On the surface the 2017 budget has the appearance of a generous big spending ALP budget but it actually contains no new recurrent spending.
This conclusion is made 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. This 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.
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 very much token gestures that will not reduce housing costs either way for all 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 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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