BUDGET SUMMARY - 2016 Budget


The 2016 Budget is unlike traditional May budgets in that it will launch the already announced election campaign for a July 2 poll. As such, the level of scrutiny of individual measures will be intense as the political parties try to score electoral points, and the execution of much of its contents will depend on the outcome of that election. Similarly, the immediate impact on particular groups of electors can be expected to dominate budget commentary and analysis as the fight over winners and losers (or actually, in terms of this budget, “non-winners”) unfolds.

However, it may not be in the immediate interests of either of the major parties to put the fundamental budget underpinnings and future budgetary prospects to the same level of scrutiny. Commentators have for some time identified the continuing poor prospects for budget sustainability as an issue, and even ratings agency Moody have sounded warnings over the likelihood of continuing high deficits. Deloitte Access Economics have forecast continuing high deficits while others have asked why the Treasury has in the past been less keen to come clean in the PEFO (Pre-Election Fiscal Outlook) with the full extent of the financial pressure that Australian governments face in the coming years.

So a key question for the 2016 Budget is the extent to which Australia’s continuing budgetary difficulties are acknowledged and addressed. Does either major party actually address “budgetary repair” in a meaningful way, or will the trend of putting off that task for another day continue to be accepted by both as they pursue immediate electoral favour at the expense of longer term reform of budget fundamentals?

Budget Aggregates

On an underlying cash basis, the deficit is forecast to be -$37.1b in 2016-17, compared to an expected outcome for the current year of -$39.9b ( both significantly up from the last budget time forecasts of -$25.8b and of -$35.9b respectively). In short there is no significant move to return the budget to balance despite the often used mantra. In fact, if the trend in past years of sizable underestimation of the deficit were to occur again, the likely deficit for 2016-17 will be closer to $40 billion.

Payments (outlays) under the Budget are forecast to be 25.8% of GDP for 2016-17 (identical to the expected 2015-16 outcome), with the anticipation that these would decline by just 0.6 percentage points over the forward estimates.

On the same basis, Receipts (revenue) were forecast to be just 23.9% of GDP (up from 23.5% from 2015-16).

Payments are to increase by some $20b, with receipts improving by $23.3b.

Key Messages

The notion strongest throughout the Budget papers and speech was about generating economic growth, with initiatives directed to this goal. A ten year plan to progressively reduce the corporate tax rate for the vast majority of Australian enterprises, anticipated benefits accruing from the beneficial impact of the trade agreements being pursued by the Government, and the stimulus to high-tech businesses from investment in innovation and the increased domestic defence equipment manufacture are to provide a boost to ongoing economic growth.

Treasury included its modelled effect of this stimulus to growth into their budget assumption for the forward years (eg corporate tax cuts are anticipated to increase growth by 1% over four years), and so to the forecast improvement to the fiscal position over the forward years. However, given that over the last decade, and the previous four governments, such forecasts of a return to balance have evaporated, it would be a brave forecaster who believed they could accurately translate the uncertainties of tax incentive behavioural effects, the vagaries of the timing of trade impacts, and the unknowability of innovation changes to divine accurate growth forecasts. The forecast GDP growth of 2.5% next year and 3% thereafter may well be achieved, but not necessarily because of budget measures.

The Budget also contained other key themes:- the start of reform to the income tax system by partial indexation of thresholds, improved compliance and closure of some perceived inequitable superannuation concessions; and maintaining a brake on expenditure.

Signature Measures

The framing of the Budget to stimulate growth as the road to eventual Budget repair and a more prosperous nation provided a three-fold framework for key initiatives:

1. Growth

  • a ten year enterprise tax plan … starting with tax cuts for small and medium-sized enterprises…;
  • continued investment in the national innovation and science agenda, including support for new start-up businesses;
  • securing an advanced local defence manufacturing industry through the twenty year defence industry plan …..;
  • opening up more export opportunities through trade agreements …..; and
  • working to get more than 100,000 vulnerable young people into jobs in the growing Australian economy by giving them real work experience with real employers that leads to real jobs.

2. Tax system

  • combatting tax avoidance, especially by multinational corporations;
  • closing off generous superannuation tax concessions for Australia’s most wealthy and better targeting superannuation tax concessions …; and
  • giving hard working Australians and the Australian businesses that employ them greater tax cuts to earn more without being taxed more.

3. Living within means

  • continuing to keep government spending growth under control and to ensure spending is as efficient, effective and well-targeted as possible;
  • targeting welfare abuse to ensure the social safety net is there for Australia’s most vulnerable, in particular those with disabilities; and
  • responsibly investing in infrastructure like roads, rail, dams and public transport and guaranteeing real, affordable funding for the health and education services relied upon by Australians.

Accuracy of Assumptions

The key assumptions underlying the budget are crucial in determining the actual budget outcome, and can only be tested after the event when the next budget incorporates revised levels. For some years now, estimates of expenditure have tended to be understated in Australian budgets, and revenue over-estimated, resulting in significant upward revisions to the budget deficits over recent years.

The budget included the following assumptions in the modelling of forecast outcomes:

  • Fiscal balance was forecast to improve by $2.3 billion from $39.4b in 2015 -16 to $37.1b in 2016-17
  • Growth was forecast at 2.5% in 2016-17, and 3% thereafter
  • Unemployment rate 5.5%

Portfolio Expenditure 2016

of total federal budget

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