Current Issue #488

Scouring the Budget for Enlightenment

Scouring the Budget for Enlightenment

On a cold winter’s day in Canberra, Stephen Koukoulas rummaged through the 2017 Federal Budget and discovered some intriguing facts and figures.

Every Federal Budget contains many thousands of numbers, graphs and words about the economy, the finances of the government and the impact of the decisions taken during the budget process.

It is impossible to digest every aspect of this myriad of information but it is fun, and somewhat enlightening, to scour through the budget papers for interesting facts and issues that the budget throws up after it has been delivered.

Some of those issues that captured my attention, as I sat by the fire the weekend after budget day, are outlined below. They help to illustrate how detailed and complex the budget process is and how much work is undertaken to get the budget finished, signed off and delivered on time each year.

Here are some Budget snippets:

Iron Ore

Each US$1 a tonne move in the iron ore price in 2018-19, away from the US$55 a tonne assumed in the budget, impacts government tax receipts by $420 million per annum. If, for example, the iron ore price were to jump US$20 / tonne, to the level it was two months ago, the budget bottom line would improve by $8.4 billion each year.

Foreign Investment

Foreigners hold just 55 per cent of the bonds issued by the government. This is the lowest level since the dip in 2009 at the time of the GFC. Are foreign investors worried about a downgrading of the triple-A rating and selling their bonds ahead of time?

Medicare Levy

In 2020–21, the Medicare levy will raise $23 billion for the government: while $9.4 billion will be allocated to covering the costs associated with disability care, overall health care costs will have risen to $83 billion. Should we prepare for a further hike in the Medicare levy in the years ahead to cover the rising costs of health care?

Tobacco

In 2020-21, the government will collect $15.2 billion from tobacco excise – this is 2.9 per cent of total revenue and is more than 20 times the amount collected from the luxury car tax, more than double the amount of petrol excise and is around $3 billion more than collected from superannuation fund taxes. Of course if smoking rates dropped to zero, the government wouldn’t collect any revenue, which means there is a threat to the budget if smoking rates fall faster than assumed in the budget numbering.

Inflation

Treasury is forecasting the rate of inflation to remain below the mid-point of the Reserve Bank of Australia (RBA) two to three per cent target all the way through to June 2019. This is in line with the inflation forecasts from the RBA but it begs the question why policy settings aren’t more stimulatory to get economic growth, and inflation, higher sooner.

Unemployment

At no stage, out to 2020–21, is the unemployment rate assumed to drop below five per cent. This is a very high unemployment rate on most comparisons to similar industrialised countries where unemployment in the four to five per cent range is common. Some would argue that Australia’s high unemployment rate is a policy failure.

Household Debt and Spending

Household spending growth is forecast to be supported by a sharp fall in household savings. The saving ratio is forecast to drop to around 3.5 per cent of income, a level not seen since 2007. With household debt high and wages growth low, it seems the only way consumers can ramp up their spending is to dig in to their savings. This, clearly, is not sustainable.

Snouts in the Trough?

The abolition of the Life Gold Pass for all former parliamentarians will save the budget $0.0005 billion per annum. It is the sort of policy that get cheers from the mugs who reckon politicians always have their snouts in the trough, but clearly, the Gold Pass was less than small change in terms of its hit to the budget bottom line.

Budget Deficit

In 2017–18, the government will collect $1.187 billion a day, on average, in tax and other revenue: it will spend $1.259 billion a day, on average. There is a deficit of $72 million a day. This simply demonstrates that the economy, and the government sector, is big.

There are many more facts in the budget that are enlightening, So the next rainy day, when there is nothing much on TV, go to budget.gov.au and look through the flood of information that makes up the annual budget.

@TheKouk

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