Reform needed but appetite lacking

by John Daley

Published by Australian Financial Review, Saturday 20 February

Reality is sinking in for the Turnbull government on the budget and the economy. There aren’t many measures that will make a big dent in the budget deficit. Those that can are all politically difficult. Nor is there much the government can do to make a big difference to economic growth. The few options are also politically difficult.

There is no doubting the reality that Australia has a material budget deficit. It has been about 2 to 3 per cent of gross domestic product for the past eight consecutive years. In theory it will reduce over the next four years, but the same prediction has been made unsuccessfully for the past seven years. Debt at 17 per cent of GDP is not yet unmanageable, but it is increasing by about 2 per cent each year. Current generations inherited no net government debt, but they are leaving future generations with a growing bill.

Governments are discovering that reducing deficits will be hard work. Of the options that will make a big difference, some are politically unthinkable, such as including owner-occupied housing in the pension assets test. Others are politically treacherous, such as cuts to pharmaceutical or pharmacology prices, which will upset vested interest groups. Most of the remainder are ideologically unpalatable, such as raising taxes.

Someone else’s problem

There have been some small steps with changes to the Age Pension assets test, the schoolchildren’s bonus, and the low-income support bonus. But the Commonwealth government is now signalling that it is prepared to live with continuing deficits for as long as a “Test match”. Presumably that means until most of the spectators have gone home – long enough into the future that making the tough calls will be someone else’s problem.

There’s little doubt about the reality that Australia is looking at many years of sluggish economic growth. Productivity growth has slowed across the developed world since before the global financial crisis, and bodies such as the International Monetary Fund are increasingly suggesting that the underlying trend might be lower for many years. In Australia, the headwinds of falling terms of trade have already resulted in several years of no real growth in income per person.

Governments are discovering that increasing economic growth will be just as hard as reducing deficits. As our Game Changers report showed, there aren’t many options that make a big difference. Of the few options that could make a significant difference, some have met political stonewalls, such as increasing the age of access to Age Pension and superannuation. Others have been left in the “some other time” basket, such as increasing female workforce participation through comprehensive reform of welfare, income tax and childcare subsidies. And some tax reforms might still be on the table, but the range of material options appears to be narrowing.

Far-reaching reforms

The Commonwealth government has gestured towards some potentially far-reaching economic reforms in responding to the Harper competition inquiry. It could bribe the states to swap stamp duties for property taxes, relax planning restrictions on property subdivision, and increase competition in human services. These could all make a big difference in the long term. But they will require first state co-operation, then effective implementation, and then it will take many years for the benefits to flow through. Don’t hold your breath.

Many people believe all can be solved by slashing middle-class welfare and reducing “big government”. But no matter how often these myths are repeated, the numbers don’t change. Australia in fact has among the smallest of governments in the Organisation for Economic Co-operation and Development, even when you allow for private compulsory superannuation contributions. Commonwealth expenditure has grown faster than GDP over the past decade, but the big drivers were healthcare, alongside the Age Pension, Carer Payment and Aged Care. Other welfare payments only just kept pace with GDP – and unemployment benefits fell in real terms.

Australians are getting something for the extra money. They are living longer, in better health. Even self-perceptions of health have improved. Fewer pensioners are in poverty, and levels of financial stress among older households have fallen. While reducing taxes would increase economic growth, it would also mean reducing the services that government provides, and that voters value.

Reduced without tax increases

Nevertheless, the government continues to insist that budget deficits will be reduced without tax increases, through the magic pudding of economic growth and unspecified spending cuts. Many doubt that these are going to bridge the gulf of a budget deficit of $37 billion a year any time soon. The government is showing few signs that it is prepared to reduce the deficit through material changes to superannuation taxes, negative gearing and capital gains taxes.

No wonder then, that many voters and commentators are unsure of the government’s economic direction. There’s broad agreement on the problems of budget deficits and slow economic growth. But there’s little movement on the tough policy calls that might make a difference. The government needs to put these tough measures openly on to the table, to start advocating them in the public interest, and to deal with reality.