When $6.5 billion is a flea bite

The Turnbull government is correct to put budget repair centre stage for next week’s opening of parliament and put the heat on their opponents over this issue. The focus on a package of hitherto unlegislated budget savings totalling $6.5 billion serves these purposes, but nobody should pretend it is anything more than a flea-bite to the budget deficit.

The headline quantum of savings is a four-year sum, which in annual terms comes to less than $2 billion against a budget deficit running at $37 billion this year. The government insists it has a plan to shrink that to almost nothing within four years, of which the $6.5 billion package has already been counted as part.

For a host of reasons, however, the credibility of four-year estimates diminishes rapidly after year one. For example, the economic basis for the estimates becomes increasingly uncertain — and the basic technical assumption that spending and tax policies will not change becomes less meaningful — the further ahead one looks. The government’s ‘plan’ relies to a disturbing degree on income tax bracket creep to super-charge revenue growth, while expenditure continues to grow quite strongly and largely maintain its share of GDP.

The best measure of the budget problem is what the deficit has been in recent times, which is a range of $30-$40 billion, or a little over 2% of GDP. Australian governments have managed to close budget deficits of that magnitude or larger three times in the past 40 years, so it should be possible again, even if the international economic climate is less favourable now than in the previous episodes. The bigger concern is the reluctance within domestic politics to curb government spending.

The truth is we will need to see many more and larger budget savings than the package being lobbed before parliament next week.