Australian Budget 2014-15: Key Initiatives, Revenue, Expenditure, And Effects

Overview of the 2014-15 Federal Budget

Question:

Analysis of the Australian Budget of 2014-15.
 

The Australian budget of 2014 is the federal government budget to finance government services and functioning for the financial year 2014-15.  This was the first budget that was delivered by the federal government lead by the Prime Minister Tony Abbot after the 2013 victory in the Australian federal election. The budget was presented by the treasurer Joe Hockey to the House of Representatives on 13^th May 2014 (Wikipedia, 2014). The budget handed down by the treasurer was considered by Australians to be a tough budget featuring tax increases, welfare cuts and also deductions in the health and education expenditures (Pitrowski, 2014). The treasurer had put aside the accusations of broken promises and rather claimed that the 2014-15’s federal budget is a part of the Government Action Strategy Plan which focuses to plug in the flaws and shortfalls of the budget and aim to build a strong and growing economy (Australian Government website, 2014). In overview by the end of the year there had been a budget deficit of $29.8 billion in 2014-15 with the unemployment rate at 6.25% and the overall economic growth of 2.5% in the financial year of 2014-15. On the other hand comparing with the budget overview of the previous year of 2013-14 we see the budget deficit was lower of $18 billion, the unemployment rate of 5.75% which was comparatively lower and the overall economic growth rate had been 2.75% slightly higher than 2014-15(Business Day, 2014). The 2014-15 federal budgets had various features and decisions of the government which benefitted some as well as made losses to some. We shall look into these features, their effects and implementations and identify the winners and losers after the implementation of the budget. 

We shall first look into the key initiatives of the 2014-15 budget. As previously mentioned this federal budget was more as a part of the Government’s Economic Action Strategy focusing on the resolution of the flaws and shortfalls of the budget and aiming to build up a strong and productive economy. There were a series of savings decisions in the budget which actually helped in bringing back Australia to a sustainable and responsible budget position. There were significant changes done to the budget with a government bureaucracy downsizing, new implementations for medical research, welfare changes and funding on roads. Until 2023, a budget surplus was not expected. By 2023-24 debt is projected to be approximately $300 billion lesser which is far low compared to the debt of $667 billion at the Mid-Year Economic and Fiscal Outlook of 2013-14(Australian Government website). The National Commission of Audit was commissioned in the month of October of 2013 for recommending various measures for the reduction in government spending. There were 86 recommendations made by the commission. These recommendations included that the increases in the age pensions will be slower, retirement age would increase to 70 by the year 2035 and from 2027 in new means testing there would occur the inclusion of the family home. All these recommendations by the commission were adopted in the federal budget. We look at the table given below: Table 1, showing the Federal government’s government sector expenses as a proportion of GDP expressed in percentage from 2000-01 to 2017-18. We also get Fig 1, a graph from the tabulated data, where we see that there had been a dip in the percentage of GDP of the expenses in 2006-07 at 23.93% which increased to 24.08% in 2007-08 and since then over the last 7 years there has been a rise in expenditure as a percent of GDP and reached 26.2% in 2013-14 and the percentage of expenditure fell to 25.42% in 2014-15. The expected expenses are further expected to go down to 25.3% in the year 2017-18.

Key Initiatives of the 2014-15 Budget

TABLE 1: Expenditure as a proportion of GDP in percentage

Year	Proportion of GDP (%)
2000-01	25.48
2001-02	25.57
2002-03	25.13
2003-04	25.06
2004-05	24.89
2005-06	24.34
2006-07	23.93
2007-08	24.8
2008-09	25.92
2009-10	26.29
2010-11	25.5
2011-12	25.7
2012-13	25.3
2013-14	26.23
2014-15	25.42
2015-16	25.22
2016-17	25.3
2017-18	25.25

Source: Australian government (budget.gov.au)

 

Fig 1: Expenditure as a proportion of GDP (in %)

If we first focus on the revenue side of the budget, taxation is the key element. A 2% deficit levy on over $180,000 personal income was introduced, which was supposed to raise revenue of $2.5 billion a year over its duration. Temporary Budget Repair Levy was the legislation to impose the levy commenced on the 1^st July 2014 and would apply for 3 years. It also was announced the decrease in the corporate tax rate to 1.5% from the 1^st July 2015 to the rate 28.5%. On the other hand, the Family Tax Benefit Part B was recommended to be abolished indicating that means would be tested to a new $100,000 threshold amount. Federal fuel excise was also introduced and the adjustment made twice a year would raise $3.7 billion in its 4 years. Hence the change being in effect from 10 November 2014 increased the base rate from 38.14¢ per liter to 38.6. (BusinessDay, 2014)

The expenditure section of the budget included several components with both increases and cuts. If we consider education, the budget introduced university fees to be completely deregulated. There was also the common wealth funding that was extended to the students at TAFEs, sub-bachelor degrees and colleges at an amount of $820 million over a period of 3 years. There was also introduction of indexation of school funding to inflation from 2018 with the school funding of labor’s ‘Gonski’ being dumped from 2017-2018 which would bring savings of about $30 billion. On the other hand at a cost of $243.5 million over a period of 5 years continued for the school chaplaincy program. Higher university costs were expected to be faced by students with the announcement of the government that university fees will be uncapped from 2016(Australian government department of education and training, 2014). There was also the announcement that the government would charge an interest rate on FEE-HELP loans which reflected the government borrowings cost.  Turning towards health expenditures Australians were to pay for blood tests, X-rays and GP visits a minimum amount of $7 whereas, for prescription drugs usual patients were to pay $5 more and 80¢ more for concessional patients. There were about billions cut down from hospitals and these freely charged for emergency department. On the other hand for Medical Research the budget outlined a Medical Research Future Fund of about $20billion this would come from the savings in the health care revenue. But even after this enormous increase in medical research funding, funds for research organizations will go down by $146.8 billion over a period of 4 years. Turning towards public service the budget mentioned that the government would dump the jobs commonwealth public servants of about 16500 along with the scrapping of various federal agencies on indicating the remaining agencies of future possible closures. It also announced that the efficiency dividend will be increased by 0.25 per cent. That also brings us to the issue of unemployment. The eligibility age for Newstart is raised by the government from 22-25 for the young people who are searching for work which would make people under 30 wait for 6 months to be eligible for Newstart and devoid young people of the extra $96 earned per fortnight on turning 22 and shifting from the less paid Youth Allowance to Newstart. However, employers are at advantage as they would be paid $10,000 for 6 months for hiring people over 50 seeking for jobs whereas they would be paid $6000 for 12 months and $8000 for 18 months and $10000 for two years (ABC, Budget 2014).

Revenue and Expenditure Components of the Budget

Considering infrastructure the government had outlined $11.6 billion in the new projects funding, a part of which is in the form of an asset recycling scheme where the government contributed till 15% of the value of State assets which are invested in new infrastructure projects. On the other hand for the mining sector the government provided $100 million over 4 years for the exploration of minerals which gave small explorers a way in to refundable tax offset for their Australian shareholders.  As per the private sector, the there has been a 1.5% cut in the corporate tax rate also with the big businesses facing a 1.5% levy to pay for its parental leave scheme. There is also the announcement in the budget regarding the start of the Entrepreneurs Infrastructure Program which accounts for a $484.2 million cost over a period of 5 years. This program is with the objective to support good and innovative ideas and commercialize those providing advices and information regarding the market and the industry. The government however is eliminating similar programs and assistance bodies saving $845.6 million (BusinessDay, 2014).

The other key element of the budget is regarding foreign aid. Over 5 years, the government is cutting back $7.6 billion from the foreign aid budget hence keeping funding of foreign assistance at present levels. The saving from this is equivalent to approximately one third of all the expense cuts over the forward estimates. On the other hand, for defense, the budget announced a $1.5 billion in defense expenses from 2017-18 to earlier years with defense costs efficiencies reinvested into defense. Finally we consider the environment where the government has cut down renewable investment as the Australian Renewable Energy Agency got abolished which saves $1.3 billion.  The $2.55 billion that was aimed to fund the Emissions Reduction Fund was announced to be spread over a period of 10 years unlike the four years as said before. The budget also said about the funding of $525 million for the initiative “Green Army” but this gets offset by a loss of $438 million to the community groups of Landcare which does a similar job as that of Green Army. Below we have the tabulation in Table 2 of expenses by function of the financial year 2014-15 along with Fig 2 based on this table showing the percentage of the total Australian government government sector expenses by function of 2014-15. We see that about out of the total expenses one third are spent on social security and welfare programs whereas on the health function programs one sixth is devoted. Significant investments are also done towards education and defense functions.(ABC, Budget 2014)

TABLE 2: Expenses by functions in 2014-15

Function	Expense(%)
Social security and welfare	35
Other purposes	20
Health	16
Education	7
General public services	6
Defence	6
All other functions	10

 

Fig 2: Expenses by function in 2014-15 

Having looked into the key features both of the 2014-15 budget we now analyse who turn out to be the winners and the losers from these changes. We list down the winners and the losers as follows based on the budget: 

Winners:

• Medical Research stood out as a key winner with the $20 billion funding aiming for further research developments.
• The infrastructure sector won in this budget outline with new projects receiving funding of $11.6 billion funding. This is also in asset recycling scheme form with the federal government contributing for state assets that are being invested in new infrastructural projects. This led to further infrastructural development.
• Defense sector also gets a boost with increase in spending of about 1.5 billion with efficiencies derived reinvested back into the sector that is generally not done for other Commonwealth departments
• Mining sector also won receiving $100 million for minerals exploration over four years which also gives small explorers a tax offset (refundable) for their Australian shareholders.

Neutral:

• High income earners are imposed a debt levy of 2% with incomes greater that $180,000 but for three years. These high income earners also get affected by the changes in fuel levy surcharge with the petrol prices moving with the inflation indexed in every 6 months. But on the other side the government also has opposed the propsals to close down on the essential tax minimization schemes like negative gearing and superannuation concessions that allow the high income earners to make up for large portion of their income.
• The effect on the private sector is also comparatively neutral with 1.5% cut in the corporate tax along with big businesses getting a levy of 1.5% though not clearly mentioned in the budget. The automotive sector will also incur losses as the government has cut off or cancelled programs responding to the announcements made by Toyota and Holden which said that they would cease the Australian car manufacturing in joining Ford. There is also the spending of $484.2 million over a period of five years on the Entrepreneurs Infrastructure Program which would generate much more innovative ideas. But to support such a program their had also been elimination of 8 such industry assistance bodies or programs which saved the government $845.6 million.

Losers:

• Families do incur losses from the 2014 budget with reduction in the family tax benefit cutoff from $100,000 to $150,000. There also occurred a real terms loss of income as all family benefits would be put on hold till 2016 or 2017 because it will no more take into consideration increases in inflation. They will also face the petrol excise increase indexed to inflation in every six months. As well a GP co-payment of $7 for visits to the GP for the first 10 per year will also affect them along with charges for visits to emergency rooms that hospital will take for patients who only need a visit to a GP. Medicines on the pharmaceuticals benefits scheme will also be more expensive. Along with this senior citizens also turn out to be the losers with pensioners being affected by the GP co-payment of $7, losing seniors supplement for the Commonwealth seniors health card owners, hit by fuel excise indexing, facing more difficulties in applying for the Seniors Health Card, along with 1.3billion cut in spending from Commonwealth support to different state and territory based seniors and lastly the pension age will increase to 70 affecting Australians only born after 1966.(Daley, 2014)
• The young people and university students are also at loss as the government rises the eligibility age of Newstart from 22 to 25 which would abduct them from the increase of $414 per fortnight to $510. Although the government extended its help to diplomas and other postgraduate studies via the FEE-HELP scheme but charged with an interest on the FEE-HELP loans and lowering of the minimum threshold income by 10% to repay loans. They also face higher costs of the universities as the Government uncapped the university. The government scraps out the ‘Gonski’ school funding plan and hence, in overall with dumping of funding, interest rates on schemes and high university costs, etc also has a grave impact on Education (Daley, 2014).
• Hospital funding agreements will also be wound back from 2017 along with other health cuts affects the Health sector.
• Fall of $7.6 billion from the foreign aid budget with allotment of foreign aid with increase along with inflation also makes it fall under the losers.
• The budget also affected the public services and service providers with the government taking down jobs of 16500 Commonwealth public servants, scraping down various federal agencies but also increased the efficiency dividend by 0.25%.
• Indigenous programs are at losses with a cut down of $534 million along with a cut of $9.5 million indigenous language support funding.
• Lastly the environment suffers too investments in renewable being slashed down, funding of the Emissions Reduction fund being spread over a larger number of years , i.e., 10 years, Carbon structure and storage program losing out $460 million but $525 million funded for Green Army (BusinessDay, 2014).

Effects of the Budget on various sectors

Hence we saw the varying winners and losers from the budget 2014-15. The overall reception of this budget has been regressive with voters taken aback considering the measures to be miserable for the economy whereas over 60% also conveyed to a survey that the budget 2014 was unfair. The budget had been considered to have broken many election promises hurting consumers, businesses, senior citizens and also students. Based on the budget the economic forecasts by economists had turned out to be true with rise in unemployment to 6.2%, rise in the consumer price index, growth of wages to 3% and the real GDP remaining weak with growth rate of around 2.5%. As per economist Richard Holen who is an economics professor at the University of New South Wales Australian School of business the deficit levy is considered to be a terrible blow which would add to the income tax that is considered to be the most inefficient form of tax. On the other hand Sinclair Davidson from RMIT University , an institutional economics professor found the budget to be impressive with a lot to like about it mentioning about the reductions in spending that would return the budget to the surplus. He also goes ahead considering the university changes to be significant leading to greater competition and the 2014 budget fiscal balance compared to the MYEFO fiscal balance it is seen that the progress was majorly driven by the disparity in parameter with varying assumptions to circumstances (Davidson, Phillips, Ralston, 2014). State premiers on the other hand had been angry about the federal cut of an amount $80 billion to hospital funding and schools whereas NGOs critically hitting on the decisions of the cut backs on aid where the government went against its promise of increase in aid rather overturning major investments that could fight against poverty and inequality (Seager, 2014).

Conclusion:

Thus, the Abott government’s 2014 Federal budget had been “very “regressive” or can be said tough for voters equally sparking angry reactions from the Opposition and the lobby groups. The budget also evolved protests against it on 18^th May of 2014, when thousands of people protested against the budget as they marched in the capital cities. There were especially strongest criticisms of the budget to be an example of broken promises of the government and also criticized of placing higher burdens on the low income earners in comparison to the wealthy, making it difficult for senior citizens, standing as a hurdle to alleviation of poverty and inequality with cut in foreign aid whereas boosting the defense, mining and medical research functions. Overall the budget was regressively taken by various sections of the society as it delivered greater number of losers than winners.  

References:

Australian Government, Budget 2014-15, viewed 2 June 2016,  

Piotrowski, D 2014, Federal Budget, viewed 2 June 2016,  

Daley, J 2014, Budget pressures on Australian government 2014, viewed 2 June 2016,

Wikepedia, 2014, 2014 Australian federal budget, viewed 2 June 2016,

BusinessDay, 2014, Federal budget 2014: at a glance, viewed 2 June 2016,

BusinessDay, 2014, Federal budget 2014: overview, viewed 2 June 2016,

Seager, C 2014, NGOs react to the Australian budget, viewed 2 June 2016,

Davidson, S, Phillips, B & Ralston, D 2014, Federal budget 2014: economists react, viewed 2 June 2016.