Here's what to expect in the 2017 budget

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Treasurer Scott Morrison after a media briefing outside the Reserve Bank. William West/AFP/Getty Images

The concept of home and all that it means will come into focus at this year’s federal budget.

Treasurer Scott Morrison, who brings down budget on the night of Tuesday, May 9, has been preparing the ground, speaking to those 30% of Australians who rent and those who in past generations would have been first home buyers but for steep prices rises.

The key questions are why housing has become so expensive and what can be done to get young people back into the market, especially in Sydney and Melbourne where prices have skyrocketed.

Expect a series of measures, to build housing supply and help first home buyers, but no magic fix.

“One budget will not turn these issues around in isolation, but we can make a start,” says Morrison.

“There are no single or easy solutions and the payback is achieved in some cases over a generation — not an electoral or budget cycle.”

Among other foreshadowed measures expected in the budget:

  • Funding to be restored to 190 community legal centres across. Attorney General George Brandis has promised extra funding in the budget. The legal centres had been due to lose $30.1 million from July 1.
  • Expect more work to keep welfare payments under control. Christian Porter, the social services minister, says the government is still committed to billions of dollars in welfare savings that do not have the numbers in the Senate to pass parliament. Social secuity and welfare is the governmnet’s biggest spending item at around $158.6 billion.
  • More changes to the Pharmaceutical Benefits Scheme, bringing down the price of some drugs.
  • Company tax cuts. The government will continue with its long term agenda to cut tax for all companies, large and small. Inn its 10 year plan, the government wants company tax cut from 30% by 5% for all companies.
  • Tax avoidance. Fresh from a significant win against mining giant Chevron over transfer pricing, the government will continue its assault on companies shifting profits from Australia to countries with lower tax rates.

Health, social security and welfare are the biggest drains on the budget. Here’s an overview of federal government spending:

Source: 2016-17 federal budget papers.

On housing, getting rid of negative gearing — the overarching principle that expenditure used to create income can be claimed as a tax deduction — appears to be off the agenda.

The government is fond of pointing out that negative gearing isn’t only for the rich.

About 1.3 million Australians negatively gear, including 58,000 teachers and one in five police officers. Two-thirds have a taxable income of $80,000 or less.

Among measures still on the table are limiting the tax break from negative gearing to a dollar amount, past which no deduction can be claimed, and putting a ceiling on the number of investment properties upon which expenses can be claimed against income.

Morrison says the main cause of declining housing affordability is the failure of housing supply to adjust to increased demand, driven by higher economic growth.

And so, he argues, the issue of affordability can can’t be answered with lower economic growth.

“Our policy response must be careful and calibrated, lest we spark a negative housing shock that would undermine our economic confidence, negatively impact household consumption and retard economic growth,” Morrison says.

“The more than two-thirds of Australians who live in owner-occupied homes would agree that reducing the value of their home is not a good plan, and it is not the Government’s plan.”

In his second budget, Morrison is expected again to demonstrated he doesn’t spend more than he can save.

Late in 2016, Morrison said: “We do not spend more than we save, and that the predominant mechanism for restoring the budget to balance is by getting expenditure under control.”

At MYEFO, the Mid-Year Economic and Fiscal Outlook, the deficit forecast for this financial year was $36.5 billion, or about $600 million better than expected when the 2016 budget was put together.

But next financial year the deficit is expected blow out to $28.7 billion, $2.6 billion worse than the May 2016 budget forecast of $26.1 billion, accordin to MYEFO.

Economist Chris Richardson at Deloitte Access Economics says the twin engines of chance — a China boom and a house price boom — are both supporting the national tax take at the same time.

“China is doing the Federal Budget favours at the same time as housing prices puff up revenues for some states,” says Richardson in his latest business monitor report.

“These are welcome developments, allowing a loosening of the budgetary noose, with the combined national fiscal position looking better.

“At first blush that seems to suggest the nation is making healthy and continuing progress from the peak deficits for the national public sector registered at the height of the GFC in late 2009.”

However, spending continues to climb and attempts to rein it in remain “fruitless vote-losers”.

The 2017 budget will also be a crucial piece of data for Standard and Poor’s when it decides whether to not to cut Australia’s triple AAA credit rating. It has already placed Australia’s sovereign rating on negative watch.

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