1. The mining boom is over and it’s grim

The mid-year fiscal and economic outlook (Myefo) in December 2013 was a document dripping with sadness on the economic front, and the budget continues in that vein. Indeed in some ways it paints an even worse picture of what Australia has in store.



For all the suggestions of pain for future gain, the budget sees very little gain when it comes to jobs. Not only does the budget predict that unemployment in June this year will be as high as 6.0% (a rise of 0.2% from its current position), it also expects unemployment to rise to 6.25% and stay there right the way through to June 2016.

On the broader economic front the budget suggests 2014-15 will be worse than this year. While the economy in 2013-14 is expected to grow by 2.75% (a slightly conservative estimate given annualised growth in the last half of 2013, which was 2.9%), in 2014-15 it’s expected to just trudge along by a mere 2.5%. Only in 2015-16 is the economy expected get back to close to trend growth of 3%.

Why are they so gloomy? Well it’s not households. Household consumption has been revised up since the Myefo – from growth of 2.75% next year to now 3% and 3.25% in 2015-16.

So we’re expected to keep shopping.

The problem is the end of the mining boom. This budget really throws off any hope that mining might sustain us. In the pre-election economic and fiscal outlook (Pefo) done just prior to the 2013 election, business investment was expected to grow in 2013-14 by 2%. The Myefo revised that down to a fall of 1.5% and the budget has dumped it even further – estimating a fall of 4%.

And things don’t get any better next year. The Pefo expected the end of the mining boom to be a soft fall, with business investment dropping by just 0.5% in 2014-15. The Myefo revised this down to -2% and now the budget takes an even more depressing view and has it falling by 5.5%. And it continues to fall in 2016-17 by another 3.5%.

Those hoping exports would save the day will have to wait – the budget revised down expectations for growth in exports and massively revised down expectations for the terms of trade (the price we get for exports compared to the price we pay for imports).

2. Revenue is still a problem, but not as bad as it once was

During the 2013 election campaign, the Liberal party claimed there was no such thing as a revenue problem. They suggested that because revenue was actually growing in nominal terms the ALP had nothing to complain about. Well, revenue continues to grow in nominal terms. Over the next four years total government revenue is expected to grow on average by 6.5% – well above the average annual growth of 3.6% that occurred from 2008-09 to 2013-14.

The government suggests revenue in 2014-15 will be $2.363bn more than was expected in the Myefo due to improvements in company tax revenue and in GST revenue from better than expected household spending.

The increase in the income tax for those earning over $180,000 (that is the top 3% of income earners) is expected to raise $3.1bn over the next four years. The reintroduction of the fuel excise is expected to kick in an extra $4bn over the next four years.

So all up in percentage of GDP terms, revenue will continue to rise over the next four years from 23.0% in 2013-14 to 24.9% of GDP by 2017-18. It’s worth noting that the ALP governments never had a revenue take of more than 23.2% of GDP.

The amount of revenue is actually slightly more than was expected in the Myefo but remains less than the more optimistic figures in the Pefo – due to the much more negative view of the economy.

3. Expenditure is falling but the cuts overall are not as bad as in the past

This was going to be a horror budget. And it is. If you are intending to go to university, if you are under 30 and unemployed, if you are a family with a child over 6, if you go to GPs, you’ll going to be hit hard.



Family tax benefits are frozen to save $2.5bn over four years, the threshold for Family Tax Benefit cut from $150,000 to $1000,000 will save $1.2bn, cutting it for families with kids over six saves $1.9bn and the $7 co-payment for GP visits gathers in $3,5bn. The increase in costs to uni students through the deregulation of fees, the cutting of funding to unis and the changes the HECS/HELP repayments $3.2bn

But the biggest individual “saving” is through not increasing foreign aid as promised. This saves $7.6bn and is easily the laziest save any government can do.

But when we look at the bigger picture number it shows that much of the cuts are done to funnel money elsewhere rather than hurry back to surplus.

Expenditure in 2014-15 is expected to decline in real terms by 1.7%, which is among the biggest cuts in the past 40 years. But it’s worth remembering that that cut is in comparison to spending in 2013-14 – which includes the extra $11.9bn Joe Hockey spent in the Myefo – including nearly $9bn on the RBA. So that alone made reducing expenditure in this year an easier job.

Interestingly, while Wayne Swan did his fair share of shuffling money around to make spending cuts look better, in 2012-13 he actually cut spending by 3.2% in real terms. So he still holds the record for the biggest cuts to expenditure.

4. The trip back to the surplus is steady not stupid

Hockey is not rushing back to surplus. Yes he’s putting on the fiscal breaks, but not like Costello did in 1996 to 1999, nor even like Keating did after the “banana republic” crisis in the late 1980s.



The budget deficit will shrink by on average 0.7% of GDP over the next four years. Costello trimmed it by 1% of GDP when he came in – but he was able to rely on much more revenue growth than Hockey.

Spending is expected to be cut each year by on average 0.3% over the next four years. Costello’s cuts to expenditure were double that.

So while this certainly is an austere budget – and very much so for certain sections of the population in broader economic terms it is not the massive slamming on the brakes that it could have been.

5. The economy remains weak, and the government has decided to do little to help

Tony Abbott and Joe Hockey suggest that to fix the economy you need to first fix the budget, but there is very little here to suggest the economy is improved in any way by the budget.



The budget figures show growth in private sector demand over the next two years is expected to be a pitiful 1.75%. But the government is certainly not stepping into the breach. Public demand is expected to also average just 1.25% - the lowest two year level since 1996-97 and 1997-98.

But back then total demand in the economy was expected to grow by nearly 3.5%. By contrast, total demand in 2014-15 and 2015-16 is expected to average just above 1.5%.

Hockey may not have cut the budget as hard as might have been expected, but he certainly is no Keynesian. Not for him will the government spend to improve the economic growth in the economy.

The big take out from the budget forecasts is that the economy is weak and Hockey is prepared to let it be so.