Research and analysis

Australia: Budget for 2014-15

Published 28 May 2014

0.1 Detail

Headline budget figures

Treasurer Joe Hockey delivered his first budget on 13 May, presenting a $29.8bn (£16.4bn) deficit for 2014-15 (down from 3% to 1.8% of GDP). Net debt will peak in 2016-17, with the budget approaching balance by 2018.

The figures are built on conservative growth estimates of 2.5% over the coming year (less than IMG forecasts), rising to 3% in 2016. Unemployment is projected above 6% until 2017; probably too high.

Australia’s budget challenges are relatively mild and its triple-A credit rating in no danger, but recent budget figures have been subsiding toward unsustainability. Popular but costly social reforms have come on top of savage downward revisions in revenue forecasts as the mining boom tails off and the economy slows.

Hockey has found savings of $36bn over four years from families, the sick, poor, aged, disabled, students and young unemployed. A temporary “deficit levy”, a 2% tax increase on those earning over $180,000, will raise $3bn in the three years of its operation. Permanent tightening of family tax benefits saves $8 billion in four years. Also imposed are Medicare co-payments (including a $7 bill for visiting a GP) and restrictions on unemployment benefits for those under 30.

Aid and defence

Foreign aid cuts provide 20% of total savings, with $7.6bn less over five years. ODA is capped at $5bn (0.33% of current GNI) until 2017, then to increase with inflation. Further refining the focus on the “Indo-Pacific” at the expense of Africa and Latin America will see the neighbourhood account for 92% of programmes in 2014-15.

Seventy federal agencies will be scrapped, privatised or merged, accounting for much of the 16,500 public service job cuts (although 14,000 of these had been foreseen under Labor). The university sector will lose $4bn in course subsidies and research funds.

Defence emerged a big winner, spared from cuts and with spending brought forward. The Abbott government sticks by a commitment to raise defence outlays to 2% of GDP within ten years. The defence budget for 2014 is $29.2bn (1.8% of GDP), rising $9.6bn over the next four years.

Hockey says the $11.6bn set aside for infrastructure (largely roads and ports) next year will kick off a $125bn stimulus by 2019, with private-sector and States’ money countering the fading mining boom. A new $20bn Medical Research Future Fund will create the world’s biggest endowment fund in six years, and put Australia at the forefront of medical innovation.

Contrary to some predictions, the new National Disability Insurance Scheme survives, as do income-tax concessions on private pensions, and fossil-fuel subsidies - $3bn a year in diesel-fuel rebates for miners and farmers.

Australia’s ageing population

The pension age will gradually rise from 65 to 70, with age and disability pensions being indexed only to inflation from 2017. Employers taking on unemployed workers over 50 will receive a $10,000 incentive payment.

Hockey has withdrawn $80bn over ten years in co-funding for hospitals and schools. The government has won economic support including from business groups for its mix of short, medium and long-term savings which will begin to haul public expenditures back into line with revenues. Economists and business say the budget passes the key test: beginning fiscal consolidation without derailing economic recovery. Interest rates should stay at 50-year lows of 2.5% into 2015 as a result. Tax reform is on hold while the government awaits a taxation white paper in 2015.

The budget provides opportunities for UK companies, particularly in infrastructure and medical research.

0.2 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.