How Chalmers’ fiscal goals lost all ambition.
Jim Chalmers’ mid-year economic and fiscal update (MYEFO) will reflect upward revisions to both revenue and expenditure, the latter including the impact of last week’s national cabinet decisions on NDIS and health funding. However, most of the changes coming out of national cabinet lie beyond the forward estimates.
The net effect on the budget bottom line may well be that this year’s deficit will be revised down somewhat, there will be continuing modest deficits over the forward estimates and the 10-year medium-term, and debt as a percentage of GDP will begin to fall gradually some time in the next few years.
This would be broadly consistent with the May budget outlook — but what is striking about it is how modest fiscal strategy ambitions have become.
Until a few years ago, aiming for surpluses on average over the economic cycle was a bipartisan cornerstone of the fiscal strategy. That was jettisoned by the Morrison government in the pandemic period and replaced with the much more modest goal of reducing debt as a percentage of GDP — eventually. That remains today.
But even this modest version of budget repair is subject to risks. If we look back 10 years, there are valuable lessons in what can go wrong.
All federal governments going back to Gillard/Swan professed to make budget repair a high priority. In the 2012/13 budget, Wayne Swan boasted of four consecutive years of surpluses ahead. Instead, the outcome was four more years of deficits, totalling $145 billion.
In the Abbott government’s first budget in 2014, Joe Hockey mapped a pathway of deficits almost disappearing in four years, followed by surpluses. In fact, the deficits proved to be more stubborn and totalled $121 billion over those four years — double the 2014 projection — although the Morrison government did bring in a balanced budget result in the fifth year (2018/19).
Expectations of surpluses beyond 2019 were then shattered by the shock of the coronavirus pandemic, but even before Covid, Commonwealth gross debt had increased by $308 billion (from 16 per cent of GDP to 28 per cent) during the period of supposed budget repair since 2012.
The current government has booked one surplus on the back of a remarkable post-pandemic surge in revenue, but is eager to lower expectations of any more — and has no strategy to return to surpluses at any stage in the future.
Some may applaud this as a welcome break from the ‘deficit fetish’. More likely it is just a weaker test of fiscal discipline, to which political behaviour will adapt; leading to slippage via the same risk factors that have blown budget repair off course in the past.
First among these is that there will always be shocks to the system. By definition, these cannot be foreseen. But they point to the need for public debt to be reduced so that the finances are in a stronger position to absorb shocks.
The pandemic was the mother of all peace-time shocks to public finances, made worse by the extreme policy responses. As a result, Commonwealth gross debt increased by another $348 billion from 2019 to 2023, taking it to 35 per cent of GDP — 10 percentage points above the level projected in the 2019 budget.
Second, budget repair objectives after 2012 were frustrated by years of revenue shortfalls as commodity export prices entered a long period of weakness. More recently, commodity prices have worked in favour of revenue, and assumptions about the future course of prices are conservative. However, the risk of a prolonged period of weakness remains.
Third, while the forward estimates are always based on the technical assumption of ‘no policy change’, policies are constantly being changed — and usually in the direction of more public spending.
The roll-call of costly new initiatives over the past 10 years or so is well known, led by the NDIS. It would be unrealistic not to expect similar, and new, pressures for more spending in the future.
Fourth, the cost of new policies and projects can turn out to be very different from what was expected. The NDIS — heading for double its original estimated cost — is again the best example of this.
Probably never before in peacetime has a single program done so much in such a short space of time to undermine fiscal sustainability — and at this stage, the national cabinet plan to curb the growth of NDIS spending leaves a lot of questions unanswered.
Fifth, expenditure savings have largely disappeared from the budget recipe book ever since the attempt in the first Abbott government budget to end the ‘age of entitlement’.
The fate of the social program savings in that 2014 budget led subsequent Coalition budgets to focus instead — and with some success — on administrative savings. But putting social programs off limits makes fiscal discipline that much more difficult by virtue of their dominance in the Commonwealth budget.
The failures in expenditure policy mean that spending as a share of GDP has trended up, while tax revenue has trended up even more due to bracket creep, explicit tax increases, and periodic surges in resources-based revenue.
Thus, any successes in shrinking the deficit, or (as in 2022/23) achieving a surplus, have been due to stronger tax revenue rather than expenditure restraint.
This is a reminder that how budget repair is achieved is as important as whether it is achieved.
Robert Carling is a Senior Fellow at the Centre for Independent Studies and a former World Bank, IMF and federal and state Treasury economist.