Coalition has fled from the fiscal challenge

On Tuesday afternoon the Reserve Bank of Australia took a bold and decisive step to cut already record low interest rates still further, attempting to combat Australia’s economic problems. Unfortunately that was the only bold and decisive step taken that day.

In last year’s budget, Joe Hockey waved the white flag on budget repair. He lifted government spending as a percentage of GDP to the second highest level in more than 20 years (beaten only by the 2009 Rudd-Swan budget at the height of the GFC).

The white flag still flies in the new Treasurer’s office. The budget contains no decisive steps, phasing in growth-boosting corporate tax changes over a decade. Nor can any bold action to cut spending be found. The Coalition has simply fled from the fiscal challenge.

If the numbers in the budget look eerily familiar it’s because the path to fiscal repair is basically the same as the last budget but nothing has happened in the last 12 months. The cumulative deficit across the forward estimates in this budget is just $400 million different than it was last year.

Don’t be fooled by how similar the numbers are: the deficit this year is $11 billion worse than projected, and overall we are $37.5 billion behind last year’s budget projections.

It is clear that over the past three years, the Coalition has achieved little traction years in repairing the budget: the cumulative deficit has declined from $21.5 billion in 2013/14 to $60.3 billion in 2014/15 and then $84.6 billion this year. Each successive budget has predicted a sharp recovery, but each successive budget has also delivered the grim news that the deficit remains intractable — if not worse than before.

Not all of this is the Coalition’s fault. A recalcitrant Senate, global economic headwinds and Labor’s baked in spending also shares some blame; but the simple truth is the Government has not been able to bring spending under control.

Spending remains at the same level as last year (25.8% of GDP), far above the historical average. Overall, spending falls by just 0.6% of GDP over the forward estimates.

Again, revenue is projected to do the heavy lifting, rising by 1.2% of GDP over the same time. Again the mechanical assumption that everything will return to trend in the projected years makes the fiscal position look much better than it really is.

Despite the government’s tax cut, income tax revenue is projected to rise at faster than 6% a year (having risen just 4.5% this year). Company tax income rises at more than 10% a year for the next two years and 7% for the third year. Together these increases account for 75% of the increase in the tax take over the forward estimates.

If these estimates prove to be incorrect, the government will likely find itself in the same position in 2020 that is has been in for the past several years — financing a structural budget deficit with increased debt.

The drivers of this structural deficit are the same as they have been in recent years: spending on health and welfare in particular increase significantly again in this budget (together with defence spending). For the first time, the government has laid bare the ongoing gap in funding NDIS support: $4.4 billion a year from 2019/20 onwards, a figure that can only grow along with the NDIS itself.

Health, welfare and education represent 60% of government spending, yet there are few initiatives to rein in costs in these areas. Health spending continues to grow despite the government’s decision to continue with the freeze of the Medicare rebate to 2020.

School funding increases significantly, though this cost is largely offset by other savings in the education portfolio (especially in higher education, which may change — given the government’s decision to review its higher education reforms).

Existing pensioners are largely untouched; certainly no consideration is given to bold reforms like including the family home in the pension means tests. The already massive welfare budget increases by more than $30 billion a year between 2016/17 and 2019/20.

At some point, the public will catch on that neither side of politics is serious about balancing the budget. While the details remain different, the broad story is the same for both parties: they are hoping for a huge boost in economic growth so they don’t have to make tough choices on taxes and spending. Without that sugar hit, neither party has a plan — only political spin.

Simon Cowan is Research Manager at the Centre for Independent Studies.

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