Australia Other


Australian government presents budget, aims sharp fiscal consolidation

On 13 May, Australian Treasurer Joe Hockey presented the 2014/2015 Budget to the House of Representatives. The budget aims at narrowing the fiscal deficit and fostering the transition to a growth model less dependent on natural resources, with a special focus on infrastructure development. The government accounts closed FY 2013/2014, which ended in March 2014, with a shortfall of 2.8% of GDP. The government expects to reduce the deficit to 1.6% of GDP by FY 2014/2015 and to gradually move to a small budget surplus by FY 2017/2018.

To reduce the fiscal deficit, the government introduced a temporary 2.0% levy on high-income earners in order to increase receipts for three years starting in FY 2014/2015. The executive will restore indexation of the fuel excise tax, which will increase petrol prices by one cent per liter per year. In addition, the government proposed re-indexing pensions to CPI instead of to wages starting in September 2017. Moreover, the indexation of many payments and programs will be temporarily paused. This includes several welfare programs for which eligibility conditions will also be tightened. Also of importance are the reduction in public hospital and education funding that states are allowed to spend and the introduction of a co-payment system in the Medicare health service. The government also plans to delay access to unemployment benefits for workers under 30 years of age and to eliminate 16,500 public sector jobs.

Regarding the economic growth model, the government unveiled several measures: It restated the 1.5% corporate tax reduction for around 800,000 companies. An Infrastructure Growth Package worth AUD 11.6 billion (USD 10.8 billion) aimed at fostering infrastructure investment at the state and local level will be executed. In addition, an AUD 20 billion (USD 18.6 billion) Medical Research Future Fund will be progressively created with funds stemming from the cuts in health services expenditures. In accordance with these three main lines of action, the government will also introduce fiscal incentives for small- and medium-sized firms to hire people over 50 years of age, a measure intended to curb the decline in the labor market participation rate.

The House of Representatives, where the ruling Liberal National Coalition holds 60% of the seats, will vote on the budget. It will also have to be approved by the Senate, however, where the Coalition holds fewer than 50% of the seats. Warren Hogan and Cherelle Murphy, economists at ANZ Research, commented that:

[...]Given the strong focus in reigning in welfare, health and education commitments, the real challenge will be the strongly negative political reaction that the Budget is likely to produce, not least from the Labor Party and the Greens.

Most analysts expect that the 2014/2015 Budget will affect the Reserve Bank of Australia's monetary policy stance (see Monetary Policy text). FocusEconomics Consensus Forecast panelists have taken the budget announcement into account and they now expect the fiscal deficit to be at 2.1% of GDP in 2014, which is unchanged over the previous month's estimate. For 2015, the panel expects the deficit to narrow to 1.5% of GDP.


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