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Budgets inherently are about trade-offs. They’re about balancing a complex combination of tax and expenditure initiatives, across multiple years, and trying to articulate how these will, overall, contribute to national wellbeing.

But in an environment where all Australians are feeling the pressure of rising living costs, the challenge of framing the Budget is increasingly difficult.

At least since the Howard/Costello years of recurring personal income tax cuts, funded by the mining boom, the Budget has come with increasing expectations around 'what’s in it for me?'. These expectations have been reinforced by successive oppositions, along with media, gleefully pointing out the “winners” and, more damagingly, the “losers” of every Budget.

Behavioural economics shows that people feel losses much more than gains - generally around twice as much. This explains why even the slightest hint at a loss gives any negative Budget campaigns so much weight. And it highlights the challenge confronting the Treasurer’s 2015-16 Budget, as it grapples with difficult economic headwinds yet the persistent need for medium-term Budget repair.

The Australian economy overall is growing at around 2.5 per cent, with this modest growth expected to improve to around 3.5 per cent, by the end of the Budget projections. However, analysis using PwC’s Geospatial Economic Model (GEM) highlights the number of communities that are doing it tough - with 35 per cent of small area economies shrinking during 2013-14. This means many Australians will be particularly sensitive to any changes which might have the slightest negative impact on them directly, even if there are offsetting positive changes elsewhere in the Budget.

With this year’s ‘no surprises’ Budget, and a Government which is still recovering from the difficult 2014-15 Budget, the ‘losers’ aren’t that obvious, but nor are the ‘winners’:

  • While childcare benefits will continue, or increase for some workers, the paid parental leave scheme will be subject to further cuts, as primary carers will no longer be able to access these benefits where their workplace scheme exceeds the government scheme.
  • Small business are set to benefit from a reduced corporate tax rate or a tax discount for sole traders, immediate deduction for capital purchases of up to $20,000, and streamlined business registration. But this two-tiered tax system, over the longer run, may risk hindering growth as taxpayers try to stay beneath the threshold, rather than embracing growth.
  • Pension indexation has been reinstated to its former rate, though combined with some tightening of part-pension eligibility for pensioners with substantial assets. Funding this, though, will be a welfare crackdown, expected to return around $1.5 billion to the Budget.

Another learning from behavioural economics is that complexity can derail incentives. People won’t respond to an incentive unless it is simple and they can understand it. But this isn’t always easy. The complex interaction of various personal tax and welfare initiatives means that it’s hard to know precisely how well they will encourage older workers and parents to (re) enter the workforce. With an ageing population, it’s critical that the Treasurer’s blend of Budget ‘carrots’ and ‘sticks’ strikes the right balance in encouraging workforce participation.

A clear plan forward?

This year’s Budget arrives with a headline deficit of $35.1 billion (2015-16), bolstered by slightly higher-than-expected commodity prices. The new narrative is about a ‘credible trajectory’ for a return to surplus, now expected by 2019-20, just one year beyond the Budget projection period.

In a community that has become accustomed to the notion that surpluses are good, deficits bad, the challenge is to chart a course for the economy with medium-term goals in sight, without undue haste to repair the Government’s Budget position for its own sake.

Recent research by the Business Council of Australia found that 94 per cent of those surveyed believe that Australia “needs a better plan for its long-term future”.

This year’s Budget, arguably, has done little to address this view. While the measures proposed may pass through the Senate more easily than last year’s Budget, one cannot help but feel like the Government is still to tackle the real problems – in tax reform, superannuation and welfare, and health. Sooner or later it will have to do something about it.

Contact us

Craig Fenton

Partner, Integrated Infrastructure, Infrastructure Advisory, PwC Australia

Tel: +61 (7) 3257 8851

Jeremy Thorpe

PwC Chief Economist, PwC Australia

Tel: +61 416 245 535

Tom Seymour

Chief Executive Officer, PwC Australia

Tel: +61 7 3257 8623

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