Fixing our budget emergency means making the case for change - Grattan Institute

Published by The Drum, Wednesday 25 November 2013

The man who used to be opposition leader, Tony Abbott, was right: Australia has a “budget emergency”. By 2023, our governments face potential deficits of $60 billion a year, in today’s money. If we ignore the shortfall, we will hand a heavy burden of debt and interest payments to the next generation.

Pressure on Australian government budgets has been building for some time. It comes from rising health costs, age pension spending, an inevitable fall in the terms of trade, and the propensity of governments to spend big on signature initiatives such as paid parental leave, new schools funding and the National Disability Insurance Scheme.

Since the lion’s share of the deficit will appear on its books, the Commonwealth Government has to cut spending or raise taxes, or both. Whether the Government tackles the tough choices on budget repair will define the new Prime Minister’s legacy. It is a fair bet that when Mr Abbott first sought the job, this was not the defining challenge he dreamt about.

But it is a challenge he can meet. Experience in Australia and overseas shows that governments can repair their budgets, sometimes from worse positions than Australia is in now. While it costs political capital in the short-term, governments can even emerge stronger. Grattan Institute’s new report, Balancing budgets: tough choices we need, shows how it can be done.

Grattan’s report considers 20 reforms that could each contribute $2 billion or more to government. In particular, we examine a reform package that would broaden the GST to include spending on fresh food and private spending on health and education, raise the age of access to superannuation and the Age Pension, limit tax concessions on superannuation contributions, and remove the exemption for owner-occupied housing from the assets test for the age pension.

Such a package, adopted in full, could add about $37 billion a year to Australian government budgets. It may sound crazy-brave. But a government not prepared to tackle any of these reforms is unlikely to rein in the deficit. There just aren’t enough feasible alternatives big enough to bridge the gap. Many of the cuts touted as answers are small relative to the size of the problem. Slashing 14,000 public servants and middle-class family benefits, for example, are unlikely to improve budgets by more than about $3 billion a year between them.

How might the Abbott Government go about the task? Governments that have successfully repaired their budgets put considerable time and effort into building the case for change. They work to get buy-in from their own MPs, the media, public servants and the public. They tell a powerful story that explains why tough choices are needed.

Reform is easier when it is perceived that the pain is being shared across society. The package we examine most closely – described above – spreads the burden of reform among rich and poor, workers and retirees. Those with more capacity to pay should always pay more. But if everyone is seen to be making sacrifices, it blunts the power of any one group to complain.

The Abbott Government has the advantage of starting from a strong political position. Governments that successfully repair their budgets use such an advantage to start making the hard calls early. A government must create momentum with tough choices that make a big difference in its first budget. Otherwise, it’s hard to convince voters thereafter that hard decisions are truly needed.

But even with a large majority, political capital and public goodwill are finite. So governments must set priorities, the right ones. Paul Keating once said that the trick to government is to pick three big things and do them well. Governments that do not prioritise risk using up limited political capital and leadership time on urgent but relatively unimportant issues.

All reform options need to be on the table. Governments cannot expect that economic growth will balance their budgets. Without deliberate changes, taxes and costs both tend to grow more or less at the same rate as the economy. With increasing demands for health services, and an ageing population, costs tend to grow a little faster.

Budget repair in Australia will need tax increases, given that our government is relatively small, major revenue sources such as the GST are in decline, and plausible expenditure cuts don’t seem to be large enough to fix Australia’s long-term budget challenges.

Australian governments will also need to cut spending. Successful reform efforts elsewhere show there is no other way. Yet the Abbott Government may have tied its own hands, having already ruled out cuts to health, education, defence, and superannuation. One can only hope that the broad terms of reference for the National Commission of Audit and the deteriorating budget outlook give the Government scope to move on some of these areas soon and build momentum for change on others after the next election.

The budget emergency remains. Resolute decisions on the tough choices are needed to protect Australia’s prosperity.