28
Jun
2016

Budget 2016: Both parties’ budget plans are simply hoping for the best

by John Daley and Brendan Coates


Published by Australian Financial Review, Tuesday 28 June

Budgetary responsibility has always been a big deal in Australian elections. Perhaps because so many Australians have large variable rate mortgages, they have historically had relatively little tolerance for budget deficits. So not surprisingly, there’s been plenty of interest in the closing week of the campaign about how everything adds up.

The glossy documents and graphs from both Labor and the Coalition, along with reassuring elephant stamps from the Parliamentary Budget Office, suggest the Australian electorate can sleep easy. Both major parties promise a return to surplus in five years’ time, and then surpluses as far as the eye can see. The ALP has slightly bigger deficits for the first four years, but larger surpluses in the long term. The message is that there is “nothing to see here, move along”.

But the reality is much more concerning. Rather than planning robustly for a range of possible futures, both sides are simply hoping for the best. Although the precise route differs, both parties expect to get to surplus almost painlessly, without large net increases in tax or reductions in spending. And the pace of budgetary repair is leisurely. Within the next term of Parliament – the period they control after this election – both parties are promising only deficits.

Instead, plans for surplus continue to rely on over-optimistic forecasts. They expect revenues to recover quickly, and spending to grow only slowly. This approach has served the country poorly in the past. This year was the seventh in which the budget forecasts a drift back to surplus over the following four years while the outcome for the current year showed minimal improvement over the year before.

These forecasts have been used to justify the absence of tough decisions. Since the budget went into deficit in 2008-09, with the exception of the May 2014 budget, no government has made significant net savings. Both sides have introduced significant savings measures, but used pretty much all of the proceeds to fund new priorities rather than to reduce the budget deficit over the following four years.

In the short term, the Coalition’s budget plan is marginally less bad than Labor’s. It promises to run deficits totalling “only” $83 billion rather than $101 billion over the next four years. That gap narrows if the Coalition faces up to the so-called “zombie” budget measures, worth $7 billion over four years, which are stuck in the Senate and likely to stay that way. On the other hand, the gap would widen again if an incoming Labor government faced opposition to its agenda, creating new zombies. That’s a real risk: new spending has generally had a much easier ride through Parliament than budget savings. After a double-dissolution election the new Senate may well have an even larger crossbench which is likely to make budget negotiations even more tricky.

In the longer term, Labor’s budget plan is materially better than the Coalition’s. Some of Labor’s largest savings measures – such as abolishing negative gearing and halving the capital gains tax discount – start small since they are grandfathered, but raise a lot of revenue in a decade’s time. And most of the net cost of the Coalition’s promise to cut the company tax cut to 25 per cent for all companies by 2026-27 – $14 billion a year – only hits between 2021 and 2026. In the very long term – after 20 years – the company tax cut will be largely self-funding if extra growth materialises. But that’s a very long time to wait for budget repair.

But these projections all assume that governments don’t give anything away over the decade. For example, both sides are assuming no real growth in grants to the states for health spending per person after 2021, which seems rather unlikely.

Good budgeting requires short-term discipline rather than promises to be better in future. If neither party is willing to make the tough choices to balance the budget in the next term of Parliament, why should we believe that they’ll make them in the term after that?

While our politicians fiddle, the budget begins to smoke. Budget deficits have averaged about 2 to 3 per cent of GDP for the last eight years, even though economic growth has now returned to around the long-term trend. Australia’s net government debt remains low, but international credit rating agencies are growing restless. Make no mistake: without serious action on the deficit, Australia’s AAA credit rating is under threat.

We’re also in a far less secure position, if there is an economic shock, than we were in 2007. The vote for Brexit has reminded everyone that unfortunate events can happen. We urgently need a budget position that provides more room to manoeuvre than we have at the moment. The Australian economy is particularly exposed: with interest rates at historical lows, the Reserve Bank can do little more to stimulate the economy, and so fiscal stimulus will be the primary defence in an economic downturn.

So Australians have few good choices in this election for responsible budgeting. It is not particularly reassuring that our best hope is that the election winners do not keep their promises.