We need restraint, not a razor

That means making tough decisions and putting difficult arguments. It means creating “losers” by winding back overly generous tax breaks for housing and super. It means the government holding its nerve on slowing the growth of the NDIS, in the face of unrealistic expectations of what the scheme can deliver. It means being brave enough to put money on the table for states to drive economic reforms, even if the pay-off for those reforms will take time to show up.

There’s one thing the Treasurer should not do: he should not give in to increasingly noisy demands to slash spending for its own sake – because plucking a percentage of GDP from history rather than dealing with today’s realities will get us nowhere. We need restraint, not a razor.

Outside an economic shock, spending restraint should always be a core part of the budget process. There are a range of savings measures the government could adopt.

Right now, the focus for lifting Australia’s economic growth should be on the supply side, and any spending measures should have boosting economic capacity and resilience as their lodestar.

Public spending is essential to the proper functioning of many aspects of our economy and our society.

The federal Budget is an opportunity to reprioritise spending on the things that matter most in an ageing society going through an energy transformation, and boost public sector productivity. But to do that, the Budget has to survive contact with the real world.

This means that the details matter: where we can spend better to get the results we want – such as reducing wasteful spending in public hospitals, or changing how we fund GPs so quality of care rather than the number of consultations is key – and what we are willing to trade off – such as reducing pension eligibility for those with substantial assets or cutting popular but wasteful infrastructure commitments.

We also need to pay close attention to where and why government spending has grown, and where the future pressures lie.

Over the past 25 years, federal government spending has grown from 25 per cent of GDP to its current 26.9 per cent of GDP. That is not dramatic, but it is higher than federal government receipts, which sit at 25.7 per cent of GDP, largely unchanged from 25 years ago. This is what has set up future budget deficits.

What has driven this growth in spending since the turn of the century? Predominantly, it is spending on older Australians, and more recently on Australians with disabilities, with smaller but still substantial increases in broader health spending and transport infrastructure.

In part, this reflects the NDIS, which has grown rapidly. But in larger part, it reflects our ageing population (pensions, aged care, and health care, and higher standards of treatment and care that enable some of the longest lifespans on the planet). The share of Australians over 65 has grown from 12 per cent in 2001 to 17 per cent today.

While aged and disability spending has caused social services expenditure to grow, federal support for younger and working age Australians has fallen: from 3.2 per cent of GDP in 2001 to just 2.3 per cent today.

This means that spending restraint that involves pulling back on the things that working-age people rely on, or asking young people to contribute more to the cost of services, will only worsen the intergenerational unfairness which is straining Australia’s social compact.

The challenge of an ageing Australia will only grow as the over-75s and over-85s become an even larger share of our population.

And there are further calls on public spending: necessary renewal of ageing public infrastructure; paying fair and adequate wages to retain workers in vital jobs including in childcare, healthcare, and aged care; responding to more frequent and extreme natural disasters; and coping with more volatile geopolitics and a more uncertain global outlook.

The future is likely to be expensive: we can’t wish that away.

That is why it is critical that this budget seizes the opportunity for a fairer and more efficient way to raise the money to pay for the things that underpin our quality of life. In the medium-term, this will mean lifting our more efficient taxes, like the GST.

But first, this budget must tackle tax concessions with flimsy justifications: this is the lowest hanging fruit to improve our tax system, even if the losers have loud voices.

Our super tax concessions go well beyond what is needed to ensure that Australians save for a decent retirement, instead creating a tax shelter for wealth within the super system.

And the capital gains tax discount is demonstrably too generous, driving inequity in our income tax system, distorting our housing system, and demonstrating poor value for money in terms of growing housing supply.

Spending discipline is necessary, but not enough for the world we live in. We need a greater ambition and better management of expectations of what it takes to ensure a bright future for all Australians.

This means being smarter about how we target our spending to build and retain human capital, ditching poorly justified tax breaks, and keeping our eyes on the biggest prize – the painstaking reforms to build a dynamic, competitive, single national economy – rather than getting distracted by nostalgia for some other, simpler time.