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May Budget

  1. pugsley100

    8,364 Posts.
    1
    Laura Tingle and Jacob Greber
    AFR.

    It looks like pre-election tax cuts will be off the menu this year, with more taxpayers exposed to the higher tax brackets, on average paying 20% more over the next decade unless they compensate for bracket creep.
    As the next election approaches it's presumed that Labor will be more amenable to passing cost saving measures in the Senate, especially if they have a chance of winning the 2016 election.

    Quote AFR:

    The Abbott government has abandoned the search for big May budget savings, will not meet its forecast 2018 return to surplus and is privately acknowledging collapsing revenue means it is highly unlikely to offer tax cuts at the next federal election.
    The dramatic dumping of long-standing goals came as a two-day meeting of the federal cabinet heard a gloomy update from Reserve Bank of Australia governor Glenn Stevens and Treasury secretary John Fraser.
    There has been a major shift in economic rhetoric from embattled Prime Minister Tony Abbott and Treasurer Joe Hockey in recent days, to a focus on “growth and jobs”.
    Mr Abbott said on Monday that “because we have done much of the hard work already, we won’t need to protect the Commonwealth budget at the expense of the household budget”.
    On Wednesday he said the government had “bit off more than we could chew” last year.
    Budget fix ‘not this year’


    “We are absolutely committed to ending the intergenerational theft, which is going on with the Commonwealth government, which is spending our children, our grandchildren’s money right now,” he said.
    “But we aren’t going to try to fix the budget this year at the expense of people’s household budgets.”
    The shift coincides with Mr Abbott’s attempts to remake his prime ministership, but it comes as a cut in official interest rates by the Reserve Bank confirmed growing concern about the outlook, with cabinet told the International Monetary Fund will soon further downgrade global growth.
    “How do you have growth with fiscal consolidation?” one source asked.
    Senior sources conceded to The Australian Financial Reviewthat tightening fiscal policy when the central bank was easing monetary policy made little sense. Both the RBA and the government are now focused on doing whatever is possible to bolster confidence.
    In the circumstances, sources said, the appropriate strategy was to allow the ‘‘automatic stabilisers’’ in the budget – the fall in revenue and increased spending on welfare that came with slower growth – to cushion the economy, with the economic boost from a dramatically lower dollar.
    “There will be no big bangs in the budget, other than a focus on jobs, families and small business,” a source said.
    Forecast loss of $500b


    Goldman Sachs Australia chief economist Tim Toohey released a bleak forecast that Australia may lose at least $500 billion in revenue in the next decade as a result of collapsing iron ore and liquified natural gas prices.
    The Coalition’s strategy at the 2013 election was to return to a budget surplus in its first term, paving the way for the ‘‘dividend’’ of tax cuts at a 2016 poll.
    These tax cuts were seen as vital because the impact of bracket creep – voters finding themselves paying higher tax rates as incomes rise – will push average wage earners into the second-highest tax bracket this year.
    The government has long campaigned on lower taxes. It faces the prospect that most wage earners will pay more in marginal tax before the next federal election. Sources say the “aim” will still be to give bracket creep back but say a collapse in commodity prices makes it almost impossible.
    Asked on Tuesday if taxes might go up, Mr Hockey said “we are not looking to increase taxes – tax rates – we are not looking [to] increase tax rates, but obviously if we can grow the economy we will get a bit more revenue”.
    The government hoped its asset recycling scheme – where it would support state government privatisation programs to fund infrastructure projects – would help fill an economic gap left be the resources boom end.
    Plan stymied


    But changing stage governments have robbed this plan of momentum.
    Sources said the government now had “to be smarter” about boosting growth through the private sector. The government will still pursue 2014 budget measures in the Senate, hopeful that self-interest on the part of the Labor Party – which will also face a bleak budget if it wins in 2016 – may make it more amenable to negotiation on savings. But senior ministers do not believe there are major options left for savings in the coming budget.
    “Eighty-six per cent of spending is subject to legislation [and therefore the Senate], 14 per cent is spent on foreign aid and defence, which we can’t cut any more, and there is about $15 billion of grants to organisations like the Salvos and the Red Cross,” a source said. “Where’s the room to move?”
    The government’s focus is on structural savings such as changes flowing from the tax and federation white papers. Failure to adjust fiscal drag means the tax system will become increasingly regressive.
    Former Treasury secretary Martin Parkinson repeatedly warned last year an average wage earner will slip into the second-highest tax bracket, at 37 per cent, in the coming financial year. In total, their average tax rate will surge more than 20 per cent in the next decade, entrenching disincentives for additional work, particularly for women and lower and middle-income earners.
    Goldman Sachs’ Mr Toohey said the collapse in coal, iron ore and LNG prices in the past year meant Australia risked missing at least half a trillion dollars in forgone earnings in the next decade. The colossal hit to national income – which could be as much as $800 billion if prices do not rebound – means the goal of restoring the surplus in 2018 is no longer feasible, he said.
    Revenue hit could be $1trn


    The hit to revenue could reach $1.1 trillion by 2025 if weak commodity prices are compounded by a US10¢ rebound in the dollar. Mr Toohey said while the high dollar scenario was close to a “worst case” for Australia, it was a “not immaterial” risk given foreign demand for highly rated Australian investments such as government debt.
    The price rout is expected to wipe at least $40 billion from the federal budget revenue over the next four years.
    Mr Toohey said the LNG sector was unlikely to deliver any extra petroleum resource rent tax revenue over the coming decade. “We therefore see a risk of further material revenue downgrades” in the May budget, he said.
    Iron ore prices have more than halved to about $US63 a tonne, cutting $300 billion from the outlook.
    The crude oil price collapse, despite a recent rebound, means the cumulative loss in LNG revenue could be $200 billion by 2025.
    The stark forecast underscores why the RBA has been loathe to allow a rebound in the dollar, which climbed on Wednesday to US78.07¢, one of the reasons for this week’s official interest rate cut.

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