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Economy

Jan 29, 2016

Slash spending to keep coveted credit rating, says Treasury chief

Treasury secretary John Fraser outlined Australia's economic forecast at a speech last night.

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Treasury secretary John Fraser delivered an address to the Sydney Institute last night, warning that government spending was too high and tough measures would need to be taken to avoid compromising the living standards of future generations. In a speech widely seen to be a precursor to the federal budget in May, he said that, despite this, “we are not in a crisis” and that Australia has a strong fiscal position by world standards.

However, net debt is approaching levels not seen since the recession of the early 1990s, which, at that time, was the highest since World War II, Fraser said. “We are yet to return to pre-GFC net debt levels.”

Australia has a structural budget problem that arose before the GFC, he said. “The recent weakness in revenue is only partly to blame. From the outset of the commodity price boom of the early 2000s, government revenue grew faster than expected as the terms of trade persistently exceeded expectations.”

“But structural expenditure decisions offset much of the temporary revenue gain,” he said, adding that much of the revenue windfall was used to fund long-term spending commitments.

As a result of this, spending in 2015-16 is forecast to be 25.9% of GDP, which is close to the post-GFC peak, he says. This is mainly due to increased spending in the areas of aged care, disability care and assistance for the unemployed and the sick.

One of the biggest drivers of increased spending is the aging of the population, an issue “I am sadly reminded of every time I look in the mirror in the morning,” the 64-year-old said. This affects health and welfare spending, he added.

Other areas of increased spending include defence and border protection, expenditure relating to the carbon compensation package and the outcomes of negotiations around the repeal of the Minerals Resource Rent Tax. The government has forecast that spending will decline to 25.3% of GDP by 2018-19.

On top of this, Commonwealth interest payments have also risen sharply despite the current low interest-rate environment; they have now reached over $1 billion a month. “This is projected to more than double within the decade, unless action is taken to improve our budgetary position,” he said.

Fraser said that the government’s medium-term fiscal strategy included achieving budget surpluses, on average, over the course of the economic cycle, saying that “this will take time”. In the longer term, Commonwealth surpluses would enable the states to run small overall deficits that they could use to finance productive infrastructure development.

However, he said that the Commonwealth government will receive around $39 billion less in tax receipts in 2016-17 than it had predicted in 2013. This was largely attributable to less income tax being collected due to lower-than-expected working-age population growth and weaker wages growth, as well as declines in commodity prices and weaker equity markets.

Fraser said that recent cuts to welfare payments were not unfair. “After taking into account the low level of tax paid by those on lower incomes, Australia redistributes more to the poorest 20% of the population than any other OECD country except Denmark.”

After leaving Treasury in the early 1990s, Fraser spent 22 years in London, working at the highest levels of global finance. Last night, he said that he had established Treasury offices in Sydney and Melbourne because he wanted to have “a great deal” more interaction with the private sector. When running the asset-management arm of global banking giant UBS in London in the 1990s, the best forecaster in the company was a woman who eschewed strict economic modelling in favour of personal conversations, he said. He was also in the process of hiring young, enthusiastic economists for two- or three-year stints at Treasury, rather than for life. “These are people who see us as part of their career,” he said.

In conclusion, he said that tax reform was very firmly on the current government’s agenda. “Tax is not just about raising revenue, it is also about helping to shape the economy so that we attract and deploy resources in a manner to deploy long term growth.” However, he declined to answer questions about the GST and the increasing cost of border protection, saying that these were political issues.

However, one of the greatest obstacles to tax reform, poor Commonwealth-state relations, was now lessening, he said.

“The co-operation between the Commonwealth and the states is far better than I remember it 30 years ago.”

But the issue of inter-generational equity is very much on his mind.

In an interview with The Australian Financial Review last year he said:

“We do have great good fortune in Australia. Everybody is happy, and God bless us. I feel it here, in Canberra in particular, where everybody is deliriously happy and comfortable. But I do worry a little bit that we don’t realise how fortunate we are and that good fortune will only continue for our grandchildren if we face up to a few issues.”

Margot Saville —

Margot Saville

Crikey Sydney reporter

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20 comments

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20 thoughts on “Slash spending to keep coveted credit rating, says Treasury chief

  1. Peter Martin

    Can the Australian government ever involuntarily default on a loan in Aus$?

    Can the US Government ever involuntarily default on a loan in US$?

    Can the UK government ever involuntarily default on a loan in £ sterling?

    No, no, and no!

    So there’s no reason why they shouldn’t ever be anything other than AAA rated by the credit agencies.

    If anyone doesn’t understand why they can ask Prof Bill Mitchell at Newcastle Uni !

  2. Carbon Footprint

    I thought we taxed people to help pay for government services. But no, it’s about ‘shaping’ the economy (whatever that means). Or is he just trying to justify a GST rise from a supposed small taxing government?

  3. Dogs breakfast

    Fraser is showing himself to be the worst of our recent excellent crop of Treasury and Reserve Bank officials.

    This is ideological economist claptrap.

    Norman, the libs regularly voted down revenue raising from the Labor government, quite reasonable and legitimate revenue raising. The “carefully selected areas in which Government spending should be cut” were not carefully selected at all, except in the sense that they hit the poorest and left the wealthiest with the tax avoidance schemes untouched.

    Are you really so ideologically blind, or is your general attitude ‘well if you’re poor, suck it up princess!” I’d really like to know what principles inform your politics.

  4. Angela

    If you want to save money get rid of the order for Joint Strike Fighters. That will save about $12 billion. Then there is the hefty ongoing cost to maintain them. The real workhorses of the RAAF are the Hercules, C17’s and the AP-3C Orion.

  5. connolly martin

    Margot Saville: please interview Prof Bill Mitchell from Newcastle University about statements like this. Or Steven Hail from University of Adelaide.
    Either will explain just how nonsensical and ideological they are, and exactly what we don’t need.

  6. Rpinglis

    I wonder if he considers Australia’s generous tax concessions to be expenditures?

  7. drsmithy

    Cut government down to the basics like law and order, defence, border control, …

    …Education, healthcare, utilities, infrastructure…

    Your idea of “basics” may not be everyone else’s idea of “basics”.

  8. Ian Osborne

    There is no doubt we have developed a structural deficit over recent decades – and the revenues of the recent mining boom are gone (and not returning in the near term).
    Therefore there needs to be an adjustment. Where this discussion is being hijacked is in the rhetoric that “nobody can be any worse off”.
    This idea needs to be challenged ASAP. The adjustment required will certainly result in pain, and this is most likely to effect everybody.
    The ideal would be for the rent seekers to be legislated out of the economy and tax expenditures eliminated.
    Cut government down to the basics like law and order, defence, border control, …
    and let individuals learn to take responsibility for themselves, not expecting government to take responsibility for everything. This is an adjustment that couldn’t be implemented in one fell swoop, it would need to be broadcast in advance and phased in so the population could adjust over time.

  9. SpaceChook

    Damn. From the headline I thought this was going to be an article about the unexpected generosity of a guitarist.

  10. Nicholas

    Our Treasury Secretary is economically illiterate. The Australian Government has zero risk of running out of money to service debt instruments (which don’t have to be issued in the first place), to pay pensions and other forms of income support, and to pay for anything for that matter. The only constraint on the federal government’s spending is the availability of real resources for sale in the Australian dollar.

  11. CML

    Can’t wait for the superior economic managers like Moralsnone to bring down their budget in May.
    Talcum Malcum was interviewed on radio in Melbourne this morning, promising to do just that…and sounding like a demented chook on economic matters!
    Agree with Lee Tinson #3…think we are in for a repeat of Budget 2014!!
    They have less than NO IDEA!!

  12. Archie Travers

    AR @8, your quote is a euphemism for, has a hatred for public spending, loathes unions, organised property transfer and share buybacks for upper one percent.

  13. AR

    What would Fraser, who “After leaving Treasury in the early 1990s, Fraser spent 22 years in London, working at the highest levels of global finance. know or care about we hoi polloi?
    And why, unless he needed his sedan chair carried?

  14. zut alors

    ““We do have great good fortune in Australia. Everybody is happy, and God bless us.”

    Quite a claim by Fraser. News flash! the lowest income earners are less than delighted with their plight – not to mention laid-off mining & manufacturing workers. Remember Ford? Holden? Toyota? Is this God’s blessing….

    Dare I suggest Fraser take time out to mix with hoipolloi for a more accurate assessment of the nation’s level of glee.

  15. AR

    ChrisC – not to mention the single greatest cause of “intergenerational inequity’, negative gearing.

  16. bushby jane

    A good capitalist enterprise would have hung on to, and fine tuned, its revenues like the carbon ‘tax’ and the mining tax.

  17. Norman Hanscombe

    This would of course be an appropriate time for the Crikey Commissariat to give enthusiastic support for the carefully selected areas in which Government spending should be cut; but that might affect its own revenues, so as a good Capitalist Enterprise, it’s not going to do that, is it.

  18. Lee Tinson

    Clear example of Morrison heavying his public servants, rather than (a) allowing, and then (b) taking their advice. Thus, nothing Fraser says has any value, particularly since Morrison has no clue.

    This is just leading up to a re-issue of the 2014 budget, except that since Morrison (unlike Hockey) has always looked, spoken and acted like a demented psychopath it will probably be worse.

  19. Archie Travers

    Fraser’s every pronouncement shows him to be unfit to manage a jar of threepenny bits. The neo liberal stupidity burns brightly in Fraser with brilliant insights that you have to cut spending in a consumer economy to achieve growth and worrying about intergenerational equity whatever that is.

    For once I would like an economist to talk about Australia being in a downturn in the business cycle and that we need to run deficits to maintain jobs.

  20. Chris Cathel

    No mention of multi-nationals paying almost no tax.

    Nor of the regressive nature of superannuation concessions.

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