Published by Australian Financial Review, Friday 20 May
Whichever party wins this federal election faces an immense budget challenge. Yesterday’s release of the Pre-Election Budget Outlook (PEFO) was a missed opportunity to remind our political leaders of this fact. Instead of using recent weak data that have emerged since the budget to justify downgrading the fiscal outlook, the heads of Treasury and Finance have maintained the rosy forecasts. Yet hoping for a better future hasn’t worked for seven years, and there is little reason to think it will now.
PEFO informs voters and electioneering parties of any changes in the nation’s fiscal position since the budget or the most recent Economic Statement. Although Treasurer Scott Morrison released his first budget little more than a fortnight ago, a lot can change in two weeks – and it has.
A slew of weaker economic data in recent weeks suggests that the budget outlook is too benign, especially for revenues. Lower than expected wages growth and weak inflation will reduce the extra revenues that future governments can expect from fiscal drag. No doubt both Treasury and the RBA are hoping that lower interest rates will push inflation back up, but that hasn’t worked recently in other developed countries.
Treasury also needs to rethink its approach to projecting medium-term growth. Assuming that growth in real GDP will return to a trend rate of 3 per cent a year appears increasingly optimistic with each passing year. Recent experience in Australia and other advanced economies points to slower future growth in productivity, and in real incomes. The secretaries gently allude to this issue in their statement, and point out the risks of what they describe as “benign” assumptions about growth. Yet Australian politics needs a kick in the pants, not a gentle push.
In each year since the global financial crisis, the budget has projected a happy return to surplus on the back of rising revenues over the four years of the forward estimates. Optimistic forecasts have allowed successive governments to avoid facing up to the challenge of budget repair. Yet each year, the prospect of these higher revenues has receded even further.
Since the budget went into deficit in 2008-09, no government has taken decisions to save substantially more than it spent in net terms. Both sides have introduced significant savings measures, then almost invariably used them to fund other priorities.
The mantra of Rudd-Gillard years was that all new spending would be offset by savings elsewhere. The problem was, some of the “savings” should have been saved. Similarly, Scott Morrison admitted earlier this year that his Government has spent $70 billion of the $80 billion in savings it had made since coming to office.
There are other risks, too. As the secretaries point out, the projections assume $18 billion in budgetary savings over five years from policy decisions that are yet to be legislated. And they flag that the government’s target of capping tax receipts at 23.9 per cent of GDP is not going to work without “considerable effort to reduce spending growth”, which “has proved difficult in practice”.
Australia’s net government debt remains low, but international credit rating agencies are growing restless, especially as both sides look to fund substantial new policy initiatives, such as the National Disability Insurance Scheme and higher defence spending. As the Secretaries say, if the economy turns down, the debt burden will impose increasing costs.
Seven years of downgraded forecasts should be enough to convince governments of the need for a new approach. But Treasury is only diplomatically whispering when politicians are unlikely to hear anything not shouted into a megaphone.