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Australian Economy

Budget 2003




Health, Defence and Tax Cuts the big items in this years Federal Budget!




It's that time of year again - time for Federal Treasurer Peter Costello to strut his stuff in front of a nationwide captive audience. Yes, that's right; it's Budget time. In what will could be his last budget as Federal Treasurer, Costello has produced a finely polished piece of work that includes spending increases as well as marginal tax breaks. In addition, he's forecast a $2.2 billion surplus; remarkable perhaps in the tough economic times experienced by the majority of the world. So what are the key features of this year's budget and how will it affect ordinary Australians?

What's a degree worth?
Despite already been partially leaked in the previous week, a key part of this year's budget is the reforms to higher education. The Treasurer has increased University funding by $1.5 billion over four years ($65.8 million for next year) and restructured the management and payment of university fees; much to the chagrin of students. In a plan cautiously applauded by Vice-chancellors, Universities will now be more flexible in their ability to attract, fund and charge students in line with market-oriented style demand and supply conditions. Universities are now free to increase HECS fees by up to 30% on some courses (nursing and teaching are exempt), while doubling the number of full-fee paying courses. Importantly, different universities will now be able to charge different prices for the same degree that will see more popular courses become more expensive. To pay for this, HECS repayment thresholds have been lifted, and a new $800 million student loan system will be implemented with interest rates below market rates and long term repayment options.

While Vice-chancellors argue that the changes are needed for Universities to flourish, critics argue that the government is creating "generation debt" with most students forced to pay more. In addition, they argue that the reforms will lead to a reduction in university places - in addition to the Australian Vice-chancellors Committee finding that up to 25,700 students missed out on places last year. At any rate, a senate and campus showdown on this issue is sure to reach headlines for weeks to come.

Medicare reforms round two
A centrepiece of this year's budget are the Medicare reforms and an extra $917 million earmarked to increase doctor numbers and improve bulk-billing access to low-income earners. Part of the plan is to offer $345.5 million over four years to encourage doctors to bulk-bill patients. Doctors who agree to bulk-bill all concession card holders will receive incentives ranging from $1 for city GP's to $6.30 for those in rural areas. Critics have argued that it will encourage GP's to charge more for all other patients, with low-income earners who do not have a concession card being the hardest hit.

Spending increases that everyone will applaud include $189.5 million for GP training places and $64.2 million for more practices, nurses and allied health workers. Additional health items in the budget included $4 billion to encourage Australians to live healthier lives (already dubbed "lifestyle scripts"); scrapping of the Therapeutic Goods Administration (courtesy of Pan) to be replaced by a new Trans-Tasman Therapeutic Products Agency; an increase in the Medicare levy thresholds; and $13 million to set up a new National Blood Authority. The only cut of substance is the $918 million reduction in payments to the states to administer the public hospital system.

Spending Spree for Defence and Security not enough
An extra $2.5 billion has been earmarked for Defence with $1 billion allocated to upgrade high-tech equipment and increase defence force numbers in light of the lessons learned from the wars in the middle-east. Over $400 million will go to ASIO and ASIS, as well upgrading security at ports, airports and nuclear facilities. Our special forces also got a boost after their stellar performance in the Gulf, with an additional 300 elite troops and a new operation command.

While catering to a well-defined need in the community to increase security in a troubled world, critics of the defence plan are concerned that the government is trying to be all things to all people; i.e. protect the nation and region, while also maintaining a high-tech unit able to site alongside the US and the UK. A new capability plan that was supposed to emerge with the budget has now been delayed until the end of the year. Many planned big-ticket defence items may be scrapped or delayed as Australia seeks to be interoperable with the US military while developing other low-tech regional capabilities. Defence insiders already admit that even the present capability plan is not affordable on the existing budget, let alone any new plan that is sure to be larger.

The tax cut surprise
One surprise from last nights budget was the $2.4 billion tax cut for every Australian - despite Simon Crean dubbing it the smallest in history. Nevertheless, any tax cut is most definitely a good tax cut, and the $3 to $11 a week in cuts for most taxpayers givens the government an additional 2 years before the majority of income earners creep above the 42% tax threshold. Another way to look at it is, that the cuts undo roughly 18 months worth of bracket creep since the GST came in 3 years ago. The government view that the cuts are responsible and constrained is accurate, and on a world scale Australia is still one of the lowest taxed countries in the OECD, currently third lowest.

However, critics argue that even with the cut, the Howard government is the highest taxing federal government in Australia's history and the level of taxation expected in the budget is still 1.4% of GDP higher than in 1996-97. Overall, the expected income tax take from individuals will rise 5.8% next year. On those figures, the tax cut seems to be giving less than what is being taken away.

So how's the economy doing in all this?
Costello has joined most economic pundits in assuming 2003-04 will be another slow year, cutting GDP growth forecasts from 4% to 3.25%. Weak exports and soaring imports are now forecast to blow
Australia's current account deficit out to $42.5 billion (roughly 5.7% of GDP). So where's the growth coming from? Primarily it is from business investment which Treasury expects to grow 7% on top of the 15% this year. Exports are expected to be flat, while imports will climb a staggering 13%.

Overall, this budget seems to be a pre-election gift in a supposedly non-election year. Only the states (via the $918 million reduction in hospital funding) and those on welfare are really hit, while the rest get $4.3 billion in various cuts and spending. On top of that is the headline $2.2 billion surplus, which by world standards is a stellar performance (just look at the US' A$500 billion deficit). So now it's time for the government to sell the plans to the populace, and time for the opposition to distinguish themselves with different policies. With double-disolution triggers in place on key items, and the opposition parties ready for a showdown, this may indeed end up an election year after all.



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