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Winners and losers of the 2014-15 Federal Budget

In its first Budget, the Federal Government has attempted to reduce its deficit. IBISWorld forecasts the potential effects of the new Federal Budget on key Australian industries.

Government debt was one of the fiercest topics of debate in the lead-up to the 2013 federal election. While Australia compares favourably with most developed countries in this area, long-term projections raise some cause for concern. The biggest risk is the trajectory of the Federal Budget, with rising deficits and slowing economic growth. Large deficits have the potential to raise the level of government debt and threaten the financial security of the nation. This includes the coveted AAA credit rating.

Budget overview
Within the Budget, deficits are forecast over the next three financial years. These follow adjustments to government economic forecasts to account for economic weaknesses, including a decline in mining capital expenditure and slower economic growth in China. The 2014-15 Federal Budget detailed a number of cuts to government programs and increases in some taxes to achieve a lower deficit than in 2013-14.

In addressing the budget situation, the government has aimed to balance changes with the weaker economic forecast for the next few years. This has necessitated more-effective spending programs to stimulate the economy and some controversial tax adjustments to fund the spending and balance the budget. A temporary budget levy of 2.0% on incomes in the top tax bracket is forecast to raise an additional $3.1 billion for the government. The levy will expire after three years, returning the top tax rate to its current level. An increase in the fuel excise levy is forecast to raise an additional $4.0 billion over the four years through 2017-18. The levy has been frozen at 38.1 cents per litre for 13 years and will now be indexed to the CPI with biannual increases. Cuts to foreign aid and co-payments for access to some medical professionals and medicines are expected to reduce government expenditure, while an increase in infrastructure funding is anticipated to stimulate the economy. A more surprising change is creation of the $20.0 billion Medical Research Future Fund (MRFF).

Winners

Road-revenue1. Road and Bridge Construction
IBISWorld Report E3101
The Federal Government has committed an additional $3.7 billion towards general road construction from 2013-14 through 2017-18, along with $2.9 billion over 10 years for the Western Sydney Infrastructure Plan and concessional loans for Stage 2 of the WestConnex project. Melbourne’s East-West Link Stage 2 will receive an additional $1.0 billion in funding, while the Perth Freight Link will receive an additional $866.0 million.

IBISWorld estimates that the industry is worth $14.5 billion in 2013-14. The overall funding increases will provide additional revenue growth for the industry, which is largely dominated by state government authorities and private construction contractors and engineering consultancies.

2. Scientific Research Services
IBISWorld Report M6910
The MRFF will enter the industry, funded by health savings. The Federal Government is targeting an increase in the MRFF’s capital level to $20.0 billion from 2014-15 through 2018-19. The MRFF will pay annual dividends to fund medical research, with the dividend expected to rise to $500.0 million in 2019-20. The additional funding will provide a significant revenue injection into an industry that IBISWorld estimates will be worth $4.9 billion in 2019-20.

In contrast, however, $111.4 million will be remove from the CSIRO’s budget over the next four years as part of $146.8 million of cuts to scientific research. Cuts to other scientific research will cause the industry to flounder in 2014-15 and 2015-16 as the MRFF is being capitalised.

3. University and Other Higher Education
IBISWorld Report P8102  
The Federal Government will remove the cap on fees that universities can charge domestic students in Commonwealth Supported Places. The Federal Government will also impose interest on HELP debts at the government bond rate (capped at 6.0%) from 1 June 2016.

While higher fees at some universities have the potential to drive prospective students away from tertiary study, IBISWorld expects that there will be little effect on demand from students aiming to enrol at the Group of Eight universities, which are expected to implement substantial fee increases. Revenue growth from these universities is projected to offset any potential decline in enrolments due to fee rises and HELP interest repayments, resulting in stronger growth than originally anticipated for the industry.

4. Technical and Vocational Education and Training
IBISWorld Report P8101
The Federal Government will remove the 20.0% loan fee applied to VET FEE-HELP loans, which are provided to eligible full-fee paying students in higher level vocational education and training. Removing the loan fee on VET FEE-HELP loans will strengthen demand for vocational qualifications, as it will significantly reduce applicable repayments. With more full-fee paying students enrolled in the vocational education system, IBISWorld expects that the industry’s revenue will grow strongly over the next five years.

Losers

1. General Hospitals
IBISWorld Report Q8401
Under the National Health Reform Agreement 2011, the Federal Government was to fund 45.0% of efficient growth for general hospitals from 2014-15 through 2016-17, then 50.0% of efficient growth from 2017-18 onwards. Efficient growth is growth in the volume of services, with every service given an efficient price as determined by the Independent Hospital Pricing Authority.

The Federal Government has reneged on $16.4 billion of funding guarantees under the National Health Reform Agreement, as well as efficient growth provisions to occur from 2017-18. From 2017-18, the Federal Government will distribute funding to the states based on CPI and population growth. In 2017-18, funding will decrease by $1.2 billion, with further decreases in the following years expected to put downward pressure on industry revenue if the states are unable to make up the shortfall.

GP-revenue

2. General Practice Medical Services
IBISWorld Report Q8511

Pathology Services
IBISWorld Report Q8521

Diagnostic Imaging Services
IBISWorld Report Q8522

From 1 July 2015, Medicare schedule fees for GP consultations, diagnostic imaging services and pathology services will be reduced by $5, with patients having to make $7 co-payments. The Federal Government is expected to achieve its aim of reducing demand from patients that do not require GP attention. IBISWorld expects that the loss of about $1.2 billion in annual funding will not be offset by patient co-payments, as lower demand will have a negative net effect on industry revenue over the next five years.

Demand for diagnostic imaging and pathology services will be similarly affected as patients avoid visiting their GPs. IBISWorld expects that demand for these services after a GP has referred patients will remain stable despite further $7 co-payments being required, as these are generally more essential health services.

3. Government Schools
IBISWorld Report P8026

Private Schools
IBISWorld Report P8025
The Budget confirmed that the Federal Government will avoid the bulk of Gonski funding by reneging on the final two years of the agreement, which would have delivered an additional $7.0 billion in federal funding to schools. While schools will benefit from $2.8 billion in Gonski funding from 2013-14 through 2016-17, they will incur significant losses in 2017-18 and 2018-19.

The new funding system will increase distribution to the states based on CPI and enrolment growth, with $54.1 million of extra funding scheduled for 2017-18. The new system will be a far cry from the Gonski model, as the states are unlikely to be able to make up the shortfall. IBISWorld expects that this will result in much slower growth for private and government schools than what was scheduled with the original Gonski model. Government schools will be hit hardest as they were scheduled to receive the greatest funding increases.

Outcome
Industries that heavily rely on Federal Government funding, such as road and bridge construction and scientific research services, have won out with the 2014-15 Budget. Heavy investment in roads and the MRFF will support revenue growth in these industries. Tertiary education providers have also emerged ahead as they will increasingly be able to place the cost burden on students.

In contrast, medical practitioners will lose out so that the Federal Government can capitalise the MRFF. Furthermore, industries that heavily rely on state government funding, such as general hospitals and primary and secondary schools, will suffer as previously agreed funding increases have been scrapped. The budget has largely been kind to for-profit enterprises, particularly with the company tax rate being cut by 1.5 percentage points to 28.5%. However, this comes at the expense of state-funded operators providing essential front-line services.

The policy changes made in the 2014-15 Budget are forecast to reduce the Federal Government deficit over the next three years and deliver a small surplus in 2017-18. Government forecasts show that the budget will remain in a worse condition than it was in the Pre-election Economic and Fiscal Outlook (PEFO), but will improve on the more recent Mid-Year Economic and Fiscal Outlook (MYEFO).

How the forecast deficit has changed

2013-14 ($billion)

2014-15 ($billion)

2015-16 ($billion)

2016-17 ($billion)

2017-18 ($billion)

PEFO

-26.7

-21.0

-1.5

7.6

MYEFO

-43.7

-40.0

-20.9

-14.3

2014-15 Budget

-46.7

-26.7

-13.8

-7.1

1.0

 

Relevant reports:
E3101 – Road and Bridge Construction in Australia
M6910 – Scientific Research Services in Australia
P8025 – Private Schools in Australia
P8026 – Government Schools in Australia
P8101 – Technical and Vocational Education and Training in Australia
P8102 – University and Other Higher Education in Australia
Q8401 – General Hospitals in Australia
Q8511 – General Practice Medical Services in Australia
Q8521 – Pathology Services in Australia
Q8522 – Diagnostic Imaging Services in Australia

 

Download this special report from IBISWorld here.

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