Australia’s budget repair problem can’t be swept under the carpet

Peter Costello delivered the last federal budget surplus on May 8, 2007. The following year, new Labor treasurer Wayne Swan promised a $20 billion surplus, which turned out to be a nearly $30 billion deficit. One decade and one day later, on the May 9, 2017, Treasurer Scott Morrison will almost certainly deliver a budget deficit at least as large as Swan’s first.

Throughout the past 10 years, politicians on both sides have claimed they were fixing Australia’s fiscal problems. Both have relied on budget trickery, pretending the deficit was a short term problem that would be fixed by future revenue growth.

Even in the supposedly horror 2014/15 budget, revenue increases were almost twice as large as the projected reduction in expenses. The extent of ‘austerity’ in Australia has been limited to arguing over the size of the increase in spending — large or very large.

It is no longer possible to take politicians’ expressions of grave concern seriously.

Certainly the credit rating agencies no longer believe the government’s lines. If Australia is trending inevitably towards the eventual loss of our triple-A credit rating, it’s because most people choose to believe things can continue on the way they are indefinitely: that we can have ever-increasing spending paid for by taxes on ‘someone else’.

Yet the repeated warnings that our credit rating is at risk have had little effect. Politicians have not had to be serious about budget repair because the public does not vote as if there is a problem.

If the rating downgrade feeds into an increase in borrowing costs, it could become a real problem. Australia is a net capital importer, relying on foreign capital to fund our economy, and our household sector is enormously indebted. Especially since, in the event of a future credit shock, Australia’s position will be much weaker than it was in 2008.

Given how recently Australia avoided the disaster of the Global Financial Crisis, it is baffling how complacent we are about the risks of a global downturn. A similar turnaround in our budget position to 2007/08 and 2008/09 — $50 billion — would push our deficit out to 5% to 6% of GDP. At that level, government debt rises very rapidly indeed.

On the revenue side, the risks are stark. Australia is a small, open economy that would be substantially buffeted by the trade war brewing between the world’s major economies. The UK and now the US are massively reducing their company tax rates, which means Australia must follow suit (at the cost of revenue) or lose competitiveness — at the cost of reduced investment and growth (and ultimately revenue again).

Australia is heavily reliant on volatile, inefficient taxes like company tax and income tax, and dependent on global commodities prices, which are more variable still.

On the spending side of the budget, the problems are even greater. Reform to health and education spending has proven to be all but impossible, while growth in welfare spending is already baked in.

We have introduced a new welfare entitlement in the NDIS that will start with a $22 billion price tag, and we already know that its proposed scope is not sufficient to meet the promises it made.

We have known for 15 years that our ageing population will put serious pressure on our welfare system, yet in that time we have repeatedly enlarged the scope and cost of the age pension, though recent changes have pegged back some of the increases.

Childcare spending is predicted to grow strongly in the next few years, even more so if the government gives in to demands for increased pay for workers in the sector due to the national quality framework.

These problems have been well-known for years. The failure of successive governments to tackle them points to a deeper malaise in our political system. For all the many flaws with the major parties, once in government they are compelled to produce budgets that allow us to hold them accountable for their taxing and spending decisions.

Minor parties have no such fiscal discipline. They can promise massive increases in spending, safe in the knowledge that they will never be fiscally responsible for the mess their policies would cause.

Populist minor parties are elected with a mandate to barter for more handouts and to resist any uncomfortable change at all costs. They function primarily as a bulwark for Australia’s budgetary cognitive dissonance. As soon as things get too real, the circus moves on to the next minor party.

The first step in budget repair is admitting there is a problem. It would be best to do this before the next crisis, not after. Unfortunately this looks increasingly unlikely.

Simon Cowan is Research Manager at the Centre for Independent Studies