This government is already on course back to deficit
Published by the Australian Financial Review, Friday 5 April
The final budget in another term of the Coalition government seems a good time to reflect on their fiscal legacy. The Treasurer gave us the rose-tinted version on Tuesday night. But how will the economic history books record the six years of the Abbott/Turnbull/Morrison government?
The biggest headline achievement has been the gradual improvement in the budget bottom line.
When Tony Abbott took office in September 2013, the forecast deficit was $30.1 billion (1.9 per cent of GDP) for that financial year. It ultimately came in at $48.5 billion, exacerbated by an $8.86 billion equity injection into the RBA and $1.5 billion for the East-West Link road project in Victoria.
Five-and-half years on, the government is forecasting a small deficit this financial year before moving to a surplus of $7.1 billion in 2019-20.
So how much of this is good fortune and how much good management?
Spending growth has been subdued since 2014-15. Real growth over the two terms of the Coalition government has averaged 2.6 per cent a year, the lowest of any government in 50 years. Economic circumstances have helped – strong jobs growth has reduced growth in social security spending. But a lot can also be credited to hard policy work by both this government and the previous Labor one.
The Abbott-era budgets tightened eligibility for the age pension and Family Tax Benefits (as did the Gillard government before it), reducing the growth rate for both payments. And the growth in disability support pension payments remains substantially below historical levels after changes to the work impairment test introduced by the Gillard government in 2011-12.
A less visible but equally significant fiscal restraint has been resisting the temptation to give one-off boosts to payments such as the age pension and carers’ payments. Such boosts were common in the previous two decades – although this government, too, has quickly yielded to temptation with the pre-election “energy assistance” payments to pensioners and other payments recipients.
But even with this restraint, spending as a share of GDP hasn’t come down significantly since the Coalition took office. And there have been a notable absence of savings measures in the past two budgets, other than the now almost obligatory measures to extract more efficiencies from the welfare budget.
Budget consolidation has mainly been a revenue story. Revenues have increased by a full 2 per cent of GDP since 2013-14. Growth in income tax receipts through bracket creep, commodity price windfalls and Future Fund earnings are the heroes of this story.
It looks like the record of a government that should take credit for some incremental belt-tightening and (largely) resisting the temptation for cash splashes. But the government wants to lay claim to a bigger legacy. It claims to have set Australia on a path to eliminating net debt by 2030, while giving the largest personal income tax cuts since the Howard government.
This version of the legacy is more fantasy novel than historical account. The government’s steady downward trajectory on debt relies on it achieving ever-growing surpluses building to almost 2 per cent of GDP by 2029-30.
Sounds impressive, especially when you take into account the tax cuts announced in the past two budgets are together worth more than $300 billion over the decade. That’s because these fantasy surpluses are born on the spending side of the budget – payments as a share of GDP are projected to fall by 1.5 per cent of GDP by 2029-30. Achieving such a reduction would require significant falls in spending growth across almost every major spending area, during a period when we know that an ageing population will increase pressures on many components of spending. The Parliamentary Budget Office’s best guess is that ageing could wipe $36 billion off the bottom line by 2028-29.
This is the problem with attempting to create a legacy in the medium-term estimates – these aren’t intended to predict what the budget would actually look like under the current government in a decade. The medium-term estimates assume a world of steady trend growth and no new spending announcements – other than for infrastructure and pharmaceuticals. To believe these figures you would have to believe the Coalition would contest another three elections without spending an additional dollar.
Hiding behind the medium-term estimates is not just rhetorical flourish. The government has used these estimates to justify substantially boosting the size of its tax cuts for high-income earners from 2022. Take away the optimistic assumptions and its not at all clear these are affordable.
So the ultimate legacy of this government could well be a budget heading back to structural deficit towards the end of the forward estimates. If only they could have been happy with just average.