Published by The Australian Financial Review, Wednesday 27 November 2013
When Australia’s treasurers meet on Wednesday, they need to get serious.
Australian governments face a decade of deficits, the result of big-ticket spending initiatives, rising health costs, pressure on welfare budgets and an inevitable fall in the terms of trade.
Collectively these could lead to deficits of 4 per cent of GDP, or $60 billion in today’s terms, within a decade.
Grattan Institute’s new report, Balancing budgets: Tough choices we need, looks for realistic proposals that could help to fix government budgets. It puts a priority on reforms that are big enough to make a difference but do not have unacceptable economic and social effects. If we’re trying to fix a $60 billion hole, then ‘big enough to make a difference’ means reforms that are worth at least $2 billion a year to budgets.
Unfortunately, state treasurers have spent the lead-up to this meeting talking about imposing GST on internet purchases from overseas. They claim they’re missing out on a big chunk of revenue.
Treasury estimates they missed out on about $650 million in revenue in 2013, and $860 million in 2016, before you take into account the cost of collecting that revenue. It might be nice to have, but it’s not going to make much of a dent in $60 billion. If governments are serious about fixing budgets, they will have to think much, much bigger than online shopping.
But it was a good idea for state treasurers to put budget reform on the agenda at the meeting. It’s clear from the terms of reference the Treasurer has given the Commission of Audit, that the Commonwealth is tempted to fix its budget problem by moving out of some areas of spending, and leaving states to foot the bill.
This might help the Commonwealth government, but it won’t help the nation. It doesn’t make the budget problem go away, it just changes who has to deal with it.
State government deficits are bad for all the same reasons Commonwealth deficits are bad. But it is harder for states to dig themselves out of budgetary trouble. Because states get most of their revenue from relatively inefficient taxes such as payroll tax and stamp duty, we will all be worse off if these are increased. Far better to increase relatively efficient taxes such as the GST – but that requires the Commonwealth to act.
GO AFTER BIG SAVINGS
Some suggest we should abolish one or more Commonwealth departments – usually health or education – and transfer their functions to the states. But the savings available are just not big enough to make a difference to budgets.
The Department of Health and Ageing will only spend $600 million on employee expenses in 2013-14. That is 0.2 per cent of the Commonwealth budget and cutting it will not come close to fixing the problem.
Instead of going after small savings, governments need to think big. Balancing budgets shows that broadening the GST could raise $13 billion a year (after compensating those on low incomes).
Under current arrangements, states would receive this revenue, but the Commonwealth would incur much of the political pain.
This presents a problem, but also the opportunity for a bargain.
States now get just under a quarter of their revenue from the Commonwealth in the form of tied grants, which are restricted to certain areas of spending. If states are getting more from the GST, the Commonwealth could reduce the amount of tied grants accordingly.
States would effectively be in the same financial position, but have more freedom to choose what to prioritise.
This would position the Commonwealth well to ask states for other reform.
For example, they might make the increased GST revenue conditional on states reducing stamp duties and increasing property rates over time.
Stamp duties are very inefficient taxes, and prevent people from moving to new houses that better suit their jobs, families and lifestyle. They also make state budgets vulnerable to falling revenues when there are fewer property transactions, usually in tough economic times.
Property rates are fairer, much more efficient and share the tax burden better.
This reform would not improve state budgets much, since they would be trading one revenue source for another. But it would make the tax system more efficient and lift economic growth, producing more income and company tax revenue for the Commonwealth budget.
Under our federal system, such a “grand bargain” is probably the only way to get genuine tax reform. As our report shows, the Commonwealth has opportunities to fix its budget without calling on states to foot the bill. They are tough choices, but given the budget gap, necessary.
Over the past few years, many state governments have begun the hard work to balance their budgets. They are right to call on Mr Hockey to follow suit.