The government’s Mid-Year Economic and Fiscal Outlook was released this morning and, despite a further round of savings and tax increases totalling over $16 billion over four years, the government has had to shave its surplus for this year to a mere $1.1 billion and reduced its forecast surpluses over the forward estimates to cope with a further downgrade in tax revenue.

Treasury has downgraded its forecasts for GDP, employment growth and inflation for this financial year and next, with economic growth predicted to be 3% for both years (down from the budget forecast of 3.25% this year) but expects unemployment to remain as forecast in May.

To meet the revenue shortfall of $4 billion forecast for this year, the government announced a series of savings initiatives, including:

  • Changes to the calculation and indexation of the private health insurance rebate, saving $700 million over forward estimates (FEs)
  • Removal of the private health insurance rebate from lifetime health cover ($386 million over FEs)
  • Increases in visa application charges, with over $500 million over FEs
  • Changes to the treatment of fringe benefits ($445 million over FEs)
  • A change to the treatment of lost superannuation accounts that will deliver an immediate windfall of over $550 million
  • An increase in the tax levy on self-managed superannuation funds worth $319 million over FEs
  • Savings from redirected grants programs, including pushing back some spending into later years
  • Reduction in the Baby Bonus to $3000 for second and later children, saving $500 million over FEs from next financial year.

Against those savings, the government has had to spend $4.2 billion on its new dental scheme, starting next financial year, additional health spending in Tasmania ($325 million), an extra $490 million on its response to the Houston panel report and more on Afghanistan (an extra US$100 million in support for the Afghan government).

The biggest cuts to revenue have come from lower company tax ($2 billion this year), and a $1 billion annual fall (or around one-third!) in MRRT revenue due to declining commodity prices (and perhaps the reality check of the first instalments coming from the big miners). However, the states have had a little luck, with Treasury forecasting around a billion extra dollars in GST revenue over FEs.

While economic growth is generally forecast to be a little softer, for the first time in a while Treasury has lifted its expectations of the crucial housing sector, with growth next year expected to reach 4%, offset by lower-than-forecast levels of non-dwelling construction; forecasts of overall government spending across the economy have also been revised down. Our terms of trade are expected to decline 8% this year rather than 5.75%, and next year has been revised down as well. Treasury has revised down its forecasts for the growth in our region, with China and Japan revised down in growth forecasts, along with India.

Beyond the big savings that will garner attention, the government has presented a long list of additional small savings measures that wouldn’t be out of place in a budget statement. This is a genuine mini-budget, and with more real savings than usual for this government, which has tended to gloss over the difference between actual spending cuts and tax rises. There are, as always, a few tricks, including pushing still more spending into 2013-14. But for all the efforts among some in the commentariat to mount a campaign against its profligacy in areas like the NDIS and Gonski, the fiscal discipline of this government, now into its fifth year, remains strong.

The broader issue, however, is whether this obsession with surplus remains appropriate given the economy is now seen as softer than previously by both Treasury and the RBA. The government has handed full responsibility for maintaining jobs and economic growth to the RBA board, and indeed boasted about it. No longer are fiscal and monetary policy working in tandem, as Wayne Swan once boasted; rather the government emphasises the contractionary nature of its fiscal policy as the basis for further loosening of monetary policy.