2015 MYEFO signals a significant shift

2015 MYEFO signals a significant shift
December 15, 2015 Peta Lange

“A Budget is a means to an end, not the end itself.”

With that, Treasurer Scott Morrison used today’s release of the Mid-Year Economic and Fiscal Outlook (MYEFO) to firmly shut the door on the legacy of his predecessor. No longer will the return to surplus be the number one policy priority for the Coalition Government. Rather, the Treasurer and Finance Minister have listened to the advice of their public servants who have been pushing them to focus on budgetary changes – both revenue and expenditure – that will reduce the size of the deficit, rather than the political Holy Grail – a surplus.

Falling commodity prices, declining terms of trade, weaker global growth and the adoption of a more realistic domestic growth outlook have decimated the Budget bottom line. The deficit will blow out by $2.3 billion to $37.4 billion by June next year with the level of deficits totalling $108 billion over the forward estimates.

Despite the grey clouds hovering over Australia’s economy, the Government’s economic team made it clear that MYEFO simply represents a Budget update and not a Budget. Those expecting the Government to use the update to make serious headway into the cutting of expenditure ahead of next year’s Budget will be disappointed.

There are savings identified from almost all portfolios in order to offset new policy announcements such as the National Innovation and Science Agenda, additional funds for the Roads for Recovery program, and the settlement of 12,000 Syrian refugees. They are subtle and clever savings designed to avoid political pain. However they will be felt hardest in the Health and Social Services portfolios – not historic areas of strength for the Coalition – where the words ‘streamlining’ and ‘efficiencies’ are the buzz words of choice. Over $1 billion will be pulled from the Health portfolio alone over the forward estimates.

The measured nature of this update, devoid of rash policies or announcements made on the run, leaves the Government with a serious task as it sets off on its marathon to deliver the May Federal Budget. The Government’s fiscal team is going to take every one of the 146 days between now and the Budget to think through each decision in a measured way and ensure it provides itself with a long road in which to bring the community with it on its journey towards Budget repair. This is a Government which learned its lesson in the fallout from the first Abbott/Hockey Budget.

With the return of Martin Parkinson to the Budget process as Secretary of the Department of the Prime Minister and Cabinet, the Government is in the strongest position it has been in recent years to work through and take the tough decisions required for budget repair. The ball really sits in the Prime Minister’s court – utilise his personal popularity and honeymoon period and put in the hard yards that could lead to long-term reform for the nation, or pull the leadership trigger and cement another three year term. There is much for the Prime Minister to consider over his festive eggnog.

Headline figures:

  • The Budget deficit will increase by $26.1 billion over four years. A balanced budget is not expected until 2020-21.
  • Real GDP has been revised down from 3.5% to 3% in the five years from 2017‑18 – mainly impacted by softer commodity prices.
  • Total revenue has been revised down by $4.4 billion since May’s Budget to a total of $34 billion.
  • Unemployment – is expected to peak at a lower level than previously forecast, remaining at around 6% in the June quarters of 2016 and 2017.
  • Headline CPIinflation is forecast to be 2% through the year to the June quarter 2016.

Policies that have hit the Budget bottom line?

  • Additional funds for the Roads to Recovery programme ($1.1 billion over two years).
  • Resettling 12,000 refugees fleeing the conflict in Syria and Iraq ($909 million over four years).
  • New and amended listings to the Pharmaceutical Benefits Scheme and Repatriation Pharmaceutical Benefits Scheme ($627.3 million over four years).
  • Managing Illegal Maritime Arrivals while their immigration status is resolved ($500 million over two years).
  • Key components of the Government’s National Innovation and Science Agenda ($459 million over three years).

Where the savings are being made?

  • Tightening welfare loopholes around Centrelink and Pay As You Go (PAYG) arrangements (savings of $704 million over three years).
  • Removing bulk-billing incentives for pathology services and aligning bulk-billing incentives for diagnostic imaging services with those that apply to GP services from 1 July 2016 (savings of $650 million over four years).
  • Streamlining health workforce programmes across clinical placement, rural workforce and aged care (savings of $595.1 million over four years).
  • Refining the Aged Care Funding Instrument (savings of $472 million over three years).
  • Reducing the Child Care Subsidy for families who earn more than $250,000 per year and capping the number of places in the Interim Home Based Carer Subsidy programme (savings of $441 million over four years).