Budget Chips Not The Answer

The Abbott government has been in office for about nine months and is apparently still trying to decide what spending reductions to announce in the budget and, at the very last minute, what sized deficit tax it will impose. I have previously described the handling of the budget as amateurish: it is now becoming almost farcical and giving the impression that it is responding to the adverse polling published on Saturday (48/52% on a TPP basis).

“By all of us chipping in, we can chip away at this legacy of debt,” Mr Abbott has said in a video. But “chipping away” is not what a new government should be doing first up, let alone by increasing income tax on “high” income earners. That is the kind of action one would expect from Obama or Shorten (the latter is opting out for now but will use this weapon later).

In reality, if the government were to “chip away” at some “middle incomers” – say those below the ridiculous welfare reduction line of  $100,000 but above those on incomes above the $65,000 average – there is a much bigger group that should experience reductions in “welfare” and other government assistance than seems to be envisaged.

Indeed, as the editorial in today’s The Australian points out (see below) the extent of churning reached under present arrangements means that even those on average incomes make a “profit” from the government – they receive back more than they pay in taxes. The editorial refers to a week-end comment on Sky News by IPA executive director, John Roskam, that a “1 per cent cut in federal spending of more than $400 billion this year could save the budget as much as the deficit tax would be likely to raise”. But one hopes that, at a minimum, there will be no increase in spending in 2014-15.

Note that a NIL increase next year would follow an 11.3% increase in the current year and would still mean spending in 2014-15 is  12.7% higher than in  2012-13 – an average annual increase of over 6%. What is needed is a blow torch, not a chip!

Estimated Budget Expenditure

2013-14 2014-15 2014-15
409.0 413.7 413.7
+41.8 $bn + 4.7 $bn NIL
+11.3% +1.1% NIL