Joe Hockey warns of spending overhaul as MYEFO forecasts $47bn deficit
BEN PACKHAM AND DAVID CROWE
THE AUSTRALIAN DECEMBER 17, 2013 3:19PM
Dennis Shanahan says it's time for Treasurer Joe Hockey to find the solutions to the mess that he set out today in the mid-year economic and fiscal outlook.
Treasurer Joe Hockey delivers his budget update to the National Press Club. Picture: Getty ImagesTreasurer Joe Hockey delivers his budget update to the National Press Club. Picture: Getty Images Source: Getty Images <> Dennis Shanahan's MYEFO wrapTreasurer Joe Hockey delivers his budget... JOE Hockey has warned tax cuts will be off the agenda for a decade without drastic action to repair the budget, and all Australians will be asked to accept savings measures to make their quality of life sustainable.
Unveiling his mid-year budget update today, which revises up the deficit to $47 billion this year, the Treasurer warned he might not live long enough to see another surplus budget.
He said "all options'', other than cuts to health, education and defence spending, were now on the table to chart a path back to surplus.
"The budget never gets back to surplus even if there are no tax cuts for the next 10 years. That's the most telling table,'' Mr Hockey told the National Press Club, referring to figures in the mid-year economic and fiscal outlook document.
The update shows the Coalition's own decisions have added $10.3bn to this year's deficit, while tax revenue has been revised down by $6.6bn.
MYEFO IN FULL
Scaling back growth forecasts and warning of deep deficits ahead, Mr Hockey's first major statement as Treasurer shows that deficits would continue to 2023-24 unless drastic action is taken to increase taxes or cut spending.
"Over the next few months Australians will be asked to accept the decisions that help to make our quality of life sustainable,'' he said.
"Returning the budget to sustainable surpluses will not be achieved by piecemeal savings here and there.
"It will require a sustained and fundamental structural overhaul of expenditure.''
However, promised funding envelopes for health, education and defence would remain, as the Coalition would not break its election commitments, Mr Hockey said.
"It doesn't mean we can't spend the money more efficiently; we can,'' he said.
"We committed to an envelope in health, education and defence and we remain committed to our election promises.
"And that is hugely important, that we keep faith with the Australian people over the commitments that came before the election.''
This year's $47bn deficit is expected to be followed by $34bn next year, $24.1bn the next and $17.7bn in 2016-17, totalling $123bn over the forward estimates compared to just over $20bn in Wayne Swan's last budget as treasurer.
In a change to its forecasting methods, Treasury has cut its outlook for the two ``out years'' of the forward estimates to show slower growth and higher unemployment.
While the pre-election fiscal outlook showed unemployment would fall to 5 per cent in 2015-16 and 2016-17, MYEFO expects it to stay high at 6.25 per cent.
The unemployment rate is currently 5.8 per cent.
The government's strategy is to use MYEFO to highlight the pressure on government finances but wait until the May budget to reveal the actions it will take to tackle the challenge.
Debt is now forecast to reach $667bn by 2023-24, well beyond the previous forecast peak of about $400bn and also beyond the debt limits contemplated by both the Coalition and Labor before the Greens suggested removing the limit earlier this month.
Labor's treasury spokesman Chris Bowen warned that Mr Hockey is softening Australians up for deeper cuts in the May budget.
"He is preparing the ground for deep and brutal cuts come budget time - cuts that will affect all Australians.''
Ratings agency Moody's said the projections were worse than they expected in terms of the fiscal and debt positions.
"However, as Moody's have always said, the Australian government has very low debt levels as a starting point, and the larger deficit in the current fiscal year, while leading to a rise in debt, is not likely to change Moody's thinking about the Aaa rating of Australia,'' it said in a statement.
Chamber of Commerce and Industry chief executive Peter Anderson said MYEFO showed there were no pain-free options to build a stronger economy over the next decade.
"This budget deterioration makes the work of the Commission of Audit a national priority, especially if it undertakes a root and branch review of government spending, duplication of services and idle or underperforming assets.''
Business Council of Australia chief executive Jennifer Westacott said the budget update revealed the extent of the economic challenge facing the nation, and the need for tax reform.
She said there must be a reprioritisation of spending commitments, and all sides of politics must be honest with the government about the cost of government programs.
"A disciplined 2014-15 budget, which includes structural measures that contain government expenditures over time, needs to be matched by greater efforts to boost economic growth and productive capacity, which will greatly assist the budget repair job,'' Ms Westacott said.
"This means investing in productive infrastructure and delivering on the government's ambitious deregulation agenda to free up businesses to innovate, invest in future growth and jobs.
"The ongoing weakness of revenues also highlights the critical role that tax reform will need to play both in shoring up the strength of the revenue base and increasing efficiency to drive economic growth.''
Tony Abbott promised to deliver a budget surplus sooner than Labor but has appeared to hedge on this in recent days, although the mid-year update restates one of his election promises.
"The government is committed to returning the budget to sustainable surpluses that build to at least 1 per cent of GDP by 2023-24,'' the MYEFO document states.
A chart within MYEFO suggests that the deficits would still be running at 1 per cent of GDP in 2020, highlighting the scale of the challenge.
The Coalition went to the election with a costings document claiming to add $6.3bn to the budget bottom line over four years.
While savings such as a cut to foreign aid will go ahead, one of the key measures in that document, a freeze in the public service, will be reconsidered and the $5.2bn projected saving has been dropped.
Rather than adding to the bottom line, government decisions since the election will weaken it.
Coalition policy decisions since the election deepen the deficits by $13.7bn over four years, including the $10.3bn in the current financial year.
Parameter variations since the election, such as missed revenue forecasts outside the new government's control, have a negative impact of $54.4bn over four years, including the $6.6bn revision for the current financial year.
Income tax receipts are one of the biggest weaknesses in the revised papers, with revenue from this source down $5.2bn from the budget forecasts.
Scrapping the carbon tax will mean giving up about $12.4bn in potential revenue over four years while scrapping the mining tax will forego $3.4bn, but this second figure excludes the savings to be made by abandoning a cluster of spending measures that were meant to be paid for by the new impost on resources.
