Australia is not Greece, but its economy is obese and unfit

by John Daley

Published at The Conversation, Monday 15 February

Australians woke up to dire warnings this week about their economic future. We need tough reforms and spending cuts, we’re told, lest Australia head down the path of Greece and end up as an economic basket case.

On the ABC’s AM program on Monday, the Australian Chamber of Commerce and Industry’s Kate Carnell called for the abolition of Family Tax Benefit Part B, means testing of the Child Care Rebate and switching pension payments for loans against the family home.

But it was the comparison with Greece that sounded most, as she put it, dramatic.

    PETER RYAN: Kate Carnell, you say that without major reform the system will break and Australia will end up in painful austerity like Greece, and to a lesser extent Spain. Isn’t that a pretty dramatic comparison to make?
    KATE CARNELL: Well it is a dramatic comparison, but I think dramatic comparisons are necessary. You know, in Australia today, every day the Government raises about $1 billion and spends $1.1 billion, so every day we have to borrow $100 million. Now everyone can understand that you can only do that for a period of time before you go broke really.

Carnell is right about Australia’s spending outpacing revenue. You can see from page 29 of the 2015-16 Mid-Year Economic and Fiscal Outlook here that Commonwealth receipts are at about $395 billion a year. Expenses are $428 billion a year.

If you divide by 365 days, you get close enough to A$1.2 billion in expenses and $1.1 billion per day in revenue.

With an underlying cash balance of negative $37 billion, her estimate of losing $100 million a day is close enough.

But we are not Greece.

Not flat-lining – just obese and unfit

It is right to say that if you run a material deficit (and 3% of GDP is material) for long enough, then you can wind up with some very painful austerity. We’re not there yet, as Carnell acknowledged.

There is no budget emergency in the sense of a patient flat-lining on the operating table. But Australia is like someone who is obese, unfit, and eating too much cheese. And we all know how that usually ends.

We have now locked in eight years of deficits around 2-3% of GDP (2008-09 to 2015-16). We are projecting future budget deficits averaging over 1% of GDP for another three years (assuming no further downgrades to revenue, which is optimistic given the track record). It’s starting to add up.

Comparisons with Greece may be a little premature, but there is certainly hard work ahead for Australia’s economic managers, through both spending cuts and tax revenue increases. None of that will be particularly easy politics, but it’s essential so that the current generation doesn’t pay for its healthcare and welfare payments simply by handing on a bill to future generations.

Ignore that, and Australia could end up flat-lining on the operating table after all.

The Conversation