Joe Hockey, the Treasurer of Australia (the equivalent of our Chancellor of the Exchequer) delivered his first budget yesterday with speedy deficit reduction the clear priority. Australia’s public finances are in far better shape than Britain’s.
We have entered the fifth year of George Osborne’s fiscal consolidation and are still on course to borrow £96 billion this year. It’s the first time in 5 years the borrowing number can be written down using fewer than 12 digits.
This year, the UK government will borrow the equivalent of 5.5 per cent of GDP compared to 1.6 per cent in Australia. Even in 2009-10, at the height of the global financial crisis, the Australian government only needed to borrow 4.2 per cent of GDP.
We won’t actually start paying back our enormous debts until the 9th year of Osborne’s plan, and many of his future savings are as yet unspecified. Hockey’s plan will see debts being paid back in four years and there’s a lot less to pay.
Public Sector Net Debt in the UK will hit £1.36 trillion this year, 77 per cent of GDP. Australian Government general government sector net debt is $226 billion (£126 billion) – little more than the UK borrowed in 2011-12 alone.
The fiscal consolidation in Australia will be achieved through a mixture of some ugly, controversial tax hikes and some sensible savings.
Major tax measures:
- Temporary Budget Repair Levy – This horribly named income tax increase will apply an extra per cent charge on individual’s taxable income over $180,000 (£99,614). The Government says this will last for three years, but many supposedly temporary taxes become permanent.
- Company Tax - commitment to cut by 1.5 per cent from 1st July 2015.
- Foreign Aid – Savings of $7.6 over 5 years by freezing “Official Development Assistance” at 2013-14 levels until 2016-17 when it will grow in line with inflation.
- Smaller government – Telecommunications Universal Service Management Agency to be abolished and functions transferred to a department saving $350m a year
- Higher Education – Changing of repayment thresholds and indexation for loans to save $3.1 billion over next four years.
- Health – Medicare Benefits Schedule Rebates reduced saving $1 billion+ a year. Instead, patients will have to make a direct contribution to the service they use.
- Benefits – Freeze eligibility thresholds for non- pension benefits for 3 years saving $1.5 billion
But despite the generally good numbers, the Australian government has decided that having run five deficits in a row, something needs to change. Their fiscal responsibility is commendable, but some of the methods leave a lot to be desired.
The “Temporary Budget Repair Levy” is a blatant breach of Tony Abbott’s promise of “tax cuts without new taxes” in opposition. There’s no justification for tax hikes with the public finances as they are and growth forecast at 3 per cent this year and 4.75 per cent next year.
Only time will tell how much these broken promises undermine Abbott’s credibility.