Double the debt and half the fiscal clues

In-office work wasn’t the only casualty of the pandemic. It also saw our governments toss out the rulebook that kept the nation’s finances in reasonable shape for so long.

That let them splurge on support and stimulus during Covid. But Canberra’s debt, which stood at $540 billion before the pandemic, is now close to double that.

Walking away from fiscal rules was understandable in the 2020-21 circumstances, but failing to walk back to them four years later is irresponsible.

Economists lament the absence of fiscal rules to keep budgets on the tracks of responsibility, just as they miss the productivity growth that used to boost Australia’s prosperity.

Politicians constantly facing temptation to overspend and overborrow need self-imposed rules to keep the demons at bay.

The current federal government loves spending, having increased it by 18% in its first three years. This fuelled inflation, tilted the economy further from the private to the public sector, and demanded more tax revenue.

It is true that this government has chalked up two surplus years, but only due to unexpected surges in tax revenue. Those surpluses now look like a flash in the pan and the budget is back to a deficit — which is set to deepen.

Until the pandemic, there was a long-standing rule that the budget would be balanced on average over the economic cycle, with surpluses in good years offsetting deficits in bad years.

The rule wasn’t always obeyed. But as long as it existed, Treasurers felt under pressure to try. It didn’t stop debt from growing, but helped keep it in check.

That rule is no longer there, and Jim Chalmers completely rejects rules like it in favour of vague statements of the government’s fiscal strategy.

He aims to “improve the budget position over time” and “limit growth in spending”. This is waffle from a government that shows every sign of not wanting to be tied down by clear numerical rules and guidelines.

It is past time for the balanced budget rule to make a comeback, but with some tweaks.

First, it needs to be clear what “over the economic cycle” means so that performance can be monitored.

Second, the practice of making the favoured measure — the “underlying” balance — look better by keeping some spending out of it needs to stop.

But apart from reinstating a balanced budget rule; the government needs to tackle the fundamental problem.

That is not too little revenue — at close to 24% of GDP federal tax revenue is about as strong as it has ever been — it’s too much spending.

There is a crucial need for a rule that would freeze real spending until the budget is balanced, which might take three or four years.

Freezing real spending for that period might sound harsh but it isn’t when current spending is bloated from years of strong growth.

Tight control of spending, not tax increases, has always been the key to shrinking budget deficits in the past. That’s how the Hawke and Howard governments did it.

A spending freeze can’t last forever, so there needs to be another rule to control spending growth once the freeze has served its purpose. That rule should cap real spending growth at the trend rates of population plus productivity growth.

This would have the effect of limiting increases in real spending per capita to the rate of productivity growth, which is a measure of the economy’s capacity to pay.

This would put government spending on a diet, but not unreasonably so — since it has increased from $478 billion the year before the pandemic to a gluttonous $777 billion expected this year.

Real spending per capita has been growing much more than productivity. Something has to give in this imbalance.

Productivity may well pick up, but there is no reason to expect a strong revival, which means expectations about the scope for future government spending must become more realistic.

There have been episodes of restraint in the past, so the precedents are there. But now as then, just cutting the public service isn’t enough.

Canberra must also tackle sacred cows like the NDIS. And this time, the diet needs to be permanent, otherwise the same old problem of spending driving up taxes and borrowings comes back.

Above all, the government needs to be committed to fiscal discipline. Just adopting budget rules as a policy fashion item is useless without a commitment to them.

Robert Carling is Centre for Independent Studies senior fellow, and a former IMF, World Bank, and federal and state Treasury economist.