Federal treasurer Scott Morrison is about to deliver his first budget, a crucial pitch to voters ahead of the election expected on July 2.
Morrison has the job keeping voters happy while at the same time working on winding in the budget deficit, which means potentially painful, and vote-losing, spending cuts and the prospect of raising more tax revenue.
From what’s been revealed in the days leading to the budget, we know there will be changes to income tax and that this will be benefit middle income earners and stop their shift, via bracket creep, into a higher tax bracket.
But the revenue raising side of the budget is a little less certain. So far, the budget is more known for what’s not being done in terms of tax raising.
Malcolm Turnbull, who as prime minister is overseeing his government’s first budget, has ruled out changing negative gearing to raise more money. He has also ruled out allowing the states to raise their own income taxes.
We also know there will be no change to the 10% goods and services tax (GST) — at least during the rest of this government’s term.
The big shadow over the budget will be the deficit and the failure of forecasts to pick a correct number on revenue. We’re just not gathering enough tax to cover the cost of government programs.
The deficit has continued to blow out ever since since the last official mid year forecasts in December with revenues shrinking and spending rising.
Deloitte Access Economics says the underlying cash deficit will be about $41.7 billion for 2015-16, a substantial $4.3 billion worse than projected in December. Last year’s deficit was $37.9 billion.
And in the background is Australia’s international credit rating. Moody’s Investor Services says the government’s aim of balancing the budget by 2021 is “unlikely” without revenue measures.
That means Australia’s AAA rating is at risk.
Morrison says improving the tax system is key.
“We need to ensure our tax system is sustainable and we make sustainable changes to the tax system, so it can support the needs that are there in the future,” Morrison says.
“It’s well targeted, it deals with the loopholes, those who are seeking to take a lend of the system, and that’s what we will be doing in this budget.”
Morrison has flagged changes to education, welfare and health spending.
But cutting spending is at the top of the list.
This will be done by “saving more than we are spending” and “reducing taxes more than we are increasing taxes”.
The aim, according to Morrison, is to get expenditure as a share of the economy to 25.3% and the deficit reduced to 0.7% from 2.4% by the end of the current budget and forward estimates period.
Keep an eye on the key numbers in the budget for hints on where the economy is heading. In MYEFO, the mid year budget update in December, the government forecast real GDP this year at 2.5%, unemployment at 6% and inflation at 2%.
Count on changes for middle income earners.
At the weekend, Malcolm Turnbull said: “There is substantial tax reform, or tax changes, in the budget.”
Expected are adjustments to the tax levels to ease the impact of bracket creep, where wage inflation pushes people into higher tax brackets.
The current $80,001 mark, above which each dollar earned gets taxed at 37 cents, is expected to be lifted, reducing the average tax rate for middle income earners.
“We’ve said consistently that we’re concerned about the impact of bracket creep,” assistant minister to the treasurer, Alex Hawke, told Sky News. “The government will continue to look at that issue and ensure to do all we can to address bracket creep and remove that burden.”
However, Morrison has said any changes to income tax will be “modest”.
The treasurer is concerned by average wage earners moving into the second highest tax bracket.
“We may be able to prevent that outcome going forward,” he said.
The nation’s superannuation nest egg is so large, at $2 trillion, and growing all the time through compulsory contributions, that is is difficult for governments to keep their hands off it.
Potential changes included getting more revenue by lowering the income level at which the concessional superannuation tax rate doubles to 30% from 15%.
Currently those earning $300,000 a year pay 30% on their contributions rather than the 15% for everyone earning below that.
Lower the level to those earning $180,000 or more could bring in an extra $2 billion a year to the government.
There are many other changes which could be made to raise more revenue. These include putting a smaller cap on pretax contributions to around $20,000 a year from the current $30,000. This would raise about raise $1.5 billion a year.
Other ideas include tight rules on the amount of after tax contributions (currently $180,000 a year) and on a life cap of what can be held in super of about $2.5 million.
Morrison has ruled out taxing capital gains more in super funds.
But there will be change.
In November, Morrison asked: “Could the costs of providing superannuation tax concessions, for example, be directed elsewhere in the economy to make it work more efficiently, such as personal income tax cuts?”
The company tax rate is expected to be dropped to 28.5% from 30% for all corporates, not just smaller businesses.
Small business, those with annual turnover below $2 million, got a 1.5 percentage point cut to 28.5% in last year’s budget.
That budget was a small business festival with a special tax write-off on any purchase up to $20,000.
Up to $1.2 billion more will be stripped from public service departmental budgets, according to the Canberra Times. These will be in the form of efficiency dividends to help pay for tax cuts.
The states are getting an extra $1.2 billion for schools between 2018 and 2020 by increasing spending growth to 3.56% a year from 2.5%.
The funding will be tied to lifting performance and results of students, says education minister Simon Birmingham. This includes reading and numeracy and giving parents annual progress reports.
“It is completely unacceptable that the performance of our students in fundamental skills like literacy and numeracy continues to slip even while our funding continues to significantly increase,” says Birmingham.
The deregulation of university fees is also back on the table. Sources told the Australian Financial Review the government will modify a plan to fully deregulate fees.
One option is to put a cap, or an upper limit, on what a university can charge. This will go some way toward dampening fears of rampant increases at prestigious universities, pushing the cost of some courses above $100,000.
Last time the government tried to deregulate fees, the measures were blocked by the Senate. At stake is $2.5 billion in budget savings.
This time the government is also expected to find some way of getting student loans repaid faster. One way to do this is to lower the income level at which students start paying back. This level is currently $54,000.
Already announced is an extra $2.9 billion for the states to fund hospitals over the years to 2020.
The states accepted the money from prime minister Turnbull during the Council of Australian Governments meeting in Canberra a month ago.
The cash partly makes up for the previous government of Tony Abbott cutting $7 billion from hospitals to 2020.
Infrastructure will again, like last year’s budget, feature prominently.
However, how much will be new funding or recycled from announcements of 12 months ago remains to be seen.
Already announced is $50 million to support infrastructure projects for cities. The federal government plans to help put projects together and guarantee loans for them rather than throw money as a direct grant.
Some of the suggested rail projects: A line to the planned Western Sydney airport, Melbourne Metro, Adelaide light rail, Brisbane cross-river rail, Perth to airport link.
At least some of the $5 billion fund established by former prime minister Tony Abbott — the Asset Recycling Initiative — will be used on the rail projects, the Melbourne Metro and Sydney Metro.
Major projects minister Paul Fletcher said: “The Turnbull Government in this budget is making a very substantial commitment to infrastructure spending.”
The big piece is the already announced $50 billion submarine contract with Adelaide as the major beneficiary.
The government is also building 12 offshore patrol vessels, up to 21 Pacific patrol boats and frigates, representing close to $40 billion of investment in naval capabilities.
ASIC, the corporate watchdog, is getting $127 million in additional funding to go after misconduct among the banks, a move seen as a counter to Labor’s election promise of a royal commission.
A feature of the funding is that the banks themselves will come up with $121 million of the program in the form of a levy over four years.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.