7
May
2015

Budget 2015: The St Augustine budget, wants to be virtuous, but not yet

by John Daley


Published by Australian Financial Review, Thursday 7 May

The strategy behind Australian budgets has been remarkably consistent since the global financial crisis.

Each budget recognised there was a significant deficit in the current year. Each budget forecast that the deficit would drift back up to or near balance over the following four years. Each budget had some cuts, but most of the recovery depended on income tax revenues growing significantly faster than the economy. Each year we have been disappointed.

Since the government promises a “dull” budget, we can probably expect more of the same. This year’s deficit will probably be about $40 billion.

A deficit of this size implicitly increases the future tax burden on younger households by about $10,000 a year. Now that we have had deficits for six years in a row, the cumulative burden is about $60,000 in future additional taxes for younger households.

If the extra spending had been for infrastructure, maybe we could justify the outcome. But most of it has gone to fund the ordinary services in welfare, health and education that taxpayers were not prepared to fund out of their own pockets.

This budget will again probably forecast a drift back to balance. But the outcomes of the last few years have demonstrated the triumph of experience over hope. Despite the forecasts, deficits of 2 to 3 per cent of GDP – about $40 billion in today’s terms – have stubbornly remained.

PRICE FALLS

Between 2009 and 2013, the problems were mainly due to mineral prices falling faster and further than forecast. As a result, corporate tax receipts were substantially lower, while expenses didn’t change. In the last 12 months we’ve had a different problem. Because nominal wages rose only slowly and barely kept pace with inflation, there was less bracket creep, and income tax revenues fell short of forecasts.

But the overall result was the same: a persistent budget deficit that hangs around like a bad cold – only with more significant side effects.

The budget of May 2014 was a little different. All of the previous five budgets included significant expenditure cuts and tax increases. But they largely gave back the money saved through new measures. Last year’s budget at least made net savings – the budget nasties outweighed the goodies.

But the May 2014 budget didn’t go over well, and the government has formally abandoned many of its measures. Others remain on the books, but have little hope of passing the Senate. The net effect of the changes actually in place, is material but modest. They improve the annual budget balance by about $10 billion, about half of the original plan.

All the signs are that the 2015 budget will revert to type. There will be nasties – a tighter age pension assets test, a Netflix tax, tighter procedures for pharmaceutical spending. All are sensible improvements to the budget bottom line, but inevitably there will be losers. And there will be goodies – more childcare spending, an end to the government’s plan to index pensions at CPI, and a tax cut for small businesses. Some of these may be sensible, but they will cost the bottom line. If this is going to be a “dull” budget, the net effect is likely to be small.

Like its predecessor, the government will probably justify the relative inaction by pointing to a sluggish economy. It will affirm that it wants to be virtuous with a balanced bottom line, but like Saint Augustine, “not yet”.

BUDGET TENSION

There is no doubt a real tension between balancing the budget and keeping the economy growing, particularly to avoid increasing unemployment and all the social costs it imposes. Yet there are real opportunities to improve the budget deficit without dragging too much on the economy. They include targeted tax increases – particularly superannuation tax increases and negative gearing – and cost reductions such as going much harder on pharmaceutical costs and age pensions.

The government seems reluctant to embrace these given its aversion to anything that might be labelled a “tax increase”. Ironically, its plan is to balance the budget primarily through increasing income taxes as a proportion of GDP. But because bracket creep is relatively invisible, this doesn’t count – at least politically – as a tax increase.

History suggests that few governments succeed in balancing their books by waiting for economic growth to do the work. Instead, they usually have to do the hard work of structural repair: overt cost reductions and revenue increases. It doesn’t sound like this budget will have much of either.

If so, this budget won’t be different. So why would we expect a different result?