2014 Budget Wrap Up

Most people would have seen almost enough analysis of the budget to satisfy their curiosity.

The “winner and losers” have been well documented in the media.

Putting aside the political argument that it seems like broken promises – the general view from a pure economic perspective has been generally favourable while acknowledging the harshness of the budget on some groups, with some other groups yet to be impacted.

The polls have taken their toll of the Government and the public response

The purpose of this is to highlight some of the omissions and to put some of the budget shocks into a bigger perspective.

·         Compared to some budgets in the past such as Wayne Swan’s last budget it actually cuts spending less, compared to GDP.   Yet, the apparent breach of trust makes it seem worse, along with some of the aspects of where the cuts are.

·         There have been a myriad of cuts to public government expenditure in various government bodies, ASIC, ABC, public service and various other sectors.

·         The biggest single portion of any budget is health and social security (pensions and Superannuation)  which has been rising at a faster rate than other segments of government expenditure. It is this area which affects most individuals directly and the area I am focusing on here.

Some Brief history:

Since about 2004, under the last few years of the Howard government various provisions in the social security outlays have become increasingly generous lifting the definition of “needy”.  Various phase out formulas for pensions and allowances have been adjusted to become more generous, compared to pre 2004 era, to win votes.

But it also roped in more of the population who became almost permanent beneficiaries to various benefits

Additionally throughout the GFC period (2008 – 2010) the various thresholds at which payments petered out and stopped being made, kept rising automatically in line with conventional wisdom and official award rates of about 3.5 – 4% p.a., at a time when net wealth in investments and superannuation were still recovering back to 2006 levels and even many employees were not receiving any pay rises. Inflation itself during the same period was extremely modest at 1 – 2.5%.  

This effectively then automatically included many more individuals on various benefits.
The social security net was being extended by default beyond the long term normal target group and was not sustainable without a significant increase in tax or some radical surgery.  

Hence the 3 year freeze on any further indexation of payments and thresholds and then a resumption based on the CPI, not the Award Wages increases.

But yet there is still more to come, since the budget did not touch areas highlighted in various reform / productivity reports, which will affect other segments of the population yet to feel a reformist zeal.

·         As far back as the early 1990’s it was expected that with an aging society and the looming baby boomer retirements that the age pension and various other benefits would be harder to maintain.

The introductions of tougher hurdles were expected such as including the family home in pension entitlements and also the eventual limited indexation of the age pension. What has been surprising is that we managed to get to 2014 before some of these were implemented.

In fact prior to the tougher Keating budgets, the age pension was only assessed on income. The introduction of the Assets test in the late 1980′s, with 2 threshold limits for those with, or without their own home introduced the home as an influencing factor in determining or limiting entitlements to the age pension. This may be extended further.

So  an Assets Test that reduces the threshold for home owners even further, could be crept in, effectively creating a greater impact on the pension paid out. The  3 year freeze on Assets Test Thresholds will contribute to this as a start point.

Outstanding Issues – not yet addressed
The budget did not address a number of outstanding issues which will be dealt with in the next 12 months or so by various committees and commissions as follows:

-   Overall tax structure and possible modifications to negative gearing, possibly  trying to focus on new property development as a preferred asset over existing properties.  This may involve a simple process of only allowing 75% – 80% of tax deductions for existing properties, or may involve more complex changes.
Watch this space.

-    Changing the age at which you can access superannuation. This has been
flagged but not yet debated in terms of when and how.

-       Taxes on both Superannuation and Allocated Pensions.
It has always been said that from a pure economic perspective the logical approach is that Super accumulation should be taxed at near zero while Pension Drawdown it is argued, can have a slightly higher tax rate.
This then generates an attractive pension pool that in retirement phase also delivers tax payments to the government.

However, the history of our Superannuation funds development meant that there were always more accumulators than allocated pension payees in the past, so the taxes were levied where the money was.

Then the Howard government eliminated all tax on allocated pensions. This increasingly looks inequitable, particularly for those who are very wealthy, as has been pointed out in the various budget reactions and also reduces long term government revenue.

Eventually the Allocated Pension will have tax reinstated, in line with recent recommendations by the Grattan Institute. The tax rate is likely to be about 5% – 15% on drawdown income.  One suggestion was a flat 7.5% for both Superannuation and Allocated Pensions.    But again, watch this space.

-       Another option not frequently cited but a realistic possibility is the re introduction of a cap on the size of an Allocated Pension, previously known as the Reasonable Benefits Limit. (RBL).  Some form of reintroduction in the future may be on the cards, but it would be reasonably generous. The old limit was $1.5 million.  Watch this space.

The “end of the age of entitlement” as described by the Treasurer will probably see quite a few changes that reduce the various benefits that have been assumed will remain in the long term.  Unfortunately, with an aging population everything is up for re evaluation.