Commentary 14th May 2014

Budget 2014 - what the experts say

Defence: 

Dr Remy Davison, Jean Monnet Chair in Politics and Economics, Monash European and EU Centre

The 2014–15 budget sees only modest cost savings in the Defence portfolio. The Abbott government has brought forward $1.5 billion in capital expenditure related to capability projects from 2017-18 to "recapitalise" defence. Spending has been shifted from expenses to capital expenditure as a significant proportion of Australian military equipment is old or outdated.

The Treasurer reiterated the government's commitment to a defence spending target of 2 per cent of GDP, which was a centrepiece of the Coalition's policy goals when it was in opposition.

In 2014–15, defence spending will be $24.19 billion; by comparison, the ALP government allocated $22.84 billion to military expenditure in 2013–14. Expenditures are projected to increase to $25.7 billion in 2016–17 and to $27.63 billion in 2017–18.

However, it is clear that the major spending plans and materiel acquisitions will be left to the Coalition's Defence White Paper, due in 2015. This will include at least 57 F-35 Joint Strike Fighters (JSFs), costing more than $12 billion, although this number represents a significant reduction in acquisitions of the aircraft. The 2009 Defence White Paper originally called for the purchase of 100 JSFs.

Defence civilian employment will experience significant staffing cuts, with a reduction of 1,200 public service staff and 300 fewer service provider staff by 2017–18, saving the Commonwealth an estimated $606 million.

On the asset side, the Commonwealth will privatise defence housing, as flagged previously. The military's defined benefit superannuation scheme has also been closed to new entrants from 2016, saving the government $166.8 million by 2017–18. This will reduce Commonwealth unfunded superannuation liabilities an estimated $126 billion by 2050.

Privatisation: 

Professor Stephen King, Department of Economics

The federal government flagged its on-going privatisation agenda in the budget. But not through its own asset sales.

The government has budgeted $11.7 million for scoping studies on a range of Commonwealth assets, including the Royal Australian Mint and ASIC's business registry business. These were expected, but the real privatisation meat – Medibank Private and Australia Post – is not in the budget sandwich. Medibank is already listed for sale and Australia Post was ignored.

The real action, however, is through the $5 billion asset recycling initiative. This program creates financial incentives for state governments to sell assets and reinvest some or all of the money (with a pro-rata 15 per cent Commonwealth cash top up) into new infrastructure.

While the money is new, the Council of Australian Governments agreed to the program on 2 May 2014.

State governments have two years to gain agreement with the Commonwealth on both the assets to be sold and the new infrastructure investment. The funds will be allocated on a first come, first served basis, with sales completed and new projects started before 30 June 2019.

The budget and aging population:

Dr Gennadi Kazakevitch, Department of Economics

As was broadly expected prior to the Treasurer's budget speech, the key theme of the 2014 budget is the deficit and how to tackle it. Meanwhile, many serious economists are asking if the problem of the blowing budget deficit and public debt is not made up all together.  

Of course, Australia is enjoying the highest possible credit rating, while its public debt does not exceed 20 per cent of GDP yet. In the short run, this does not look like a budget crisis. In the long run, budget deficit might be not a bad thing either, provided increase in public debt is slower than the GDP growth, and that borrowing ultimately serves accelerating economic growth, especially in the sectors where the country might enjoy comparative advantage in the future.

However, according to the National Commission of Audit, due to a rapidly aging population, if nothing is changed, some areas of public expenditure such as age care and health within the next 10 years will cause increase in the accumulated public debt beyond GDP growth. The age pension bill will be increasing by 6.2 per cent a year; Medicare by 7.2 per cent; expenditure on hospitals by 10.4 per cent; and proscription medicine subsidies by 5.4 per cent a year. All of the above will be inevitable, while the projected GDP growth will not exceed 3.5 per cent a year.

Therefore the debate should evolve not about IF the reduction in deficit is needed, but HOW it can be achieved in the most efficient and harmless way.Finally, Australia will continue to make contributions to stabilisation and counter-terrorism operations in the Middle East (Bahrain, Qatar, UAE and Afghanistan), with defence expenditures for the area totalling $131 million in 2014-15, falling to $18.5 million in 2016–17.

Monash University experts comment on the 2014 federal budget, handed down by Treasurer Joe Hockey last night.

General commentary:

Dr John Vaz, Department of Accounting and Finance

My principal concern for the budget originally centred on the contractionary effects it would have on the economy as a result of expenditure cuts however any contractionary effect is likely to be  somewhat moderate; limited to the medium term (1-2 years).

I also believe the budget will return to surplus earlier than forecast (near the next election) as it is predicated on inflated deficit numbers. My concern is it is inequitable and misses significant opportunity. Most of the heavy lifting is on the young, the disabled and the old who bear approximately $13 billion of reductions versus $3 billion likely in additional taxes from higher income earners. Furthermore some of these cuts to benefits to those under 30 and 25 assume that most are not actually looking for jobs. The problem is jobs are scarce to this group and there are no initiatives to create jobs and many unemployed young people will end up with no means at all.  There will be some job growth in specialised construction areas for infrastructure investments.

There are many missed opportunities that would have achieved similar outcomes fiscally without hurting those most vulnerable. The missed opportunities that are very costly to tax revenue and part of the structural problems are "subsidies" such as capital gains, negative gearing, diesel subsidies for rich miners and trusts not to mention tax minimisation schemes by multinational firms that create a perception of bias toward the wealthy.

The real sleeper in the budget is a rise in the GST forced upon the state by very significant cuts in the later years of the budget in health and education.

Budget deficit:

Professor Jakob Madsen, Xiaokai Yang Professor of Business and Economics, Department of Economics

This is a very disappointing budget which is inconsistent and contains a lot of austerity measures and yet the budget bottom line is not a significant improvement over Labor's last budget. Cutting mining and carbon taxes while introducing new spending items, such as the Paid Parental Leave Scheme, Direct Action climate change policy, and the $10 billion infrastructure package, doesn't make economic sense in periods where the deficit has to be reduced and with ever pressing global warming problems. The proposed increase in the pension age to 70 is welcomed; however, first increasing it in 2035 is far too late. The budget did not contain many growth stimulating measures such as tax concessions to R&D or investment in higher education.

Health and medical:

Professor Greg Bamber, Department of Management

This is a budget of paradoxes. The $7 co-payment for the use of general practitioners' services will have the unfortunate consequence of discouraging people, especially the poor, from seeing their doctors to foster their primary health.

At the same time it will encourage people to go directly to hospitals' emergency departments, which are already stretched. This will push more of the costs on to hospitals, yet the budget is cutting the states' funding for hospitals.

The new medical research fund is welcome, but the source of the funds, the $7 co-payment, will detract from health: another paradox!

Other countries are promoting health, putting more emphasis on preventative health in local communities. They are aiming to keep people out of hospitals whenever possible. But this budget kills Medicare Locals, which were increasingly promoting health and disease prevention. It remains to be seen if their replacement, Primary Health Networks, will be more effective. We hope so!

Education:

Associate Professor Lucas Walsh, Faculty of Education

For young people, the signals are generally not good. They suggest an approach to encouraging job-seeking through financial deprivation, while potentially inhibiting pathways to higher education for those experiencing disadvantage, as well as impacting on regional communities from which young people are leaving in droves.

For Australia's young people, having "the adults back in charge" is replete with irony, as many face less support and fewer possibilities for earning and learning.

Defence:

Dr Remy Davison, Jean Monnet Chair in Politics and Economics, Monash European and EU Centre

The 2014–15 budget sees only modest cost savings in the Defence portfolio. The Abbott government has brought forward $1.5 billion in capital expenditure related to capability projects from 2017-18 to "recapitalise" defence. Spending has been shifted from expenses to capital expenditure as a significant proportion of Australian military equipment is old or outdated.

The Treasurer reiterated the government's commitment to a defence spending target of 2 per cent of GDP, which was a centrepiece of the Coalition's policy goals when it was in opposition.

In 2014–15, defence spending will be $24.19 billion; by comparison, the ALP government allocated $22.84 billion to military expenditure in 2013–14. Expenditures are projected to increase to $25.7 billion in 2016–17 and to $27.63 billion in 2017–18.

However, it is clear that the major spending plans and materiel acquisitions will be left to the Coalition's Defence White Paper, due in 2015. This will include at least 57 F-35 Joint Strike Fighters (JSFs), costing more than $12 billion, although this number represents a significant reduction in acquisitions of the aircraft. The 2009 Defence White Paper originally called for the purchase of 100 JSFs.

Defence civilian employment will experience significant staffing cuts, with a reduction of 1,200 public service staff and 300 fewer service provider staff by 2017–18, saving the Commonwealth an estimated $606 million.

On the asset side, the Commonwealth will privatise defence housing, as flagged previously. The military's defined benefit superannuation scheme has also been closed to new entrants from 2016, saving the government $166.8 million by 2017–18. This will reduce Commonwealth unfunded superannuation liabilities an estimated $126 billion by 2050.

Finally, Australia will continue to make contributions to stabilisation and counter-terrorism operations in the Middle East (Bahrain, Qatar, UAE and Afghanistan), with defence expenditures for the area totalling $131 million in 2014-15, falling to $18.5 million in 2016–17.

Privatisation:

Professor Stephen King, Department of Economics

The federal government flagged its on-going privatisation agenda in the budget. But not through its own asset sales.

The government has budgeted $11.7 million for scoping studies on a range of Commonwealth assets, including the Royal Australian Mint and ASIC's business registry business. These were expected, but the real privatisation meat – Medibank Private and Australia Post – is not in the budget sandwich. Medibank is already listed for sale and Australia Post was ignored.

The real action, however, is through the $5 billion asset recycling initiative. This program creates financial incentives for state governments to sell assets and reinvest some or all of the money (with a pro-rata 15 per cent Commonwealth cash top up) into new infrastructure.

While the money is new, the Council of Australian Governments agreed to the program on 2 May 2014.

State governments have two years to gain agreement with the Commonwealth on both the assets to be sold and the new infrastructure investment. The funds will be allocated on a first come, first served basis, with sales completed and new projects started before 30 June 2019.

The budget and aging population:

Dr Gennadi Kazakevitch, Department of Economics

As was broadly expected prior to the Treasurer's budget speech, the key theme of the 2014 budget is the deficit and how to tackle it. Meanwhile, many serious economists are asking if the problem of the blowing budget deficit and public debt is not made up all together.  

Of course, Australia is enjoying the highest possible credit rating, while its public debt does not exceed 20 per cent of GDP yet. In the short run, this does not look like a budget crisis. In the long run, budget deficit might be not a bad thing either, provided increase in public debt is slower than the GDP growth, and that borrowing ultimately serves accelerating economic growth, especially in the sectors where the country might enjoy comparative advantage in the future.

However, according to the National Commission of Audit, due to a rapidly aging population, if nothing is changed, some areas of public expenditure such as age care and health within the next 10 years will cause increase in the accumulated public debt beyond GDP growth. The age pension bill will be increasing by 6.2 per cent a year; Medicare by 7.2 per cent; expenditure on hospitals by 10.4 per cent; and proscription medicine subsidies by 5.4 per cent a year. All of the above will be inevitable, while the projected GDP growth will not exceed 3.5 per cent a year.

Therefore the debate should evolve not about IF the reduction in deficit is needed, but HOW it can be achieved in the most efficient and harmless way.

Social service and domestic violence 

Emeritus Professor Thea Brown, Department of Social Work

The federal budget brought down last night by the Treasurer contains savage cutbacks to many welfare programs. The contrast between him indulging with his parliamentary colleague in a cigar (as seen in the photo sent through google) and his budget that forces the young  unemployed off the dole for lengthy periods of time illustrates the unfairness of the cutbacks to welfare programs. 

Many income security programs for the most vulnerable groups – payments to the aged, youth and families with dependent children- have been cut back.  In addition by increasing the cost and restricting the availability of other services, like health and education, the budget will cause further suffering among these groups. Cutbacks in payments to state governments for health and education will cause even more problems for these groups.  States will have less to offer them and will not have sufficient funding to help them manage these changes.   

Youth unemployment will not be improved by these changes.  It is a serious national problem and it requires a better, and a more comprehensive and nuanced attack. There is nothing in the budget to address this problem or the many problems of developing a workforce properly prepared for the industry needs of the nation.     

Social policy and welfare:

Associate Professor Philip Mendes, Department of Social Work

Key welfare initiatives such as "Learn or Earn" that limit access to the full Newstart allowance for those under 25 years, tougher eligibility criteria for the Disability Support Pension, and reinstatement of Work for the Dole (WFD) for those under 30 years seem to be measures which emphasise coercive sticks rather than empowering carrots, and target only individual rather than systemic or structural causes of poverty and disadvantage.

These measures may have unintended consequences. Young people aged 22-25 years who lack parental support to assist with housing and other essentials – including particularly vulnerable groups such as young people who grew up in state out-of-home care – may end up homeless. At the very least, there is likely to be increased demand on non-government emergency relief services. It is surprising that the government doesn't consider more positive actions and incentives such as wage subsidies, genuine employment training programs as opposed to WFD, and promoting the growth of new industries and job opportunities in depressed areas.

The budget does not take any action to:
- positively enhance the choice and agency of income security recipients;
- broaden the definition of participation so that valuable volunteer activities such as caring for young children, the disabled, and people who are frail aged or chronically ill, to manning the kiosk or clothes shop at school and/or coordinating the local sports team are valued as highly as paid work;
- or reduce the overly centralised nature of the welfare state so that mutual obligation requirements are linked to a decentralised bottom-up model that respects the stated needs and decisions of local communities.

It is to be hoped that the forthcoming report by Patrick McClure into income security will address some of these fundamental issues around the philosophical direction of welfare.

Dr Veronica Sheen, School of Social Sciences

There were not many surprises in the 2014 budget with much of its content having been variously announced, leaked or predicted over recent weeks. Nevertheless it is salutary to see it in print and to consider the implications.

As a social policy researcher, my interest was on the impact of budget measures on the social safety net. Treasurer Joe Hockey made much in his budget speech about the sustainability of the safety net – and little on any other aspects such as the very low Newstart Allowance. So, as we were led to expect, the budget contained a range of measures for cutting back expenditure and growth in social welfare.

Young people are a significant target. There is an increase in eligibility age for Newstart from 22 to 24 forcing young people to remain on the lower Youth Allowance. In addition, people up to the age of 30 must demonstrate appropriate job search and participation in employment services support for six months before they are eligible for either Newstart or Youth Allowance - although prior workforce participation may reduce this waiting time. They will then be required to participate in 25 hours a week Work for the Dole.

People under the age of 35 on Disability Support Pension will be subject to a reassessment of eligibility with a view to removing them from these payments. They will subsequently be reliant on the much lower Newstart payment. greater levels of workforce participation – and  It is puzzling why there are no additional resources to help people who may lose the DSP payment in the new assessment regime.

Older Australians will be affected by changed indexation arrangements for the age pension which will reduce its overall value. It is understandable that there are concerns about access to pensions for people with relatively high value assets but many age pensioners are poor and will be hurt by the lower rate of increase in the value of the pension.

Just as these groups will be facing a loss or reduction in income, they will be subject to a co-payment of $7 for GP visits and increased costs of PBS prescription medications.

The pension eligibility age will rise to 70 by 2035 affecting people born after 1965 and aged now under 50. There is a commendable $10,000 support program to encourage business to employ people on Newstart or Disability Payment over the age of 50. But much more needs to be done for retraining older workers for jobs in the new economy especially those workers now in their 40s and 50s who are affected by ongoing changes in the economy and industry.

There are changes in eligibility for family payments parts A and B, tackling so called 'middle class welfare'. However, more analysis of the effects of these changes especially on low income and single parent families will be required.

The housing needs of people with significant and permanent disability must be considered if the government is to deliver on their promise that no Australian is left behind because of the circumstances of their birth or the events of their life.

  • greg-bamber-pr

    Professor Greg Bamber

    Distinguished Academic, Department of Management Monash Business School

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  • gennadi-kazakevitch

    Dr Gennadi Kazakevitch

    Department of Economics Monash Business School

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  • jakob-madsen-pr

    Professor Jakob Madsen

    Professor, Department of Economics Monash Business School

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  • john-vaz

    Dr John Vaz

    Department of Banking and Finance Monash Business School

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