Understanding the Federal Budget

My own first budget as a CEO meant a lot of learning for me. As budgets went, it wasn’t all that much — a hundred million or so — but I was responsible for it, so I needed to understand it, and the way it was set out. Where did all the money come from — and where did it all go? And why? Plainly it was intimately related to last year’s budget, when I hadn’t been at the University. What about the year before that? When I thought I understood it all I decided to write about it for the benefit of staff. After all, if I couldn’t understood it, how could they? Now that I could, I was sure they would be glad to know.

So I wrote what I hoped was a clear and accessible account of what we had done, and why it was that way. I learned that most staff had just glanced at the title and gone to other things. No one wanted to know about the budget. It was dull and boring, despite my encouraging prose, and they couldn’t do anything about it anyway. I guess most citizens feel the same way about the Federal Budget. I would also be pretty sure that there are very few within the Government who really understand it in its entirety. As with any other organisation’s budget, this one is intimately related to last year’s, and to next year’s. Those who care about budgets are usually looking to see how their group/interest/project fared: did we get anything? Or, there’s not enough! Or, thank goodness, we didn’t get cut. I can remember that kind of excitement at different times when my area was a small part of the Commonwealth Government.

In the case of this year’s Federal Budget, brought down just before an election, we should look for  goodies for target groups, and expect also that there won’t be any really unpleasant taxes. I came across a splendidly sane summary of the Budget the other day, and you can read it here. I’ll comment on just a few of the insights I found. To start with, and as one must have expected, there’s no real attempt to cut back on the deficit. Revenue has been rising over the past several years, but the deficit just keeps growing. The graph shows it all quite clearly. If we’d been able to peg expenditure at 2012/13 levels, revenue would have covered it four years later. But plainly we didn’t. Maybe next year someone will do something.

budget-2016-17

Why not? Well, governments develop programs, and their future costs are put into forward estimates. We citizens have a quite sensible belief that the programs that affect us are going to be there for the future, and we build our own family budget decisions on them. We decide whether or not to renovate a house, or move to another job, or take out more or different health insurance, or even spend less on some things rather than others, in part because of what our governments tell us they are going to do. So government programs are hard to change, and almost impossible to end. That is why there is, and should be, such a lot of debate about them before they begin.

Back to the graph. The Government expects its revenue to increase by six per cent, and it expects its spending to increase by about four per cent. Look there, its supporters might say, doesn’t that show we’re making savings? Well, you might reply, how certain are you about the six per cent growth?  The 4 per cent expenditure increase we can believe in, but the other…? Those revenue forecasts have been pretty dodgy over the past decade. This one is based on the assumption that GDP will grow by 3.25 per cent, and that is based in part on assumptions about the price of oil and the relative value of the $A. We’ll see.

That’s about all you are likely to find out about revenue, save that smokers are to be hit, as are people packing away money for their retirement. It seems that the Government possesses a forlorn hope of getting multinationals to pay tax if they earn money here. Everything else in the Budget is about spending. Which area is the great winner? Transport infrastructure, about which no one in Sydney or Melbourne is likely to complain — at least, not very loudly.

Another big winner is debt interest, which will pass $15 billion for the year, an increase of 8.2 per cent. In the last ten years, including 2016/17, debt interest or, if you like, accumulated government deficits, have passed $106 billion, which makes it the largest expenditure endeavour in our history. It is not quite clear what Australia got for all that debt, but its four principal elements are plain: the ‘stimulus’ provided by the Rudd Government between 2008-2010, the NBN, another Rudd initiative, the Gonski education ‘revolution’, and the NDIS, a Gillard initiative. Julia Gillard managed to place the then Opposition in a position where its leaders felt they had to accept both Gonski and NDIS. They are now paying for it. Labor didn’t have the money to pay for all these schemes, and nor does the Coalition.

Those on the sympathetic, humane side of our politics, those who worry about the poor, the disadvantaged and the needy, often see Defence appropriations as the source for the extra money they see as necessary. Surely those planes or submarines could be postponed for a few years. But a look at the Budget totals makes you shake your head. Yes, Defence is a whacking great $27 billion, and no doubt there is money there that could be found without imperilling anyone’s security. In comparison, the combined projected expenditure for Help for the aged and Help for the disabled is a measly $97 billion. In fact, just the money to be paid to families with children is much more than Defence — $38 billion. Health is $71 billion. Social services and welfare make up $159 billion of the Government’s total expenditure of $431 billion. Education makes up another $34 billion. Put them all together — social services and welfare, health and education — that’s 61 per cent of the entire Commonwealth Budget. Let’s face it, if savings have to be made, this is the area where they have to come from. We are a social-welfare democracy. I’m not opposed to that at all, but it seems nutty to me that cuts cannot be made in the nearly two-thirds of the Budget that are devoted to transfer payments from one group of Australians to others.

Sometime soon, someone will have to bite the bullet, and say ‘No more!’ There’s no sign that a windfall is going to come out of the sky, or that the great innovation boom we see on Government television ads is going to find all the money needed, or that Australia will win the $100 billion Global Powerball Jackpot, any time soon. No. Ending the deficit has to come from cutting services and transfers. So if the Turnbull Government is re-elected, which is my gut feeling at the moment about the outcome of the election, then we should prepare ourselves for a tough budget in 2017. If it doesn’t happen then, we are really in trouble.

 

Join the discussion 33 Comments

  • whyisitso says:

    You think Turncoat is likely to win the election. I think he has a snowflakes…

  • Bryan Roberts says:

    I think a likely outcome is a hung Parliament, with a lot more independents in the Senate.

    • JMO says:

      I just hope there are enough people who are willing to hold their nose and still vote for Turnbull, as I think I will as I can I hold my nose tight enough (we will see in 8 weeks.).

      Yes he has not turned out to be the white knight after all, in some ways he is a greater embarrassment than Abbott. But at least he understand money far better than Shorten. Turnbull made his money by working for it, Shorten made his money by marrying it, twice!

      • Bryan Roberts says:

        According to Paddy manning’s biography of him, the 27-year-old Turnbull was the sole beneficiary of a multi-million dollar estate and inherited well north of $2 million.

        • JMO says:

          Hi Brian
          But that is only $2 million, for Turnbull that is a little bit more than petty cash. He is far wealthier than that, he worked for the rest before entering politics.
          Having said all that he is a dud PM, and I think he will lose. As a politician he is no match for Shorten. I despair of his awkwardness (not as bad as Abbott), bumbling, clumsiness and dithering.
          Unfortunately we will then have a shamelessly and sweepingly dishonest PM who is breathtakingly unhinged from fiscal and economic reality.

  • Don Aitkin says:

    Well, it’s my gut feeling at the moment, because I think that Turnbull will do better as PM at the hustings than Shorten will. I could well be wrong.

  • Doug Hurst says:

    I don’t know who will win the election, but I hope the government does and brings down a hard 2017 budget, no matter how many ‘promises’ they break. Too many Australians are wedded to government handouts. As Don points out, most of our expenditure is in handouts, so that’s where most savings will come from.

    I worked in Defence budgets years back, but suspect some things haven’t changed. Most of the money was spoken for – wages, running expenses, new kit etc , and we had very little discretionary spending in Year 1. Big savings could only be made by reducing people numbers, activities and new equipment buys, and these things go up and down – always in the future – all the time.

    I believe the Federal Budget is mostly a bigger, broader version of this. Most of the money is already committed, they have few short-term options and longer-term can only make big savings from big programs.

  • gnome says:

    I never comment on budget numbers in dispute because I don’t know enough about them, and it seems that the figures reverse themselves in discussion when the government changes. Government supporters attribute bad figures to previous governments and vice versa, and no simple individual can ever work out if a bad figure is really bad or not anyway. I’m also one of those old-fashioned types who can’t quite think in billions yet.

    Having said all that, can you account for us, why accumulated budget deficits of $106 billion should attract annual interest payments of $15 billion? Surely our government isn’t paying about 15% interest?

  • Peter B says:

    Basically the Libs are on a hiding to nothing. If they even hint at a cut somewhere, the rent-seekers will be out in force, ably assisted by their media friends. And this remains the problem, because unless the media are prepared to report the facts [reporting anything of substance would be helpful], and explain the dilemma we are facing, the polls as they currently stand will be reflected in voting intentions for decades to come. In this, the Labor Party has been cunning, although disingenuous, because of the number of people who benefit from government handouts in some form. If that figure stays at 50% [which it apparently is], then any scare campaign by Labor will ensure them a handy support base and make it that much harder to change the voter’s minds. So regardless of how much the government of the day needs to bite the bullet and get back to economic reality, convincing those recipients of handouts to read the details and not just the headlines, will be a very hard sell [as you apparently discovered, Don]. However, I would hope that sanity will prevail and we can receive a government that is able to have legislation passed to achieve a level of economic stability and, of course, further prosperity. Surely that is not too much to hope for.

    • BB says:

      Perhaps it is Peter B, a few days ago Terry McCrann came out with the statement he expected the government to lose. Even if it wins Jo Nova is saying the coalition will introduce a new climate tax http://joannenova.com.au/2016/05/report-suggesting-new-carbon-tax-for-australia-hidden-til-after-election/. I will vote for the coalition but I sure as hell wish there was an alternative. What I’m reading is that the likelihood is that we have a one term government. Even if it squeaks in more than likely they still will not have control of the Senate and the whole double dissolution will be have been in vain. “Were all doomed I tell you doomed”

  • PeterE says:

    As Markus pointed out, this year’s is ‘another horrible budget.’ I can’t see that a Labor Government would do the right thing but the recent budget does not give confidence in the incumbents doing much better. As you say, Don, cuts must come from social services and welfare, health and education. The voices calling for this are too few and feeble. Who will bite the bullet? Peter Costello had the persuasive power. Keating’s ‘banana republic’ speech also was effective. Was it Andrew Bolt who recently pointed out that ‘the problem is us’?
    On the election, 21 seats is a big ask but the swing is doable. I would rather we were facing this election with Abbott despite all his hesitancies of expression. His heart is in the right place. If Jo Nova is correct about Turnbull, we are in trouble.
    In past years I did put a bit of time in on studying Federal budgets and there is much to be learned from doing so.

  • beththeserf says:

    Scylla’ n Charybdis but Shorten’s Charybdis is worse.
    Thx Don for a measured response regarding fiscal responsibility.

    Feelings about the Federal Budget? Speaking for myself as a serf,
    a sense of pervasive- helplessness. Expectations re fuchur guvuhmint
    revenue? Assumption-based like you say … and we’re not that good
    at predicting. (Philip Tetlock.) A tight hand on spending? Hmmm,
    politicians aren’t that good at biting the bullet of fiscal responsibility
    as a rule…. Superannuation, that’s a tempting target and done
    expediently, a vote winner. Shades of Schumpeter, the modern
    State’s power to tax and borrow invites political irresponsibility,
    gaining votes by expeditiously shifting income from producer to
    non-producer… works for now.

  • chrisl says:

    Social welfare and entitlements will be the death of the western way of life.Once given,they can never be taken away. Not even a little. Traveling through southern France,l have never seen so many deserted factories, closed shops and beggars. A taste of things to come…

    • Bryan Roberts says:

      Yes, what politician in his or her right mind would dare to tell people who produce children that they, not the State, might have an obligation to pay for their upbringing.

    • Ross says:

      All attributed to Social Welfare? You do understand that capitalism is all about winners and losers, chrisl?

      • chrisl says:

        It is a long time since we have had capitalism in France Ross. It’s a crumbling unsustainable welfare state. Eking out a living by begrudgingly serving tourists.

  • Peter Kemmis says:

    What is needed in Australian politics are at least one or two articulate voices, that spend quite some months with an information campaign, to educate the electorate generally about government receipts and expenditure. Rather than expressing both in billions of dollars, why not explain it as proportions of figures that relate to the ordinary hip pocket.

    For example, for every $100 of government income, $x comes from income tax, $y from other taxes (incl GST), and $z from company taxes. So, Mr Taxpayer, you may think most about that $x you see in your pay sheet as the tax you pay, but you pay more than that indirectly.

    But let’s imagine that either directly or indirectly, you are paying that $100 to the government as tax. How is it being spent? Then we have the breakdown in simple dollars, each major item as a proportion of that $100. Importantly, the imbalance is shown as that increasing level of debt.

    Now the question: do you agree with those expenditures, and support that growing debt ? If not, which figures would you change, and by how much? Sure, it’s hypothetical, but it is one way to get some people to start to think about what a budget means, and the hard choices that are required.

    • Don Aitkin says:

      Peter K,

      Our last tax statements from the ATO came with an account of how much tax we had paid, and where it had all gone to, so you could see how much of what had you paid over had gone to which item of public expenditure. It didn’t ask which figures we would change, though! Most of us, I think, would agree to pay more for particular items of public expenditure, and even more of us would argue that nothing at all should be paid to X or Y. But that is why we have governments…

      • BB says:

        Don I am curious about the tax statement from the ATO. Did it deal solely with income tax or did it show all taxes. I find a lot of people just don’t seem to get it when you start talking about tax. I have read that we in Australia are very highly taxed but if I tried to explain that to most they would deny it. There are many of these but let me talk about fuel. I run a diesel car these days I am paying about $1.20 per litre $.395 is excise, $.109 is GST and I will have to of paid about 30% in income tax for the money in the first place. So that means to buy that one litre of fuel I will have given the government $.86. The fuel company is getting about $.695 from it. All those service stations you see should have signs out front saying agent of the Australian tax office because they are far and away the ones that most benefit from your transaction.

        • Don Aitkin says:

          I’m away from base at the moment, but I’ll see if I’ve kept the statement when I get back. People talk about tax as though income tax is everything.But it’s not. There is GST, excise, company tax, duties, and the like. Relative to other OECD countries we are low-taxed, but we have high income taxes.

          • Don Aitkin says:

            Yes, I kept it. It is headed TAX RECEIPT, and goes on Dear [me], The Australian Government thanks you for your contribution for 2014-15. This statement details Australian Government debt levels and where your personal tax was spent, based on 2015-16 Budget estimates.

            [Then this sub-heading:]

            Level of Australian Government gross debt This year $370 billion. Last year $319 billion Interest payments on gross debt this year: $13.5 billion.

            Then follows an account of where my $37,586 assessed tax went: Welfare $14,647 and so on… I thought of writing a piece about it then, but at least it has made a comment!

        • Don Aitkin says:

          It all depends on what we are comparing. In terms of total tax take we are low compared with most of Europe. In terms of income tax and social service contributions we are also low. See the OECD analyses at http://stats.oecd.org/index.aspx?DataSetCode=TABLE_I5
          and elsewhere.

        • Don Aitkin says:

          I forgot to mention whether the statement was about all tax. It doesn’t say income tax anywhere, but that is what is involved. No one but the individual could determine how much he or she had paid in GST or excise unless they went about it in a wholeheartedly systematic way. You can get the average in a roughly by dividing all GST revenue by an estimate of the real GST-payers (discounting kids buying comic books etc).

          • Don Aitkin says:

            If I can fit this table in it will help: from 2009-10 to 2014-15 (going down) figures in billions.

            COMMONWEALTH GOVERNMENT
            Taxes on income
            186 660
            204 546
            230 871
            241 728
            248 448
            258 605
            Employers’ payroll taxes
            507
            505
            528
            646
            844
            735
            Taxes on property
            12
            13
            13
            13
            15
            15
            Taxes on provision of goods and services
            78 865
            81 788
            83 377
            85 999
            92 470
            93 120
            Taxes on use of goods and performance of activities
            2 527
            3 196
            3 781
            11 064
            11 339
            4 932
            Total taxation revenue
            268 570
            290 047
            318 570
            339 450
            353 116
            357 406

            Very roughly, if I use the ratio of GST to income tax and apply it to me, I would have passed over another $13,500 in GST as well, plus more in excise on petrol etc.

  • Bryan Roberts says:

    “Most of us, I think, would agree to pay more for particular items of public expenditure”

    This is an assertion for which you have no evidence whatsoever, and which I seriously doubt.

    • gnome says:

      I think the statement as it stands is correct. I often her people say the government could do more on… and more for… I even hear people say that they wouldn’t object to taxes being increased.

      But- and it’s a big but- those same people sometimes tell me how they go about reducing their own tax liability, and look at the furore over any hint of raising the GST, which everyone pays. There’s something elegantly appropriate about the people who pay the least tax being most in favour of taxes being increased. It would be nice, but too much to hope for if they thought they, personally, should pay more tax. The welfare lobby is always willing to propose tax increases (just not GST).

      Do we have a revenue problem or a spending problem? I rather think the answer depends on whether the respondent pays any net tax or not.

    • Don Aitkin says:

      Well Bryan,

      I said ‘I think’ and referred to ‘most’. As you suggest, I could be wrong, and I might be. Let’s agree that you don’t think so, and you could be right. But I’ve heard quite a few people say something like that over the years. They might have really meant it, of course.

  • chrisl says:

    BB For your information . Income tax in France is 53% from first dollar earned So it is Wednesday at 1 pm before you are working for yourself Then there is Gst of 20%
    The rich are leaving in their droves across the border to Italy Spain or Belgium because they pay 75%!

  • bryan roberts says:

    Don, I think it is generally accepted that about half of Australian ‘earners’ receive as much in benefits as they pay in tax, so I am sceptical that they will be at the forefront of those volunteering to increase their tax burden to receive additional benefits.
    ‘Some’, perhaps; ‘most’ no.

  • Michael Dunn says:

    Don

    Your comments about the need to tackle welfare spending are relevant to the current Budget’s proposed changes to super.

    After some reflection, may I suggest those changes could in fact be reasonable ? Government age pensions account for a major and likely growing chunk of Commonwealth spending. If we want to keep public spending under control, super offers an incentive for people to shoulder part of their retirement burden themselves.

    The full age pension for a couple is worth about $800,000 in today’s dollars. Once a couple have saved enough in super to pay for their age pension, why should taxpayers give them a tax incentive to put aside even more? In that light, an amount of $1.6 million in tax-exempt retirement funds seems rather generous.

    On top of that, people can keep even more money in an accumulation fund, taxed very lightly, especially when franking credits can offset the tax due.

    Super remains a tax-effective way to save for retirement and contributes to reducing the future burden on taxpayers for welfare payments. Still, more needs to be done to integrate superannuation withdrawals with the age pension.

    • Don Aitkin says:

      Michael,

      You’ve touched on an awkward area. If there is a standard OAP then a lot of people will just look forward to it, and not save. If you don’t have an OAP then there will be a lot of misery among the old. The OAP was introduced to obviate that misery. If the OPA becomes too large an item in government expenditure, the response is to encourage people to save and accumulate so that they don’t need one. $800,000 in invested funds will give a couple $40,000 pa at 5 per cent, which is not a lot. Also, once you encourage people to save this way, people who would never need an OAP will do so too to accumulate even more at low-taxed levels. One argument says that’s a good thing, because it provides more for investment. The counter argument says that the latter group should be paying more taxation. The same problem arises with negative gearing. It does provide more housing, and we need it, but it also encourages people to accumulate rather than paying tax. Who’d be in government!

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