The 2015 Federal Budget represents a capitulation by the government to the ALP and the Senate and builds a populist base for the next election.
Outlays are projected to be 25.9% of GDP, which is a similar level to that hit by Rudd after the GFC, Keating in the 90s and Fraser and Hawke in the early 80s. In fact it is well under the Hawke level.
But these other periods were periods of economic emergency. 1983, the first year of the Hawke government, was the worst recession since the Great Depression at that stage. In the early 90s Australia faced the “recession we had to have”.
But at this time the government is projecting reasonable GDP growth of above 2% and there is no economic crisis.
This means that permanently higher expenditures and therefore taxes, have been wired into the system.
It wasn’t where Abbott meant to be, but faced with the prospect of a reception like last year he has obviously opted for a politically palatable budget which doesn’t rock the boat.
At the same time, by giving a favourable tax treatment to smaller businesses it loads the dice a little in favour of greater employment growth and greater efficiency.
This, coupled with accelerated depreciation for amounts under $20,000, should rev the economy up in the next few years, helping to compensate for the ending of the mining boom.
But the budget still retains its booby traps far into the future in the shape of the NDIS, which is not means tested, and which continues to be deployed, and the unsustainability of our retirement system.
There has been some trimming of entitlements to the aged pension, which will hurt the Coalition’s base vote, with the asset taper being made twice as steep, meaning that people who have assets outside the family home will find it harder to get the pension.
But this doesn’t solve the problem as returns on assets are lower than they have historically been, meaning that these excluded Australians will have to sell assets to survive, so will come within the means test quickly enough.
By not touching the family home it also means that potential pensioners have an incentive to put all their assets into the home rather than assets which might be more productive for them, and also for the country.
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