On 19 December 2016, the federal government released the 2016/2017 Mid-Year Economic and Fiscal Outlook (MYEFO), which was jointly presented by federal treasurer, Scott Morrison and minister of finance, Mathias Cormann.
In the media release accompanying the report, the ministers announced that “sustained discipline to offset new expenditure and pass existing Budget repair measures is needed to consolidate the Budget and to lower government debt, particularly against the continuing backdrop of a challenging global economic outlook”.
The ministers also announced that the 2016/2017 MYEFO confirms that the Federal Budget is projected to return to surplus during the 2020/2021 year.
Note: For announcements within the 2016/2017 MYEFO relating to superannuation and retirement planning, see later in this article.
So, how is the federal government planning to offset new expenditure and secure the passing of existing Budget repair measures to achieve the budget surplus in 4 years’ time?
According to the federal government, in the last 2016 sitting of parliament, nearly two-thirds of the government’s repair measures were passed delivering $22 billion in savings over the forward estimates (including the superannuation changes – see SuperGuide article Latest superannuation changes: 2017/2018 guide).
Note: ‘Forward estimates’ for the purposes of the 2016 Federal Budget, the 2016 Pre-Election Economic and Fiscal Outlook (PEFO) and for the 2016/2017 MYEFO, cover the financial years 2016/2017, 2017/2018, 2018/2019 and 2019/2020.
The government states it “is committed to working with the Parliament in 2017 to continue to legislate the savings measures included in the Budget bottom line”, which presumably includes abandoning Tony Abbott’s Green Army program (delivering a saving of $225 million over 4 years from the 2016/2017 year), and finding enough savings to hand over $22 million to the makers of the film Aquaman, to entice them to film at the Gold Coast during 2017.
NDIS and government debt: The government is not proceeding with the Asset Recycling Fund (ARF), which was to receive initial contributions from uncommitted funds in the Building Australia Fund and Education Investment Fund, and proceeds from the sale of Medibank Private. The uncommitted funds flagged for the ARF, will instead be redirected to the National Disability Insurance Scheme Special Account, and used to reduce Commonwealth debt, which is projected to “reduce gross debt by more than $10.0 billion by 2019-20”. Noting that the 2016/2017 MYEFO accounts indicate that canning the ARF will trigger savings of more than $700 million.
The federal government also announced that any additional spending commitments “have been more than offset by spending reductions in other parts of the Budget and not through higher taxes”, and total government payments will be $18.5 billion less over the 4-year forward estimates.
According to the overview section of the 2016/2017 MYEFO: “The Government is delivering on its plan for economic growth and jobs, with the budget maintaining an improving trajectory consistent with the Government’s fiscal strategy. The budget is projected to return to surplus in 2020-21, the same year as at the 2016 Pre-election Economic and Fiscal Outlook (PEFO).
“The Australian economy continues to transition from the investment phase to the production phase of the mining boom. Economic growth is expected to increase over the forecast period, as the drag from the decline in mining investment dissipates and the economy transitions to broader-based growth, supported by historically low interest rates and a lower Australian dollar.
“The Government is delivering on its 2016 election commitments, with new investments designed to support innovation and growth in Australia’s cities and regions. These investments build on the Government’s economic plan, while further decisions taken to improve the integrity of welfare and taxation systems will assist in maintaining the budget position.”
Outlined below is a quick summary of the main economic and financial indicators and a link to the full 2016/2017 MYEFO is at the end of the article. Immediately below is a list of super and retirement-related policies that have been announced since the 2016 PEFO (2016 Pre-election Economic and Financial Outlook).
Note: I always wonder what assumptions Treasury truly uses for these forecasts because Treasury forecasts have been wrong for at least 6 years in a row, and quite a bit out from the forecasts made 6 months ago (in 2016 May Budget and 2016 PEFO), although in defence of the government number crunchers, the world’s economies have experienced a lot of volatility in the past few years.
The electorate is still grappling with the radical changes to the super rules taking effect from 1 July 2017 (see SuperGuide article Latest superannuation changes: 2017/2018 guide), and the January 2017 Age Pension changes (see SuperGuide article Age Pension: 300,000 Australians lost entitlements on 1 January 2017 ).
Even so, the 2016/2017 MYEFO contains several retirement-related new policies, hidden within the detail of the report, and that may be of interest to readers:
- Independent standards body to govern financial advice industry. At a cost of $15 million, the government will establish “an independent standards body, as a Commonwealth company, to govern the professional standards of the financial advice industry”. The body is to be fully funded by the advice industry.
- Change in definition affects some LISTO and SAPTO recipients. Some Australians may lose out on the Low Income Superannuation Tax Offset (LISTO), the Seniors and Pensioners Tax Offset (SAPTO), the net medical expenses tax offset and the dependent (invalid and carer) tax offset, due to the change in the meaning of ‘adjusted fringe benefits total” from 1 July 2017. The federal government has modified the meaning of ‘adjusted fringe benefits total’ so that the gross rather than the adjusted new value of reportable fringe benefits is used. “Fringe benefits received by those working for public benevolent institutions, health promotion charities and some hospitals and ambulance services will not be affected by this change.”
- Increase in value of penalty unit. The federal government is increasing the amount of a Commonwealth penalty unit from $180 to $210, from 1 July 2017. The penalty unit is used when imposing administrative penalties on SMSF trustees (see SuperGuide article SMSF trustees now face bigger penalties (from 2017/2018 year)). The unit value will then be indexed every 3 years in line with CPI, with the first indexation taking place on 1 July 2020. The government will generate revenue of $90 million over the forward estimates.
- Reversal of $500,000 lifetime non-concessional contributions cap. As discussed in other articles, from 1 July 2017, the federal government has cut the annual non–concessional contributions cap to $100,000 and you can only make NCCs if your total superannuation balance is less than the superannuation transfer balance cap, currently set at $1.6 million (see SuperGuide article New $100,000 cap: Cut to non-concessional contributions cap).
- No more Pension Supplement for intrepid Age Pensioners. Saving the government $124 million over 4 years from the 2016/2017 year, from 1 July 2017, the Pension Supplement will no longer be paid to Age Pensioners residing overseas, or who spend 6 weeks or longer overseas.
- Aligning the Age Pension means test arrangements with residential aged care arrangements. Although, announced in the 2015/2016 MYEFO, it is worth reminding readers of this important change taking effect from 1 January 2017 (and saving $60.8 million over 3 years).
- Fraudulent Age Pensioners and other welfare recipients. The government predicts it will save $3.7 billion over 4 years from 2016/2017 by expanding the DHS fraud prevention and debt recovery capability. From 1 January 2017, the ATO and Centrelink will improve engagement with welfare recipients to ensure they understand obligations.
- Elder abuse. The federal government will provide $15 million over 3 years, from the 2016/2017 year to protect the rights of older Australians from abuse of all forms. Although this is an excellent initiative, the meagre funding is supposed to finance a study to discover the prevalence of elder abuse, finance a national awareness campaign, and implementing a national elder abuse hotline and develop and implement a pilot training program for frontline staff.
- Working holiday makers. The benefits payments tax on departing Australian superannuation payments for working holiday makers has jumped to 65% (see SuperGuide article Superannuation tax: ‘Working holiday makers’ hit with 65% tax (since July 2017)).
- Same sex marriage plebiscite. Now that the community vote to decide whether gay and lesbian couples can marry has been dropped, the $160 million allowed for the cost of running the vote, will be redirected to other budget commitments, less $6 million already expended by the Electoral Commission. The money will be re-allocated to the plebiscite if the Liberals can pass relevant legislation in the future.
- New listings for Pharmaceutical Benefits Scheme. The government will provide $141 million over 4 years from the 2016/2017 year, for new and amended listings on PBS and the Repatriation PBS. The government will also provide $84 million over 5 years for price amendments for certain medicines. Don’t forget however, that the government cut the PBS scheme and took savings of $549 million in the 2015/2016 year, and expected to take $1.6 billion in savings up to 2018/2019.
- Cuts to Family Tax Benefit. Savings of $643 million over 4 years by ceasing the FTB Part A end-of-year supplement for families with a household income in excess of $80,000 from 1 July 2016. Further savings of $327 million over 4 years by not increasing the maximum rate of FTB Part B by $1,000.10 for families with youngest child aged under one year. The government will save another $162 million over 4 years by extending the freezing of higher income thresholds for family payments.
- Digital literacy for older Australians. The government will provide $47.2 million over 4 years from 2016/2017 year to “implement an older Australians digital inclusion and online safety strategy to support, coach and teach older Australians to improve their skills and confidence in using digital technology.
- Aged care provider funding. Delivering savings of $22.5 million over 4 years, the government is pausing indexation “of all domains of the ACFI [Aged Care Funding Instrument] in 2017-18, and reducing indexation of all domains of the Complex Health Care Domain component of the ACFI by 50 per cent in 2018-19”.
- Changes to bulk-billing for diagnostic Imaging and pathology services. Changes to bulk-billing incentives for these services has been deferred until 1 July 2017, which will cost the government $211 million over 4 years, but save the government billions over the longer term.
- Modernise payment systems for Medicare, aged care payments and veteran payments. This project will cost 431.5 million during the 2016/2017 year.
- Specialist dementia care units. The government will provide these units in each of the 31 Primary Health Network regions, but the regions will have to fund this service themselves, because no money has been allocated to run the units.
- Automated data collection about super pensions to Centrelink. The Government is automating the process to collect information about pensions, which is aimed at improving the accuracy of Centrelink and reduce the compliance burden on income stream providers, and will save the government $38 million over 4 years. From 1 January 2018, “a six-monthly electronic data collection process will be introduced for income stream information from financial service providers”.
- $300 million over 4 years to upgrade Centrelink’s technology systems.
- SuperStream Governance. Giving $2 million to SuperStream Gateway Network Governance Body (GNGB). This is an industry measure to move responsibility for the gateway infrastructure of SuperStream (transmission of data messages by funds and employers about super payments) to the GNDB, and away from the ATO. The ATO will recoup this funding from large super funds from 1 July 2018, via the annual supervisory levy.
- Veterans and family. The government will provide $14.1 million over 4 years to support current and future veterans and their families. Including mental health support and counselling services.
Important: In the 2015/2016 MYEFO, the government announced changes to the Income Support for People with Disability (DSP), triggering cuts (savings) of $201 million in 2015/2016 year, and $756 million over 4 years to 2018/2019 year). In the 2015/2016 MYEFO, the government also announced cuts to the Income Support for Carers triggering savings of $192 million for 2015/2016 year and a whopping $1.2 billion over 4 years to 2018/2019 year.
Updated fiscal outlook
In the 2016/2017 MYEFO, the federal government reported the following fiscal indicators:
- Cash deficit. Cash deficit is expected to fall to $36.5 billion (2.1% of GDP) during the 2016/2017 year, from the $37.1 billion reported in the 2016 Federal budget and 2016 PEFO. The government predict that the cash deficit will fall to $10 billion (0.5% of GDP) by the 2019/2020 year.
- Net debt. In last year’s MYEFO, the government said net debt would peak at 18.5% of GDP in the 2017/2018 year. In the 2016/2017 MYEFO, the government predicts that net debt with peak at 19% of GDP in the 2018/2019 year, and then fall over the medium term to roughly 10% of GDP.
- Government payments. Government payments have fallen from 25.8% of GDP when 2016 PEFO was announced, to 25.2% of GDP for the 2016/2017 year. The government predicts that government payments as a share of GDP will remain steady at 25.2% of GDP over forward estimates (that is to 2019/2020 year).
- Total receipts. In last year’s report (2015/2016 MYEFO), the government announced that total receipts were expected to be $33.8 billion lower over the 4 years to end of 2018/2019 year, compared with what had been announced in the May 2015 federal budget, due to declining commodity prices leading to lower company tax collection, and a weaker outlook for wages and population growth. Weaker share markets also meant lower capital gains receipts. In the 2016/2017 MYEFO, the government has again downgraded projections for total receipts since 2016 PEFO, with total receipts expected to be $3.9 billion lower for the 2016/2017 year, than what was projected a mere 6 months ago, and $6.2 billion lower for the 2017/2018 year, than what was again projected a mere 6 months ago.
- Tax receipts. According to 2016/2017 MYEFO, tax receipts have fallen by $3.6 billion compared with what was projected in 2016 PEFO a mere 6 months ago, and fallen by $30.7 billion over the forward estimates (2016/2017 year to 2019/2020 year), compared with what was projected in 2016 PEFO.
- Total revenue. Revised down by $5.7 billion for the 2016/2017 year, since 2016 PEFO (6 months ago) and also revised down by $8.3 billion for the 2017/2018 year (since 6 months ago).
Note: The transition to the full National Disability Insurance Scheme began on 1 July 2016 and will be fully rolled out by July 2019.
Important: According to the 2016/2017 MYEFO, the Future Fund becomes available to meet the federal government’s superannuation liabilities from the 2019/2010 year.
Updated economic outlook
In the 2016/2017 MYEFO, the federal government reported the following economic indicators:
- Lower rate of real GDP growth. In last year’s MYEFO, the government predicted that Australia’s real (after inflation is taken into account) GDP growth was expected to improve from 2.5% in the 2015/2016 year to 2.75% in the 2016/2017 year. In the 2016/2017 MYEFO however, the government predicts real GDP will grow by 2% during the 2016/2017 year, and economic growth is expected to gain momentum during the 2017/2018 year and grow by 2.75% as the impact from a drop in mining investment subsides. Nominal GDP growth (before taking into account inflation) is expected to be 5.75% during the 2016/2017 year, reflecting a rebound in commodity prices.
- World economic growth to improve, but remains uncertain. During the 2016/2017 year and the 2017/2018 year, world economic growth is expected to improve, with global growth forecast to improve from 3% in 2016 calendar year, to 3.25% in 2017 calendar year, and 3.5% in 2018 calendar year. Australia’s trading partners are forecast to grow at a stronger pace than the broader global economy with 3.75% in 2016 calendar year, 4% in 2017 calendar year, and 4% in 2018 calendar year. emerging market economies contributing 70% of the growth.
- Rate of inflation downgraded since 2016 PEFO. CPI (inflation) is forecast to be 1.75% through to June 2017 (lower than forecast in 2016 PEFO, and in last year’s MYEFO was forecast to be 2.25% through to June 2017). CPI is expected to pick up to 2% through to June 2018. According to the report, CPI “is low reflecting subdued wage growth other factors such as heightened competition in the retail sector, slower growth in rents and lower import and petrol prices. There is also a subdued inflationary environment globally”.
- Underlying cash balance. The net impact of decisions taken since 2016 PEFO has improved the underlying cash balance by $2.5 billion.
- Steady employment growth means steady unemployment rate. Employment is forecast to grow by 1.25% through to June 2017, “reflecting more subdued employment growth over recent months… and slower output growth.” In last year’s MYEFO, employment was expected to grow by 2% through to June 2016 (but instead grew by less than 1% to June 2016). Employment is forecast to grow by 1.5% through to June 2018. The unemployment rate is forecast to remain steady at around 5.5% to June 2017, and to June 2018, although the underemployment rate has remained high, which the report states that this means there is spare capacity in the labour market.
- Rise in commodity prices. According to the report, a recent strengthening in bulk commodity prices, and the volatility in these prices means uncertainty in predicting terms of trade and nominal GDP. In last year’s MYEFO (2015/2016), the government predicted a drop in the expected price of iron ore from US$48 per tonne (as at May 2015 Federal Budget) to US$39 per tonne, and expected it would take out $7 billion in forecast tax receipts over the 4 years to 2018/2019. In this year’s MYEFO (2016/2017), the government predicts that the iron ore price will drop from its current US$68 per tonne, until it eventually reaches US$55 a tonne in the 2017 September quarter – still substantially higher than what was forecast in last year’s MYEFO and the 2015 Federal Budget.
Income tax and GST collection to fall
- Personal income tax receipts and withholding taxes have been written down by $2.1 billion for the 2016/2017 year, and a massive $18.3 billion over the 4 years to 2019/2020 year, compared with 2016 PEFO (6 months ago).
- Company tax receipts have been written down by $1.8 billion for the 2016/2017 year, and a significant $5.9 billion over the forward estimates (4 years to 2019/2020 year)
- GST receipts has been written down by $5.3 billion over the 4 years, due to lower forecasts for domestic prices
For more information on the full 2016/2017 MYEFO report, click here.