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Federal

Jun 20, 2014

It's time to grit our teeth and face fiscal reality

This government blames all of its unpopular budget cuts on the spending of the previous government, and no doubt the next government will do the same. But Stephen Bartos, ACIL Allen Consulting public policy and governance expert, says the real problem is that time is not on our side.

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Australia has a budget problem. No need for panic: there is zero possibility that we will default on our debts or require International Monetary Fund intervention any time soon. We are not in poverty. MP Clive Palmer has observed, correctly, that our debt is low by the standards of other advanced countries. The problem is that our budget position is getting worse, while that of other countries is improving. Even more worrying is that without policy changes our downhill slide will accelerate with each passing year.

As the Federal Treasury has been warning now for at least five years, the pincer of rising demands for government services coupled with revenues growing more slowly than needed to meet those demands creates a widening gap. We borrow to fund the deficit between spending and revenue. Debt repayments are the first call on spending — we repay debt before we spend anything else. All countries, except those that default, do this; otherwise lenders would stop lending. What it means is that as debt rises, spending on repayments rises, as a result increasing the deficit. It’s a vicious cycle that worsens over time. The Commission of Audit report has a compelling analysis of the problem (its proposed solutions are where the disputes arise).

So who is to blame for the fiscal pickle?

Both sides of politics have had successes and failures. Fiscal repair started in the budgets of the late 1980s Labor and was pushed along in the early budgets of the Coalition in 1996 and 1997. The Hawke/Keating governments implemented far reaching micro-economic reforms (floating the dollar, reducing high tariff walls, reforming the public sector), but so did the Howard government. Howard had the courage to implement a GST, which encouraged household savings, removed some inefficient state taxes, and for many years was what Peter Costello described as a growth tax for the states.

“Both parties have made promises at every election that politicians must know are not affordable without tax increases … But why does the electorate keep buying the line?”

Some partisan warriors can’t help themselves from taking sides. Henry Ergas in a column in the weekend Australian attempted to blame the problems on the Rudd/Gillard government. His comparison with welfare spending under that government with the start of the Howard government in 1996-97 is misleading; social security spending rose dramatically under Howard (remember Family Tax Benefits A and B, baby bonus, assistance to retirees and other measures). It was a legacy inherited by Labor, just as new measures like the national disability insurance scheme have been inherited by the present government. Both sides have been guilty of leaving longer-term future problems to their successors.

When mining boom revenues were at their height many budget observers, including myself, suggested a fund along the lines of the Norwegian government pension fund (formerly petroleum fund) should be established. The Howard government did establish the future fund to cover the costs of public service superannuation, which was a good move to salt away some money and head off future payments but did not go far enough.

It has become accepted political wisdom in Australia that politicians cannot level with the electorate about our fiscal situation. The spectacular failure of John Hewson in the unlosable election of 1993 put paid to that. Both parties have made promises at every election that politicians must know are not affordable without tax increases (which, funnily enough, are rarely promised). But why does the electorate keep buying the line? Is there any appetite among voters for an honest assessment of long-term fiscal policy?

Ultimately though, the main culprit is time itself. Fairfax’s Peter Martin noted that the budget indexation changes harnessed the miracle of compound interest to deliver long-term savings. Up until this most recent budget the miracle had been working in reverse: revenues such as the fuel tax were static, while spending on social welfare was compounding into the future. Coupled with this is our ageing population, which puts pressure on aged care and pension spending and reduces the ratio of the working age to non-working population. In one sense that’s a short-term problem: it turns around from the 2050s onwards as the baby boom generation finally succumbs. The intervening 35 years is more than long enough to build up an unsustainable debt for the next generation.  The Australian electorate needs to face up to the realities of time and how to deal with them.

* Stephen Bartos was a senior public service budget and fiscal policy adviser under the Hawke, Keating and Howard governments. He was assistant secretary in charge of budget coordination branch, principal adviser in general expenditure division, head of budget group, and ultimately deputy secretary in the Finance department.

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