Context and commentary

Budget Review 2012–13 Index

Anne Holmes, Robert Dolamore and Indra Kuruppu

Introduction

The 2012–13 Budget was introduced into Parliament on 8 May 2012. The economic context is a domestic economy where the overall indicators appear favourable but where there are clear risks; and an international environment which is the most unstable since World War 11. The political context is of a minority government which, while it has been successful in passing major legislation, has only tenuous control of the Parliament.

The outlook for the economy in the coming years is favourable on the whole. The industrialisation of Asia is expected to support demand for Australian exports, especially commodities. However, the industrialisation of Asia and the continuing fragility of the advanced economies are driving restructuring in the Australian economy. While some sectors are prospering, others are struggling. It is harder to predict outcomes.

The Budget is framed around small surpluses. Apart from economic and fiscal strength, the budget documents stress the major social policy initiatives and the need to spread the benefits of the mining boom and to alleviate cost of living pressures on ‘families and pensioners on modest incomes’.[1]

Economic environment

International events

The outlook for the international economy is uncertain. Both Treasury in the Budget and the International Monetary Fund (IMF) forecast reasonably strong growth, but both are conscious that there are many threats to that growth. The IMF describes the world economic recovery as ‘very fragile’ and ‘vulnerable’[2], while Treasury believes that ‘there are still substantial downside risks to the global economic outlook.’[3]

The major risks come from Europe. At least eight European countries are in recession and it is generally believed that recovery will be slow and patchy, and that there are threats to that recovery. However, in effect, the forecasts are framed on the assumption that there will be no contagion from the crisis in Greece.[4] At time of writing, the political impediments to an orderly restructure in Greece appear great. If another economy such as Spain or Italy were also unable to manage its sovereign debt, a downward spiral could set in that would have catastrophic effects worldwide. At best, the European recovery will be slow as governments and citizens wind back debt and in doing so reduce consumption.

The US economy appears to be on a more certain path to recovery. Employment has grown and unemployment has fallen; the housing market appears to have bottomed, although it will be a long time before it fully recovers; and demand, consumer confidence and factory output are strengthening. Even so, there are concerns about its fiscal position.

Both Treasury and the IMF assume that future growth will be driven by demand from Asia. China’s government appears to have successfully reined in runaway growth and inflation, but there are still concerns about a housing bubble and the level of local government debt. Lending growth has slowed in China and India, but this may be partly offset by reconstruction after natural disasters in Japan and Thailand.

Treasury and IMF forecasts are reproduced in Table 1. They are not significantly different. If anything, the Treasury forecasts are marginally more cautious.

Table 1: International GDP growth forecasts – Treasury and IMF (per cent)

 

 

Forecasts (a)

 

 

2011

2012

2013

United States

Treasury

1.7

2.0

2.25

 

IMF

1.7

2.1

2.4

Euro area

Treasury

1.5

-0.75

0.75

 

IMF

1.4

-0.3

0.9

Japan

Treasury

-0.7

2.25

1.75

 

IMF

-0.7

2.0

1.7

China (b)

Treasury

9.2

8.25

8.5

 

IMF

9.2

8.2

8.8

India (b)

Treasury

7.3

6.25

7.75

 

IMF

7.2

6.9

7.3

World

Treasury

3.9

3.5

4.0

 

IMF

3.9

3.5

4.1

(a) Growth rates are calculated using GDP weights based on purchasing power parity
(b) Production based measure of GDP
Sources: Statement 2: Economic Outlook, Budget paper no.1 2012–13, Table 2; IMF, World Economic Outlook April 2012 Table 1.1

The outlook for world growth is important because it will determine demand for Australia’s exports, and in particular the prices for resources and the exchange rate. For example, Treasury estimates that a four per cent fall in the terms of trade would lead to a one per cent drop in nominal GDP.[5] This in turn has ramifications for all the other forecasts in the Budget.

The domestic economy

At present the Australian economy is operating at around trend levels. The estimates are that in 2011–12, real GDP grew at 3 per cent, unemployment was 5.25 per cent on average, and inflation was at a low 1.25 per cent; however, employment growth was low at 0.5 per cent.[6]

But recent data are mixed. March and April 2012 saw good jobs growth. Retail sales were also stronger than expected. On the other hand, the Australian Industry Group’s Performance of Manufacturing Index fell 5.6 points to 43.9, and its Performance of Services Index fell 7.4 points to 39.6. [7] (On both scales, a reading below 50 indicates a contraction.) Tax receipts are significantly lower in 2011–12 than expected. Meanwhile, the housing market remains flat. Both Treasury and the Reserve Bank of Australia (RBA) have revised their growth forecasts down.

The patchwork economy

The industrialisation of Asia and the after effects of the global financial crisis are together causing a restructuring of the Australian economy. The rise of Asia has increased demand for Australian commodities, which has driven up the dollar and made it harder for Australian exporters to compete in international markets. At the same time, the growth in low cost Asian manufacturing has put further competitive pressure on Australian producers. The financial crisis has also helped to drive up the Australian dollar as a safe haven, while reducing demand in some other countries and causing Australians to wind back their debt. So, while resource based industries have performed well, exposed sectors such as some manufacturing and tourism are suffering. However, some exposed sectors have found new markets in Asia.

The Australian dollar appreciated by 65 per cent against a trade-weighted index between September 2002 and June 2011; against the US dollar it appreciated by 118 per cent.[8] The movement in exchange rates over a longer term is illustrated in the following graph from a speech by the Deputy Governor of the Reserve Bank.

Figure 1 Real exchange rate since 1970[9]

Figure 1 Real exchange rate since 1970 

The figure shows that exchange rates have been high in the past. However, the current level is the highest since the dollar was floated in 1983. The dollar is being driven largely by the terms of trade[10], specifically the huge increase in minerals prices, and the amount of foreign investment. Even if minerals prices stabilise or even soften, the dollar will be supported as the new investments in mining come on stream and increase the volume of exports.

The foreign investment that is driving the dollar is not only for mining. It is also a stream of funds from overseas investors seeking a substantially higher return, given Australian interest rates, than they can get in Europe or the US. They may also be seeking a safe haven in Australia’s robust economy, or a proxy for investment in China.

This prolonged period of high exchange rates and other factors are driving a massive restructuring of the Australian economy. Figure 2, which shows shares of output in the economy, shows declines in agriculture, retail and wholesale trade, and especially manufacturing; and rises in other business services, financial and insurance services, construction and especially mining.

Figure 2 Industry shares of output[11]

Figure 2 Industry shares of output 

 

To some extent this is an acceleration of a normal process for developed economies: they are characterised by a move towards services and away from manufacturing.[12] There are several reasons for this. There is generally a differential in labour productivity growth between the manufacturing and services sector. Since manufacturing generally experiences more rapid labour productivity growth, its share in employment will fall over time. In addition, industries with rapid labour productivity growth will experience a decline in relative prices, which will contribute to a fall in value added shares. In contrast, many services industries such as personal services, legal services and hospitality have little scope for labour productivity growth.

The share of manufacturing in the Australian economy has been steadily falling since 2003. The high exchange rate has created additional problems, because it means that exports are dearer and therefore less competitive in foreign markets, while imports are cheaper and therefore more competitive in the domestic market. But, in part, the challenge to manufacturing comes from competition from low cost producers in Asia and is the same threat faced by manufacturers in other OECD countries. The fall in Australian manufacturing employment is perhaps less apparent than in other developed countries. Absolute employment in manufacturing has been relatively stable, as illustrated by Figure 3, although it has fallen as a share of the total work force. Further, other developed countries’ economies have experienced recession and low growth – they are a reduced share of a shrinking total – whereas Australia’s manufacturing has a reduced share of a growing whole.

Figure 3 Manufacturing employment in the G7 and selected countries[13]

Figure 3 Manufacturing employment in the G7 and selected countries 

Other industries which are vulnerable to the exchange rate have also suffered. Tourism has been hard hit by the high dollar. Coastal resorts have experienced a decline in business as they become relatively expensive for their overseas market, particularly Britain, New Zealand and Japan, while overseas destinations are cheaper for Australians. But there has been a partially offsetting rise in the number of foreign visitors. This is a result of the expansion of the Chinese and Indian middle classes. Not only are they coming in larger numbers, but they spend more than some other nationalities. They do, however, tend to stay in the cities.[14]

Similarly, retailing has faced difficulties on several fronts. Australians have become more cautious consumers. This appears to be largely a response to the global financial crisis. The slowing in consumption expenditure means a slowing of domestic demand, which has made conditions more difficult for some industries, especially retailing. Meanwhile, demand has shifted from goods to services and, to a small but growing extent, online retailing has taken customers away from established businesses.[15]

Meanwhile, the resources sector is continuing to expand. Investment in this sector is expected to continue to be strong, and exports will increase as production comes on stream from past investment.

The outlook for rural industries is also positive, despite the high dollar. The recent wet years have led to increased production and the value of farm production next year is expected to remain near this year’s high levels.[16] 

The uneven performance of different sectors makes budget forecasts more difficult. It also makes communication about the state of the economy harder. The faces of 100 workers laid off from a factory tell a more vivid story than an Australian Bureau of Statistics report that 10 000 jobs have been created elsewhere in the economy.

The domestic outlook

The budget forecasts for the Australian economy are for growth around trend levels, continued low unemployment, and well contained inflation.

Table 2: Major economic parameters (a)

Forecasts

Projections

2011–12

2012–13

2013–14

2014–15

2015–16

Real GDP

3.0

3.25

3.0

3.0

3.0

Employment

0.5

1.25

1.5

1.5

1.5

Unemployment rate

5.25

5.5

5.5

5.0

5.0

Consumer price index

1.25

3.25

2.5

2.5

2.5

Nominal GDP

5.5

5.0

5.25

5.25

5.25

(a) Real and nominal GDP are year-average growth. Employment and CPI are through-the-year growth to the June quarter. The unemployment rate is the rate for the June quarter
Source: Statement 1, Budget Overview, Budget paper no.1 Table 2 page1–8

As for international forecasts, Treasury forecasts for domestic GDP growth appear to be in line with, but slightly less optimistic than, other official forecasts.

Table 3 Real GDP growth forecasts, Budget and RBA, per cent

 

2011–12

2012–13

2013–14

Budget

2.0

3.0

3.25

RBA

2.75

3.0-3.5

3-4

 

As noted above, consumers are reluctant to take on debt, because of continuing global uncertainty and because their net worth remains at levels below those before the global financial crisis, with a slow recovery in share prices and lower housing prices. Household consumption is expected to be tied to income growth at three per cent for the next two years. Housing investment is likely to stay low, with the caution about debt limiting demand.

The main feature of the expected growth is surging investment in resource industries. Business investment is forecast to rise by 12.5 per cent in 2012–13, and eight per cent in 2013–14. Within this, resources investment is expected to be particularly strong, reaching nine per cent of GDP in 2013–14, while non-resources investment will be more subdued. Engineering construction investment, which is linked to the mining boom, will be particularly strong.

Public final demand (that is, expenditure by the government on goods and services, not including transfer payments) will be flat, in line with the fiscal tightening in the Budget, although Treasury expects this to be partly offset by spending by the state and territory governments. (This appears optimistic in the light of falling GST receipts—see the accompanying brief The GST pool.)

The value of exports is expected to increase in 2012–13 and 2013–14. The composition of exports will reflect the growing importance of Asia as a market while the share of the advanced economies in Australia's exports continues to fall. The investment in resources will translate into increased output and, notwithstanding a modest fall in the terms of trade, the value of non-rural commodity exports is expected to increase. Rural exports are expected to remain at historically high levels. Exports of elaborately transformed manufactures are also expected to increase modestly despite the continuing high exchange rate. Exports of services, including tourism and education-related travel services are expected to recover only slowly after falling in 2011–12.

Imports are expected to increase strongly, particularly capital goods for the liquefied natural gas industry. Meanwhile, consumer goods and travel imports are expected to grow as consumers take advantage of the high dollar.

Overall employment growth is expected to strengthen. The sources of the growth will reflect the restructuring that is occurring in the economy. The resources sector is capital intensive but is still expected to account for solid growth in employment; employment in services, especially those related to resources, is also expected to expand. Overall the employment growth will not be enough to prevent a slight rise in unemployment. Wages are expected to be contained by this slight rise in unemployment combined with a low inflation rate.

Treasury forecasts for the domestic economy are summarised in Table 4.

Table 4: Domestic economy forecasts(a)

Outcomes(b)

Forecasts

2010–11

2011–12

2012–13

2013–14

Panel A - Demand and output(c)

Household consumption

3.1

3.25

3

3

Private investment

Dwellings

3.0

-1

0

2.5

Total business investment(d)

5.6

18

12.5

8

Non-dwelling construction(d)

8.8

25

14

7.5

Machinery and equipment(d)

3.0

16.5

12.5

8.5

Private final demand(d)

3.3

6

5

4.25

Public final demand(d)

3.4

1.5

-0.5

0

Total final demand

3.3

5

3.75

3.25

Change in inventories(e)

0.5

0

0

0

Gross national expenditure

3.8

5

4

3.5

Exports of goods and services

0.2

4

4.5

4.5

Imports of goods and services

10.4

12.5

7.5

5.5

Net exports(e)

-2.0

-2

0.75

-0.5

Real gross domestic product

2.0

3

3.25

3

Non-farm product

1.9

3.25

3.25

3

Farm product

7.1

-6

2

1

Nominal gross domestic product

8.3

5.5

5

5.25

Panel B - Other selected economic measures

External accounts

Terms of trade

20.6

3.25

-5.75

-3.25

Current account balance (per cent of GDP)

-2.4

-3

-4.75

-6

Labour market

Employment (labour force survey basis)(f)

2.2

0.5

1.25

1.5

Unemployment rate (per cent)(g)

4.9

5.25

5.5

5.5

Participation rate (per cent)(g)

65.5

65.25

65.25

65.25

Prices and wages

Consumer price index(h)

3.6

1.25

3.25

2.5

Gross non-farm product deflator

6.0

2.5

1.75

2.25

Wage price index(f)

3.8

3.5

3.75

3.75

(a) Percentage change on preceding year unless otherwise indicated.
(b) Calculated using original data unless otherwise indicated.
(c) Chain volume measures except for nominal gross domestic product which is in current prices.
(d) Excluding second-hand asset sales from the public sector to the private sector.
(e) Percentage point contribution to growth in GDP.
(f) Seasonally adjusted, through-the-year growth rate to the June quarter.
(g) Seasonally adjusted rate in the June quarter.
(h) Through-the-year growth rate to the June quarter.
Note: The forecasts for the domestic economy are based on several technical assumptions. The exchange rate is assumed to remain around its recent average level  – a trade-weighted index of around 77 and a US$ exchange rate of around 103 US cents. Interest rates are assumed to move broadly in line with market expectations at the time the forecasts were finalised. World oil prices (Malaysian Tapis) are assumed to remain around US$126 per barrel. The farm sector forecasts are based on a return to average seasonal conditions over 2012–13 and 2013–14.
Source: ABS cat. no. 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury.
Source:  Statement 2, Budget Paper No. 1 2012–13, p. 2–12.

Fiscal strategy

According to Budget paper no.1 (page 3–4) the Government's fiscal strategy has remained unchanged since 2008–09. The medium term strategy is to:

  • achieve budget surpluses, on average, over the medium term;
  • keep taxation as a share of GDP below the level for 2007–08 (23.7 per cent of GDP), on average; and
  • improve the Government's net financial worth over the medium term.[17]

This Budget returns to a slim surplus in 2012–13, with small surpluses in the out years.  The government's rationale for returning to surplus is, in effect:

  • while the economy is growing is a good time for fiscal restraint
  • restraining government demand will leave room for the Reserve Bank to cut interest rates and allow private demand to keep the economy growing
  • fiscal restraint sends a signal about Australia's strong public finances which is more important than ever in the light of the European sovereign debt issues.[18]

The 2012–13 Budget features a surplus for the first time since 2007–08. The estimated surplus is very small. More important, it is projected to increase only slowly—the surplus actually declines as a proportion of GDP, from 0.5 per cent in 2012–2013 to 0.4 per cent in the forward years. Returning to surplus entailed the sharpest fiscal consolidation since the 1950s, with a contraction in the Budget of about three per cent of GDP, from a deficit of $44.4 billion to a surplus of $1.5 billion (see Table 5.)[19]   

Table 5: Budget aggregates

Actual

Estimates

Projections

2010–11

2011–12

2012–13

2013–14

2014–15

2015–16

Underlying cash balance ($b)(a)

-47.7

-44.4

1.5

2.0

5.3

7.5

Per cent of GDP

-3.4

-3.0

0.1

0.1

0.3

0.4

Fiscal balance ($b)

-51.5

-42.0

2.5

2.6

7.0

9.5

Per cent of GDP

-3.7

-2.8

0.2

0.2

0.4

0.5

(a) Excludes expected Future Fund earnings.
Source: Statement 3 Fiscal Strategy and Outlook, Budget Paper No. 1 2012–13 Table 1 p.3–3

The 2011–12 Budget projected a surplus in 2012–13. The deficit for 2011–12 was revised upwards in the mid-year economic and fiscal outlook and again in the Budget. The revisions were due partly to reduced tax receipts owing to lower economic activity. Some expenditure was also brought forward from 2012–13. So part of the consolidation is a matter of timing. Even so, the real contraction is very large.

Around half of the dramatic turnaround of $46 billion comes from ‘parameter variations’. These are increases in receipts and reductions in payments due to changes in the variables shown in Table 2 above. As can be seen in Table 6, parameter variations between the 2011–12 Budget and this year’s Budget total $22 billion.

Table 6: Reconciliation of underlying cash balance estimates

Estimates

Projections

2011–12

2012–13

2013–14

2014–15

$m

$m

$m

$m

2011–12 Budget underlying cash balance(a)

-22,618

3,498

3,672

5,795

Per cent of GDP

-1.5

0.2

0.2

0.3

Changes from 2011–12 Budget to 2011–12 MYEFO

Effect of policy decisions(b)

-4,860

2,857

3,701

4,676

Effect of parameter and other variations

-9,634

-4,876

-5,509

-7,363

Total variations

-14,495

-2,019

-1,808

-2,687

2011-12 MYEFO underlying cash balance(a)

-37,113

1,479

1,864

3,108

Per cent of GDP

-2.5

0.1

0.1

0.2

Changes from 2011–12 MYEFO to 2012–13 Budget

Effect of policy decisions(b)(c)

Receipts

76

2,021

3,680

4,915

Payments

2,777

-903

-253

2,424

Total policy decisions impact on underlying cash balance

-2,701

2,924

3,934

2,491

Effect of parameter and other variations(c)

Receipts(d)

-6,117

-7,825

-7,797

-7,288

Payments

-1,529

-4,958

-4,043

-7,007

Total parameter and other variations impact on underlying cash balance

-4.588

-2,867

-3,754

-281

2012–13 Budget underlying cash balance(a)

-44,402

1,536

2,044

5,318

Per cent of GDP

-3.0

0.1

0.1

0.3

(a) Excludes expected Future Fund earnings.
(b) Excludes secondary impacts on public debt interest of policy decisions and offsets from the contingency reserve for decisions taken.
(c) A positive number for receipts indicates an increase in the underlying cash balance, while a positive number for payments indicates a decrease in the underlying cash balance.
(d) Receipts will differ from the cash receipts reconciliation published in Budget Statement 5 because they exclude Future Fund earnings.
Source: Statement 3 Fiscal Strategy and Outlook, Budget Paper No. 1 2012–13 Table 5 p. 3–10

Measures were already built in to the forward estimates to produce a surplus this year. Further savings come from policy measures in this Budget. Some of these are discussed in more detail later in this Budget Review.

Revenue measures

The main revenue measures are listed in Statement 3 of Budget Paper No. 1. They are estimated to contribute $2.0 billion in 2012–13. They include:

  • not proceeding with lowering the company tax rate, which was due to commence from the 2013–14 income year, nor the early start to lowering the company tax rate for small businesses, which was due to commence from 2012–13
  • not proceeding with the standard deduction for work-related expenses and the cost of managing tax affairs, which was scheduled to commence on 1 July 2013, although this is partly offset by an increase in the tax-free threshold
  • deferring the higher concessional contribution caps for individuals over 50 with superannuation balances below $500 000, which was due to start on 1 July 2012, to 1 July 2014
  • increasing funding to the Australian Taxation Office (ATO) to increase the ATO’s collections of outstanding taxation debts and superannuation guarantee charges and to extend GST compliance activities
  • further reform to the fringe benefits tax concessions for living-away-from-home allowances and benefits by limiting access to the concessions
  • reducing the tax concession for superannuation contributions of very high income earners and
  • not proceeding with the 50 per cent tax discount for interest income which was due to commence on 1 July 2013.

The impact of these policy decisions on receipts has been partially offset by a number of decisions that have reduced receipts, most importantly, allowing companies to carry back tax losses so they receive a refund against tax previously paid.

Expense measures

The main expense measures are listed in Statement 3 of Budget Paper No. 1. They include:

  • increasing the maximum rate of the means tested Family Tax Benefit Part A (FTB-A)
  • continuing Australia’s military contribution to international stabilisation in East Timor, Afghanistan and the wider Middle East Area of Operations, and the Solomon Islands
  • replacing the Education Tax Refund with a new Schoolkids Bonus provided through the transfer system—this measure increases payments by $1.3 billion in 2011–12 and reduces costs by $105 million in 2012–13 because of differences in the timing of payments under the new arrangements, but still involves an increase in spending of over $400 million in 2012–13
  • the first stage of a National Disability Insurance Scheme
  • funding for the Government’s Aged Care Reform package
  • a range of dental health measures, partly offset by not proceeding with the Commonwealth Dental Health Program  and
  • funding to construct a new Commonwealth-operated post-entry quarantine facility.

The impact of these policy decisions on payments has been partially offset by a number of decisions that have reduced cash payments, including:

  • from 1 January 2013 requiring those who have been on ‘saved’  Parenting Payment arrangements to meet the same eligibility requirements as those who have come onto the payment since 1 July 2006
  • limiting eligibility for FTB-A to young people under 18 years of age, or where a young person remains in secondary school, the end of the calendar year in which they turn 19, while Youth Allowance becomes the primary form of assistance to eligible young adults
  • restructuring apprenticeship incentive payments for existing workers
  • improving the targeting of the Extended Medicare Safety Net
  • deferring the commitment to spend 0.5 per cent of Gross National Income on Official Development Assistance by one year to 2016–17
  • deferring some Defence acquisitions, adjusting the Defence capital equipment program and delivering further operating efficiencies and
  • accelerating funding for Local Government Financial Assistance Grants to assist in the response to natural disasters in 2010–11 and 2011–12—this measure is expected to reduce payments by $1.1 billion in 2012–13 and increase cash payments by the same amount in 2011–12.

The net impact of the expense measures is to reduce payments by nearly $1 billion.

The budget outcome depends on the parameters discussed above. Those parameters are realistic but vulnerable to domestic and international events.  Predicting the budget outcome is also difficult in times of structural and behavioural change. As economists Chris Richardson and Stephen Smith have pointed out, corporations do not pay tax on their spending, whereas consumers do.[20] When growth has shifted to become dependent on business investment rather than household consumption, initial tax collections fall. So the projected sound growth in GDP may not generate the taxes that would usually come with it. Revenue has fallen short of projections in each of the last five years.[21]

The budget outcome also depends on the success of several measures presented in the Budget. Most notably, the increases in revenue projected for the tax compliance measures appear large. The plausibility of these estimates is discussed in the accompanying brief GST compliance activities of the ATO and the Budget surplus, which concludes that they are reasonable.

In the light of the mixed signals about the domestic economy discussed above, it is not obvious that returning to surplus with such a sharp fiscal consolidation is the best strategy.  There is a potential for fiscal tightening to put even more pressure on struggling companies, especially in the retail sector. But the environment is extremely uncertain.

Some themes of the Budget

Spreading the benefits of the mining boom

In his Budget Speech the Treasurer indicated that a key theme of this year’s Budget is to share the benefits of the mining boom with more Australians. The increase in revenue from the Minerals Resource Rent Tax (MRRT) will fund a range of initiatives targeting families and businesses (see the accompanying brief Minerals Resource Rent Tax: changes to revenue and expenditure estimates). However, it is important to recognise that Australians and the wider economy are already significantly benefiting from the mining boom. Professor Bob Gregory’s analysis of the implications for Australia’s living standards of the large and sustained increase in the terms of trade associated with the mining boom highlights that unlike previous mining booms the current episode has been overwhelmingly driven by changes in the price of Australia’s exports rather than export volume growth generated by new discoveries.[22] Another key difference is that in previous mining booms Australia had a fixed or tightly managed exchange rate, which meant that the real exchange rate could only adjust to the terms of trade shock through higher inflation. In contrast, a floating exchange rate in the current episode has allowed the Australian dollar to appreciate, thereby keeping downward pressure on import prices and moderating inflationary pressures.

Professor Gregory estimates that the direct and indirect income effects from the trading gains have lifted Australian living standards relative to the United States from an average in the long run of around 92 per cent over the 1959–2003 period to a current level of 115 percent. In other words, in just eight years, Australian living standards have increased by 25 percent relative to the United States, which as Professor Gregory notes is an extraordinary change by historical standards.

The appreciation in the exchange rate has been an important mechanism for helping spread the benefits of the mining boom more widely in the Australian community. A stronger Australian dollar reallocates some of the direct income gains from the mining industry to those who buy imports or products with a large import component. This is because a stronger Australian dollar reduces the domestic price of both mining exports and imported products. For wage earners the gains in real living standards since 2003 have been substantially delivered through the increased purchasing power generated by lower import prices.

The Reserve Bank of Australia (RBA) has also highlighted the ways in which the benefits of the mining boom flow through to the wider economy. For example, the RBA estimates that while the mining sector currently accounts for around 10 percent of Australia’s GDP and 2¾ percent of total employment, when account is taken of the inputs into the mining sector produced by other domestic industries and those employed in activities related to the mining sector, these figures are around 16–17 per cent and eight per cent respectively.[23] Although the mechanisms by which the benefits of the mining boom flow through to the wider economy can be hard to see they are real nonetheless. In this regard, Deputy Governor Philip Lowe has noted that:

In effect, there is a chain that links the investment boom in the Pilbara and in Queensland to the increase in spending at cafes and restaurants in Melbourne and Sydney. This chain starts with the high terms of trade that has pushed up the Australian dollar. In turn, the high dollar has meant that the prices that Australians pay for many manufactured goods are, on average, no higher than they were a decade ago, despite average household incomes having increased by more than 60 per cent over this period. The stable prices for many goods, combined with strong disposable income growth, mean there is more disposable income to be spent on services in cities and towns far from where the resources boom is taking place.[24]

This is not to suggest that everyone has benefited as a result of the mining boom or to the same extent. Nevertheless, in framing policies that are intended to redistribute the gains from the mining boom, it is important to recognise the ways in which and the extent to which the wider economy and community are already benefiting.

Redistribution

The Australian newspaper on 9 May 2012, the day after the Budget, carried the front page headline, ‘Smash the Rich’. The Treasurer, in his budget speech, emphasised that he wanted to alleviate cost of living pressures on ‘families and pensioners on modest incomes.’[25]

The Budget has not made substantial reforms to ‘middle class welfare’—payments through the tax and transfer systems to relatively affluent people. It is much more difficult to take such benefits away than to instigate them. The links in the following discussion are to accompanying briefs in this Budget Review which deal with the measures mentioned.

There have been minor adjustments to some measures, including;

  • reducing the tax concession for superannuation contributions of very high income earners (over $300 000 a year), which increases revenue by $1.0 billion over four years, in the context of tax expenditures on superannuation worth $27.2 billion in 2010–11, when almost 20 per cent of superannuation contributions are made by the top five per cent of income earners.[26]
  • changes to the net medical expenses tax offset to reduce it for people on high incomes, which saves $370 million over three years.

There is also increased funding for compliance activities by the Australian Tax Office, but this is to implement the existing system.

There are some measures which will benefit low income earners, including:

  • the new 'Schoolkids Bonus' cash payment, which replaces the existing Education Tax Refund
  • the increase in the rates of payment for FTB-A and
  • a new 'Supplementary Allowance' providing a small cash payment to certain income support recipients—particularly Newstart, Youth Allowance and Parenting Payment recipients.

Journalist Ross Gittins quotes the calculations of Professor Peter Whiteford, of the University of New South Wales, to say that the cost of the welfare measures, $8 billion over four years, represents an increase of less than 1 per cent of total budget spending on health and social security.[27]

These measures will help those who are eligible, but do little to address the kinds of issues identified by the Henry Review with regard to the adequacy, complexity and incoherence of the welfare system. In particular, there has been no attempt to address the increasing gap between allowance and pension payment rates caused by different indexation methods. This issue is dealt with in the accompanying brief on New and increased benefits for families and job-seekers.

Meanwhile, limiting eligibility for FTB-A to young people under 18 years of age or, where a young person remains in secondary school, the end of the year in which they turn 19, results in a saving of $312 million over four years.  This measure is discussed in the accompanying brief, Family Tax Benefit Part A—change to age of eligibility. While it does have a clear rationale, the funds will be lost by people who are by definition not affluent.

Improving the productive capacity of the economy

The Budget contains some measures which are likely to improve the productive capacity of the economy. There are measures applying to individuals and companies, but there is little new expenditure on infrastructure.

The individual measures are mostly directed at improving workforce participation. These are discussed in the accompanying brief Increasing workforce participation.

There are further measures to support mathematics and science education (see accompanying brief Mathematics and science—increasing participation). There is also an increase of $55.7 million over four years in funding for the Home Interaction Program for Parents and Youngsters, which helps parents prepare their children for school. There are few real changes in the education area, but this is in the context of a rise in participation in higher education building on earlier measures, reform of skills training in conjunction with the States and Territories, and a foreshadowed reform of school funding.

The main business focused measure is the business tax loss carry-back, which is discussed in an accompanying brief, Abandoning a reduction in the company tax rate and introduction of tax loss  carry-back. This is a new measure which will reduce risk and therefore encourage innovation by business. It will not be of benefit to all businesses, but it appears to be particularly appropriate, given the uncertainty in the international economy discussed above.

There are few new infrastructure financing measures in the Budget. This is perhaps understandable, given infrastructure funding associated with the response to the global financial crisis, the spending on the National Broadband Network, and creation of the Regional Infrastructure Fund in association with the Minerals Resource Rent Tax.

Reactions from business associations and community groups

Australian Chamber of Commerce and Industry

The Chief Executive of the Australian Chamber of Commerce and Industry, Peter Anderson, has labelled the federal budget as strong in ambition to repair government finances  but lacking in vision and support for the economy. Mr Anderson stated that while returning the budget to surplus is ambitious and should be supported by businesses if the forecast for improved economic conditions is realised, but proceeding with the carbon tax and failing to deliver the company tax cut fails to strengthen the economy and to address falls in the competitiveness and productivity of the business sector.[28]

Australian Council of Social Services

The Australian Council of Social Services (ACOSS) has welcomed the overall budget which it believes moves to secure a more sustainable revenue base while funding important national priorities and implements a number of the Council’s recommendations to make the budget more equitable and sustainable. ACOSS notes that, while the budget makes the tax system fairer and will result in improvements for low income earners, there is no strengthening of investment for the long-term unemployed, unsustainable cuts to Job Services Australia and 100 000 sole parents as ‘collateral damage’.[29]

Australian Council of Trade Unions

According to the Australian Council of Trade Unions (ACTU), the federal budget has been driven by the government’s objective to return a surplus and provides a progressive tax system, better assistance for low and middle income earners and protection for jobs in struggling businesses. However, the ACTU believes cuts to public service jobs and social security are regrettable and while the forecast for Australia’s economy indicates lower unemployment than the United States and much of Europe, the government should be mindful of ongoing global economic instability and the necessity to reconsider their position if necessary.[30]

Australian Industry Group

The Australian Industry Group (AIG) welcomes the budget surplus but argues that the Government has sacrificed longer-term drivers of economic growth for a short-term boost to consumption. The AIG considers that additional taxes and costs imposed on industry will affect the capacity of business to boost productivity, improve Australia’s global competitiveness and increase employment by making critical longer term investments. Defence spending cuts also raise concerns about the impact on industry. However, the AIG expects the budget surplus to have important national benefits, particularly for industry, in relation to increased levels of permanent migration addressing skills shortages, emphasis on incentives to encourage mature-age Australians in the workforce, ongoing commitment to higher education, training and skills and the establishment of a manufacturing technology centre and Australian skills centre.[31]

Business Council of Australia

The Business Council of Australia (BCA) believes that the federal budget takes some steps to strengthen Australia’s economy but has missed an opportunity to outline a clear medium-term economic strategy. While the budget surplus is supported, the BCA believes the test for the government will be in implementing and delivering the projected surplus. The Business Council welcomes the welfare and social services reforms and measures to support the economy’s productive capacity, but sounds a warning against ad hoc measures, recommending comprehensive welfare and tax reform, and an independent audit of the scope and size of government to develop a medium-term strategy for sustainable focussed expenditure and to support growth.[32]

Every Australian Counts

Every Australian Counts, an organisation which lobbies for improved services for people with disabilities, has said that the $1 billion to be committed over four years is a welcome measure and, in a tight fiscal environment, represents a positive change for Australians living with a disability. It notes that the scheme, which lays a strong foundation to realise the National Disability Insurance Scheme, comes sooner than expected and will rely heavily on cooperation between Federal, state and territory governments.[33]



[1].       W Swan (Treasurer) Budget Speech 2012–13 accessed 17 May 2012.

[2].       IMF, World Economic Outlook April 2012, at http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/c1.pdf p. 5, viewed 12 May 2012.

[3].       References to the Budget and budget figures in this brief have been taken from the following document unless otherwise sourced: Australian Government, Budget Strategy and Outlook: Budget Paper No.1 2012–13, Commonwealth of Australia, Canberra, 2012, viewed 12 May 2012.

[4].       IMF, op. cit., p. 5.

[5].       Budget paper no. 1, p. 3–23.

[6].       Ibid., p. 1.8.

[7].       Australian Industry Group, ‘Manufacturing falls sharply in April’, viewed 4 May 2012; Australian Industry Group ‘Services sector slumps in April’, viewed 4 May 2012.

[8].        R G Gregory, Living Standards, Terms of Trade and Foreign Ownership: Reflections on the Australian Mining Boom Centre for Economic Policy Research, ANU, 2011, p. 10 footnote 15.

[9].        P Lowe,  The Forces Shaping the Economy Over 2012 Address to the Committee for Economic Development of Australia 16 February 2012 RBA Bulletin March Quarter 2012, p. 88.

[10].      That is, the ratio of prices of exports to prices of imports.

[11].      Reserve Bank of Australia Chart Pack March 2012 page 13.

[12].      OECD, The Changing Nature of Manufacturing in OECD Economies Working Paper, 2006.

[13] .     M Parkinson,  Policy Challenges in a Changing World Address to the American Chamber of Commerce in Australia 9 November 2011.

[14].      C Yeates, ‘Tourism industry weathers a sea change.’ Sydney Morning Herald 2 January 2012.

[15].      Productivity Commission, Economic Structure and Performance of the Australian Retail Industry Inquiry Report No. 56, 4 November 2011. 

[16].      Australian Bureau of Agricultural and Resource Economics and Sciences, Agricultural commodities, Vol. 2 No.1 March 2012.

[17].      Budget paper no. 1 p. 3–4.

[18].      Ibid.

[19].      C Richardson and S Smith, Deloitte Federal Budget Brief 2012 Deloitte Access available at https://www.deloitte.com/view/en_AU/au/news-research/federalbudget2012/index.htm , accessed 16 May 2012.

[20].      Ibid.

[21] .      S Kompo-Harms, ‘Budget 2011–12 — key features’,  in Parliamentary Library Budget Review 2011–12.

[22].      R G Gregory, op. cit.

[23].       P Lowe, Developments in the Mining and Non-mining Economies, Address to the ADC Future Summit, Melbourne, 14 May 2012, available at http://www.rba.gov.au/speeches/2012/sp-dg-140512.html.

[24].       P Lowe, The Forces Shaping the Economy over 2012, op.cit., p. 88.

[25].       W Swan (Treasurer) Budget Speech 2012–13 accessed 17 May 2012.

[26].       Association of Superannuation Funds of Australia (ASFA), The equity of government assistance for retirement income in Australia, Research Paper, February 2012, pp. 18–21, viewed 6 May 2012.

[27].      R Gittins, ‘Spreading the love to buy votes? So what, it was about time’, Sydney Morning Herald 16 May 2012, viewed 17 May 2012.

[28].    P Anderson, A budget of short term appeal, but bigger missed opportunities and a failure on company tax, media release, Australian Chamber of Commerce and Industry, 8 May 2012, viewed 11 May 2012.

[29].      C Goldie, Robin Hood comes good, except for single parent families, media release, Australian Council of Social Service, 8 May 2012, viewed 11 May 2012.    

[30].    G Kearney, Government takes important steps toward creating a fairer Australia with 2012 Budget: unions, media release, Australian Council of Trade Unions, 8 May 2012, viewed 11 May 2012.

[31].      Australian Industry Group, Business pays back to black budget, 8 May 2012, viewed on 11 May 2012   

[32].    J Westacott  Budget a start but a comprehensive strategy must follow, media release, Business Council of Australia, 8 May 2012, viewed 11 May 2012.

[33].      J Della Bosca, NDIS: Budget makes it real, media release, Every Australian Counts, 8 May 2012, viewed 11 May 2012.

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