David Koch gives a preview of what to expect from this years Federal budget.
Australian governments have long relied on the so-called levy to fund healthcare initiatives, rebuild after natural disasters and advance social crusades.
Will he be smiling tonight ... Treasurer Joe Hockey at a press conference at Parliament House, Canberra. Source: Supplied
PLANNING on living under a rock for the next 48 hours?
No? Well then chances are sometime soon someone is going to try to engage you in conversation about the federal budget.
The nation's economic boffins are converging on Canberra today to pour over the details of Joe Hockey's first budget.
Can't tell your net debt from your GDP? Fear not, here is a handy, cut out and keep, guide to decoding the budget jargon and sounding like an economic whiz in no time.
FEDERAL BUDGET 2014: In a nutshell
FIRING LINE: Federal agencies to cop it bad
First Budget ... Treasurer Joe Hockey puts final touches to his first plans to reduce national debt. Source: Supplied
DEFICIT
Context: "I am really worried about the size of the government's budget deficit."
This sounds like a simple one. Obviously, deficits are bad, m'kay? But why? A deficit is created when government spending exceeds government revenue in any one year. The budget deficit for the financial year about to end is on course to clock in at nearly $50 billion. While the government raised about $365 billion in taxes in the year, it spent an even greater amount — about $410 billion. The shortfall between the two is the government's deficit for the year. (If it raises more in tax than it spends, the government gets a surplus. But don't worry, that hasn't happened in a while …)
DEBT
Context: "I am really worried about the size of the federal government's debt."
When the government does not have enough revenue to fund its spending, it has to borrow the difference. It goes to financial markets and asks investors to lend it the money to fund the difference. Every time it does this, it adds to the government's stock of debt — it's credit card balance, if you will. If the government runs surpluses, it can begin paying off this debt. Just like you and me, the government must pay interest on its debts.
NET DEBT
Context: "I am not worried about the government's debt, because its net debt position is much lower."
When you buy a house, you take on a big mortgage. But you also get a big asset — a house. The government also has assets that it owns. If it really needed to, it could sell off some of these assets to pay off its debts. So economists like to talk about government debt in terms of "net debt": the difference between the value of the government's debts and the value of its assets. Net debt is always lower than debt.
THE FORWARD ESTIMATES
Context: "Gosh, Hockey has delivered significant savings over the budget forward estimates."
Four years. That's all that means. By convention, the budget forecasts are presented for the coming financial year and the following three years. So this budget is the 2014-15 budget, and will take us out to 2017-18. This period is called the "forward estimates". Anything beyond that is "beyond the forward estimates" (that's where governments like to hide all the spending).
GDP
Context: "Wow, the government's forecasts for GDP growth have been revised upwards."
GDP stands for "gross domestic product". It's basically the value of Australia's economic output in any one year. Currently, Australians collectively produce about $1.5 trillion dollars' worth of goods and services each year. This generally grows in value over time as the population grows and we get more efficient at making stuff. The government is currently assuming the Australian economy will grow 2.5 per cent in the coming financial year, but it's likely this will prove pessimistic, and could be revised up in this budget.
NOMINAL GDP
Context: "Ah, but what really matters for government revenue is nominal GDP."
Nominal GDP is a measure of economic output that adjusts for the prices foreigners actually pay us. During the mining boom, nominal GDP grew by much faster than GDP because of a steep rise in Australia's export prices. This led to a windfall in taxation receipts. Since the GFC, nominal GDP has been growing much slower and even shrinking as commodity prices have fallen. The government's forecasts for nominal GDP also look too weak and may be revised up today.
FISCAL CONSOLIDATION
Context: "Spending cuts in this budget will only add to the pace of fiscal consolidation."
This is the main game for Hockey right now. Fiscal consolidation is when you start to have smaller deficits because you have increased taxes or cut spending. It's the opposite of fiscal expansion, which is what the government did during the global financial crisis by increasing spending. "Fiscal" just refers to the policies of government. It's different to "monetary policy" which refers to the Reserve Bank's decisions on interest rates.
INDEXATION
Context: "I think the way they have changed the indexation of welfare payments is really stingy."
All government welfare payments are "indexed" in some way which means that they increase in value over time. If a payment was fixed in dollar terms, it would shrink in value over time as general prices in the economy grow. Some payments are linked to inflation — like the jobless allowance — while other things like the pension are linked to a more generous measure of average wages. Wages tend to grow faster than inflation over time, so one way to save money is to index payments to inflation, not wages.
MEANS-TESTING
Context: "I think the way they have introduced a means test on family benefits is super unfair."
From each according to his ability, to each according to his needs. It might sound like Marxism to you, but it's basically how our progressive tax and payments system works. Rich people are not supposed to need government support, so most government payments come with a "means test" — basically to determine whether a person has the means to provide for themselves. It's usually a certain income level at which payments are either cut off completely or begin to be reduced. The government can save money but having a lower income text or increasing the rate at which benefits are withdrawn as incomes rise. You can expect a bit of both in this budget.
So there you have it. Now you can tune in to Joe Hockey's budget speech at 7:30pm tonight and listen like a pro
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