Tony Abbott's promise to balance budget in five years raises prospect of new cuts
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Tony Abbott's promise to balance budget in five years raises prospect of new cuts

Prime Minister Tony Abbott has insisted the federal budget will be be back in balance within five years, even as the government's higher education reforms were defeated in the Senate and clear signs emerged that Treasurer Joe Hockey will not pursue big structural reforms after his bruising first budget.

Mr Abbott's bullish prediction, made during a joint meeting of the Liberal and National parties on Tuesday, has raised the prospect of future deep spending cuts to replace blocked measures in the Coalition's first budget.

In the lead-up to the next budget, structural cuts and savings in areas such as health, education and the pension that were attempted in the first budget have been put on the backburner and the government is likely to seek one-off savings from changes to programs.

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Several Coalition sources familiar with the discussions of the powerful expenditure review committee confirmed structural budget reform had been pushed back, with one saying any structural measures would be "nowhere near the extent of last time" and a second saying, "We are not going to rock the boat too much this time".

Prime Minister Tony Abbott's pledge is in contrast to Treasurer Joe Hockey's refusal to put a timeframe on a return to surplus.

Prime Minister Tony Abbott's pledge is in contrast to Treasurer Joe Hockey's refusal to put a timeframe on a return to surplus.Credit:Photo: Alex Ellinghausen

These statements are consistent with Mr Hockey's admission, as he launched the Intergenerational Report [IGR], that his first budget had attempted to do "40 years of work in one year".

In turn, Mr Abbott over the weekend promised a "prudent, frugal budget" while insisting the government's reform agenda was "absolutely not" dead as he pointed to forthcoming tax and federation white papers.

The second budget will focus on doing less and selling it better. A series of packages aimed at families, small business, jobs and workforce participation measures for women and older Australians will help form the centrepiece.

The government now argues the Parliament has passed around 80 per cent of the first budget measures, delivering about $30 billion in savings and a net $16 billion improvement to the bottom line over four years.

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The recently released Intergenerational Report forecast the deficit could be eradicated within five years but that hinged on the Senate agreeing to all spending cuts, including the Medicare co-payment and the original higher education reform package.

The mid-year economic update forecast a budget deficit of $40.3 billion in 2014-15, falling steadily to $11.4 billion in 2017-18 - effectively a balanced budget.

But Mr Abbott's timeframe pledge to the party room is in contrast to Mr Hockey, who has studiously declined to put a timeframe around a return to surplus.

In February, the Treasurer said: "I have never specified a date because I can't control external forces and I am certainly not going down the path of Wayne Swan."

Mr Abbott told colleagues the Intergenerational Report showed under Labor, Australia was on track to "southern European levels of debt" and that budget balance would be achieved in half the time under the Coalition.

Both Mr Abbott and Foreign Minister Julie Bishop flagged the cabinet's plan to use the report to better sell the need for budget repair.

Ms Bishop's public intervention in debate about the government's budget strategy came after an embarrassing leak from a full meeting of the 42-member ministry on Monday night, revealed by Fairfax Media, that Ms Bishop had questioned the federal government's handling of its first budget.

The increasingly assertive deputy Liberal leader - whom many in the party consider to be the next leader - raised her concerns about the sales job of the first budget with Mr Abbott and Finance Minister Mathias Cormann, arguing for broader consultation on the budget "narrative" and unfavourably contrasting it with the Howard government's efforts.

Later on Tuesday, she said the Intergenerational Report set the scenario "for the budgets that will need to hand down in the future".

Ms Bishop did not deny she had made the comments to the full ministry meeting and then spelt out in detail how the Intergenerational Report, and the need to rein in deficits, should be central to the government's economic plan of attack.

Grattan Institute chief economist John Daley said the budget could sneak into balance on the Prime Minister's timeframe, assisted by fiscal drag.

But that is assuming the Treasury forecasts are correct and over the past seven years they have been consistently out by tens of billions of dollars.

"This time they might be lucky, but if I was the Treasurer I wouldn't be counting on being lucky," he said.

More likely, the government would have to find new savings to propel the budget into balance within five years, Mr Daley said.

Shadow treasurer Chris Bowen said the nation faced a worsening budget deficit no matter what the government did.

"Just last October, Tony Abbott promised the budget would be in 'broad balance' by 2017-18, now that's out to 'within five years'," he said.

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