Australia’s future fiscal shock

While Treasurer Wayne Swan goes back to the drawing board to conjure up a wafer-thin budget surplus this year, there is a more important long-term task facing the government: securing the sustainability of government expenditure, revenue and debt well beyond the current four-year horizon of the budget estimates.

So far, the government’s efforts, together with community demands for more spending, are making this long-term task harder. The recent flurry of new spending initiatives with commencement dates well into the future means the full costs will not register until much beyond the current four-year horizon. The national disability scheme, with its full $22 billion price tag in 2018–19, is the best example of this, but there are others too.

In addition to programs the government has already committed to, there are community pressures for it to spend in new areas and increase spending in existing programs. For example, there are widespread demands for a large increase in the Newstart allowance (unemployment benefit).

My calculations for a new CIS report (Australia’s Future Fiscal Shock) show that actual and potential new government spending since 2010 could easily amount to $28 billion by 2020. Some of this will fall to the states, but the picture for the total public sector, including all tiers of government, is more important than disputes about who will pay what.

The government likes to trumpet the budget savings it has made since 2010. However, much of these so-called savings are in fact increases in tax revenue, and some of the expenditure savings are merely deferrals that will, perversely, make budgeting more difficult beyond the four-year forward estimates by pushing costs out to later years. The defence budget is a good example.

Whether Commonwealth and state budgets will be able to absorb additional costs of this magnitude in 2020 is an open question, not one that can be answered now. It is therefore imprudent to make these commitments now.

Another perspective on long-term fiscal management is provided by the government’s 2010 Intergenerational Report. This report estimates that by 2050, population ageing and other long-term trends will increase Commonwealth government expenditure by almost 5% of gross domestic product, resulting in a permanent fiscal gap (excess of expenditure over revenue) if nothing is done to correct the problem.

The 2010 Intergenerational Report was based on the expenditure policies at the time. New spending commitments made since have added to the projected expenditure baseline and the long-term fiscal gap. Instead of anticipating the long-term fiscal gap and adjusting policies to reduce it, the government has so far been adding to it.

As I have argued in Australia’s Future Fiscal Shock, current policies have Australia on the path towards a bigger government sector in the long term, which implies a much larger tax burden.

Robert Carling is a Senior Fellow at The Centre for Independent Studies and author of Australia’s Future Fiscal Shock.

Australia’s Future Fiscal Shock

Australia’s Future Fiscal Shock.

Robert Carling is a Senior Fellow at the Centre for Independent Studies.