Six reasons for our long budget retreat

The forthcoming mid-year economic and fiscal outlook (MYEFO) for 2017-18 may show a small improvement compared with the May budget – even enough for the Prime Minister to dangle the prospect of personal income tax cuts (merely returning part of bracket creep proceeds) in front of voters.

But none of this will alter the fact that the federal budget is still in deficit almost ten years after it was last in surplus or balance, and that the deficit is structural, not cyclical. Any projections that say the budget will return to balance, let alone surplus, by a certain date are just that – projections subject to a wide margin of error and, in all likelihood, biased to the optimistic side.

Looking back, governments from both sides have clung to the goal of a balanced or surplus budget on average over the economic cycle, without actually achieving it. Arguably it was achieved up to 2008, but not since. And there is little prospect of it being achieved in the foreseeable future.

The expenditure side of the budget is being driven by new programs and enhancements devised with scant regard to their affordability. Tax policy of recent years, aside from the planned 25 per cent company tax rate, has lacked strategic purpose and a coherent reform theme. Its main purpose has been to raise extra revenue in politically opportunistic ways.

Despite all that, Australia remains a case study in fiscal reform for the rest of the world. We continue to bask in the glow of the 1985 – 2007 era. No doubt a great deal was achieved in those twenty-odd years. But the truth now is that those achievements are at risk of being reversed. We may yet become a case study not just for successful fiscal reform but also for its fragility and the failure to adjust to new realities.

The starting point for understanding how to get back on the track of fiscal reform is to understand how we were derailed from it in the first place. There have been six key contributing factors.

The first is the onset of complacency. Twenty-six years without anything labelled ‘recession’ (even though there really was something worthy of the name in 2008-09) have fostered a belief that we (the polity) can get away with anything, but we can’t.

The second and related factor is that voters want social benefits protected and increased while insisting that ‘someone else’ (usually high income earners and large corporations) can always pay for them. It isn’t long before this becomes an arithmetic impossibility.

The third is the inequality mania imported from the northern hemisphere. Flying in the face of the facts, Australians appear to be gripped by the belief that inequality is bad and increasing. Notwithstanding the highly redistributive design of the tax and transfer system, the parliament will not accept any individual change in either taxes or transfers that takes anything away from households below average incomes (that is, the majority).

The fourth factor is fragmentation in politics. Minor parties and independents are winning a larger share of votes, but with a few exceptions are more interested in their narrow constituents’ interests than the national interest.

Fifth, there is a ‘whatever it takes’ attitude on the part of oppositions –  the drive to be in government takes precedence over the national interest.

Finally, reform requires effective political champions, but they have been lacking in the parliaments of recent years.

Robert Carling is a Senior Fellow at The Centre for Independent Studies and the author of From Reform to Retreat: 30 Years of Australian Fiscal Policy, a contribution to The Case for Fiscal Reform: Lessons from the Anglosphere.