Why Advance Australia unfair?

National Economics Editor Jessica Irvine says she's surprised at how stingy the Treasurer's being with the aged pension

MOST budgets come and go and are never rate a mention again.

But the Federal Budget handed down by Treasurer Joe Hockey last Tuesday is different.

It will change the nation.

Fundamentally, it marks a line in the sand. The days when we pay for our promises on the never never are over. Hockey has cut up our national credit card. It's time to pay up.

Political pundits can argue until the cows come home about whether there is a "budget emergency" in Australia.

Yes, our national debt is low relative to other nations — about 15 per cent, compared to 80 or 90 per cent in many European countries.

But trust me, you wouldn't want to be those other countries, with sclerotic growth and high unemployment.

As a significant importer of foreign capital to fund our growth, it's more important for Australia to prove our creditworthiness — our capacity to pay our bills and live within our means.

And we haven't been.

The salad days of the mining boom are over.

The global financial crisis and its aftermath cut a swathe through government revenue. Tax collected on company profits has dwindled. So too did tax collected on property and other capital gains. Wages growth has been slower — meaning less revenue from personal incomes.

As a nation, we took a temporary boom and turned it into permanent spending promises. We cut taxes below what is now needed to balance the budget. And we spent money on permanent increases to pensions and family payments that we can now no longer afford.

Without Budget cuts of the magnitude unveiled last Tuesday's, we are heading for decades of deficits.

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Budget fallout ... Prime Minister Tony Abbott with Treasurer Joe Hockey who were waiting Opposition Leader Bill Shorten's Budget Reply Speech in Parliament House in Canberra. Picture: Gary Ramage Source: News Corp Australia

Worthy national programs like a National Disability Insurance Scheme are under threat if we do nothing to close the yawning gap between budget revenues and spending.

And so last Tuesday's Budget asks Australians to make a sacrifice. We pay now, so the government can continue to invest in productivity-enhancing things like education, skills and infrastructure.

Paying more for less will be painful. It will mean a reduction in the living standards that many Australians have come to enjoy.

But what's the alternative? A Budget in deficit forever is no strategy at all.

Hockey and Abbott are due some respect for finally pulling the veil from our eyes and exposing the truth about our Budget that the Rudd and Gillard governments tried so hard to hide.

This Budget goes a long way to fixing the budget. But, as things stand, it fails the fairness test.

The debt levy on high income earners is a temporary salve that expends significant political capital on a broken promise that will raise only a paltry $3.1 billion.

High income earners largely escaped last Tuesday's Budget scalpel. Rich Australians will continue to benefit disproportionately from tax breaks on superannuation, family trusts, share market gains and property investment.

Meanwhile, middle and low income earners are hit hard. These families spend more of their weekly budget on petrol, so the increased excise hits them hardest. Family tax benefits may need a haircut — but that will hurt too. A flat GP co-payment of $7 will also hurt low income families relatively harder than high income families. Increases to university fees will make it harder for students from low income households to make the grade financially.

And imagine the plight of a 28-year-old electrician with two kids and a mortgage who is made redundant. Under Hockey's Budget, he would have no income for six months. That just doesn't add up.

This Budget, as it stands, fails the fairness test. But that does not have to be the end of it.

Comprehensive tax reform can help balance the books.

The Government's coming white paper on tax reform must look at the disproportionate benefit high income earners enjoy the flat taxation of super at 15 cents in the dollar. Tax breaks on capital gains should also be wound back.

More fundamentally, Australia needs a beefed up GST — an efficient tax that will help state governments fund hospitals and schools. But a proportion of the revenue raised must go to compensate lower and middle income households through tax cuts or pension increases.

Left as it is, Hockey and Abbott's first Budget would indeed change the nation: by increasing inequality in Australia.

If they are serious about fixing the Budget AND contributing to a fairer Australia, there is much more work to do.