Why governments must dig harder to get us out of deficit

by John Daley

Published by The Australian, Wednesday 14 August 2013

The pre-election fiscal outlook numbers released yesterday by the Treasury and Finance departments confirm what we have known since April: while governments are making a start on digging Australia out of deficit, there is a long way to go.

The collective position of the commonwealth and all state budgets is forecast to be a net surplus of only $6 billion in 2016-17.

That’s about 0.3 per cent of gross domestic product, really only a rounding error. Given the inherent uncertainty in budget forecasts, it’s not really a surplus at all.


Worse still, new Grattan Institute analysis confirms that Australian governments are facing a collective budget deficit of 4 per cent of GDP by 2023.

That is about $60bn in today’s terms. Rapidly rising health costs, falling terms of trade and rising welfare payments caused by increased inequality as the mining boom ends are all big risks to the budget. So are both parties’ plans, such as paid parental leave, abolishing the carbon and mining taxes, the national disability insurance scheme and more spending on schools.

These “signature initiatives” alone could add up to as much as 1 per cent on GDP.


Although the pre-election fiscal outlook projects a growing surplus in future years, this depends on unprecedented restraint in spending. Consistent with the last budget, it assumes that the next commonwealth government will increase real spending by just 2 per cent a year.

Cumulative real spending growth since 2005 is 3.6 per cent a year. Any future budget surplus assumes the next government will be much more disciplined than its predecessors.

Of course, there could be a surplus if government keeps all of the bracket creep of the next decade. But this would be politically brave and, as the outlook shows, would mean an increase in the commonwealth tax take from 23.5 per cent to 26.5 per cent of GDP.

No matter who wins the election, the budget is in trouble in the long run without a serious commitment to reform. We know that the big drivers of government spending in the past 10 years have been health, infrastructure and welfare for older people. We also know that it’s not the ageing of the population that is driving these costs. It is people using more health services and pensions becoming more generous. Meanwhile, our tax base is being eroded by substantial superannuation concessions to upper income groups that are costing us much more than they will ever save us in pension payments.

Changing any of this will be difficult but our leaders need to stop pretending the budget is a magic pudding. Hard choices must be made. Taxes must be raised or services cut, or both.

The encouraging news is that in the budget and since then, the government has made genuine spending cuts and revenue increases in an effort to get the budget closer to balance. And, unlike in previous budgets, it hasn’t spent all those savings on other programs.

However, recent budgets have already grabbed a lot of the “easy wins” in the budget. There’s not a lot of fat left to trim from many of the favoured targets in today’s political debate. We spend only $1bn a year on the Schoolkids Bonus, opposition Treasury spokesman Joe Hockey’s favourite spending cut.

Recent polling data showed that the most popular spending cuts were in foreign aid and the arts. But we spend only about $5.7bn a year on foreign aid, and another $3bn on the arts and sport put together. Even abolishing all that spending would not dent the looming $60bn deficit. We need to think bigger but proper budget reform inevitably leaves losers as well as winners.

Immediately after the budget, there was a brief moment of hope in change to the Australian attitude that “no one should lose a dollar” in reform. The government sensibly cut the Baby Bonus. Public opinion accepted the change; a good sign, not just because the policy was a waste of money but also because it had been a sacred cow for so long. More than two-thirds of people polled were prepared to accept the change, even though some of them would lose money. There was also broad acceptance of additional income tax to fund DisabilityCare Australia.

In further evidence that voters are more sophisticated than many credit, one poll showed that most respondents expected the budget would make them worse off personally, but almost half thought it would be “good for Australia”.

Yet it’s hard not to be disheartened all over again when we look at the election back-and-forth over the GST. Australia needs a sensible discussion about our future tax base. But too many good ideas are taken off the table because politicians are pressured to reject them before they’ve been properly considered. If we want politicians to tackle the big reforms that Australia needs, we must allow them the space to do it.