditions are likely to prevail.
Lower inflation leads to lower profits to tax and therefore less money for the government coffers. For the economy to remain optimistic, inflation levels are expected to be around 2% to 3%. For the first time since the Global Financial Crisis, inflation levels have been moving slow and not in the comfortable increasing range. The Federal Budget predicts that inflation will get back into that comfortable range with the stimuli that Reserve Bank would reduce interest rates. Economists comment that with the country depicting deflationary levels, Reserve Bank would face difficulties in achieving its inflation targets.
Inflation Trend (Source: Reserve Bank of Australia)
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