Australian Federal Budget Snapshot | Bassanese Bites | May 2017

Budget Special

BY David Bassanese | 10 May 2017

The latest Turnbull Budget is clever both politically and economically.

Despite its appearance as a generous big spending “Labor-lite” budget, it actually contains no net new recurrent spending.

We get to this conclusion by considering changes in the budget relative to last year’s mid-year review. On this basis, there is $20 billion in new taxes over the forward estimates plus an $8 billion in reduced spending due to “parameter” changes – largely reflecting lower expected payments in some programs like disability support and private health insurance rebates.

In turn, this bounty helps fund an $11 billion reduction in future budget deficits over the forward estimates, a $3 billion reduction in revenue due to lower expected tax receipts, and around $14 billion in foregone spending cuts the Government now concedes it won’t get through the Senate.

In this sense, the new spending in health and education is met by cuts elsewhere – such as slugging Universities and cutting family tax benefits. It’s also not true the higher Medicare levy helps fund the NDIS. It was already funded.

Despite some wild claims, the economic forecasts seem reasonable – with expected growth around potential this year and next which even a touch conservative compared to those produced by the Reserve Bank a week ago. The budget’s commodity price forecasts are also reasonable, anticipating some decline from recent, unsustainable high levels.

The “technical assumption” of above-potential growth in the out years – such that the unemployment rate falls back to its full-employment level of 5% is also nothing new and should remain a desirable policy expectation.  In this way, the Government is effectively targeting a return of the “structural” budget to balance over this period.

The raft of housing affordability measures are mainly token gestures and won’t materially affect housing costs either way for most Australians.

That said, the Government’s increased commitment for infrastructure spending is refreshing and well timed given the challenges faced by the economy as the housing boom eventually fades.


All up, the modestly improved budget projections founded on still relatively conservative economic assumptions should not unduly threaten Australia’s AAA credit rating anytime soon.

The lack of major new fiscal stimulus for next financial year – with budget improvement similar in degree to that in last Decembers mid-year review – should also mean it will also have a relatively neutral impact on RBA near-term policy deliberations.

That said, the RBA will likely take heart from the Government’s commitment to even more infrastructure spending in the years ahead, as it will lessen the downside risks to economic growth.

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