MYEFO: Is it an emergency yet?

In February 2009, Kevin Rudd’s second, fiscal stimulus package brought the total of GFC stimulus to $52.4 billion. Between the headwinds of the GST and the Rudd stimulus strategy it should hardly be surprising that government spending as a percentage of GDP leapt from 23.1% in 2007-08 to 26% in 2009-10.

What might be a surprise is that in Tuesday’s Mid-Year Economic and Fiscal Outlook (MYEFO), Treasurer Scott Morrison announced that spending for this fiscal year will be 25.9% of GDP. And even that figure assumes the senate passes the measures they are currently refusing to pass (including some from the 2014-15 budget).

In May, then Treasurer Joe Hockey argued that the task of budget repair begun in the 2014-15 budget was well under way and under control. The 2015 MYEFO proves that task has not yet even started.

For all the criticism of the harsh cuts in the 2014-15 budget, it projected cuts in spending of less than 1% of GDP, much less than Howard and Costello achieved in 1997-98. The bulk of the work reducing the deficit was left to steadily increasing revenue, in no small part from bracket creep, which would increase by nearly 2% of GDP.

The 2014-15 plan called for spending as a percentage of GDP to fall to 24.7% of GDP by 2016-17, a plan abandoned in the 2015-16 budget, which suggested spending would fall to just 25.5% of GDP next year, and cremated in this MYEFO where it is now predicted to remain basically unchanged at 25.8%.

This is the highest sustained level of government spending in 20 years. Far from being a steady journey back to surplus as the Treasurer quipped in his post MYEFO media blitz, this is more akin to walking on a treadmill.

Predictably the opposition missed this entirely, choosing instead to focus on a supposed revenue problem. There is no revenue problem. Australia has a revenue forecasting problem because overly optimistic treasurers, bereft of the will or political capital to actually address Australia’s budget concerns, keep hoping growing revenue will magically deliver a surplus.

Successive budgets and MYEFOs have kept predicting rapidly increasing revenue, the 2012-13 budget alone predicted a 1.5% increase against GDP to 23.8% in 2012-13. This was written down to 23.1% of GDP in the final budget outcome, a ‘reduction’ of $17.7bn on the prediction but still a $20 billion increase from the year before.

Since 2010-11 receipts as a percentage of GDP have increased by 2.5%. At their current level of 23.9% of GDP, they are right on their 40 year average. What hasn’t happened is they have not returned to their historically anomalous levels at the height of the mining boom.

This is the heart of Australia’s so called revenue problem. Persistent wishing for the return of rivers of gold from a once in a lifetime mining boom.

Crucially if government spending was at its average level during that same boom time (2002-03 to 2007-08, the allegedly profligate period of the Howard government) the budget would currently be in balance.

MYEFO lays bare the simple truth: over the past 10 years, government spending has been re-baselined to a higher level, driven largely by permanent increases in pensions, family and childcare payments, health and education spending.

Initially this spending trajectory was funded by the mining boom and then a huge spike in commodity prices. As these transient benefits began to fall away, this spending has been funded by debt.

The budget deficit now represents the structural gap between the spending expectations of Australians, built up over 25 years of economic growth and populist politics, and the unwillingness of Australians to pay for this spending.

None of the 3 major political parties has a realistic plan to deal with this. The Greens and Labor pretend that if only unfair tax concessions and multinational tax dodgers paid their ‘fair share’ there would be enough revenue to balance the budget and pay for a bunch of new spending too.

That their announced plans raise barely a fraction of the revenue needed to close the current gap has not deterred them from claiming theirs is the one true answer.

The Coalition instead seems to be basing their plans on welfare integrity measures, which while popular with their base never seem to raise anything like the revenue predicted ($2.1 billion over the forward estimates in MYEFO), and a long term plan to unilaterally shift rising health and education costs back to the states.

Over time, meaningful economic reform would grow the economy out of this mess, provided it was coupled with serious spending restraint. This reform and restraint will create losers though, as would any realistic attempt to raise taxes enough to close the gap. MYEFO shows that until politicians are willing to own up to that pain, we will see budget deficits continue well into the future.

Simon Cowan is Research Manager at The Centre for Independent Studies