It’s almost time for the federal budget, and Prime Minister Julia Gillard’s government has another Herculean task ahead of it. Promises of a razor-thin surplus have evaporated as revenue fell away, and now the government has to find how to pay for big-ticket items like the Gonski education reforms and the National Disability Insurance Scheme.

Treasurer Wayne Swan has some hard choices to make. Luckily we’re here to help. Crikey asked some of Australia’s leading economists what major spending items they would cut, or how they would raise more revenue, to provide long-term, substantial savings to fund Gonski and the NDIS.

Chris Caton, chief economist at BT Financial Group, pointed out the Treasurer has a several options, but none of them are particularly easy.

“We know what they’re looking at, they’re looking at basically reducing the tax spending on superannuation, and that’s a big target. The plus side is that the [current] tax treatment of super does favour the relatively well-off. The negative of going for super is that we keep stuffing around with it, and when you stuff around with it you have a deleterious effect on confidence.

“But I’d [also] be looking at various changes to superannuation, nothing else really stands out. Particularly if you don’t want to get eliminated at the next election. It’s a very difficult question. In the end, you probably do have to look at a higher GST. Increase the rate and possibly the coverage also. We did have a chance with the mining resources rent tax but that’s been fluffed completely. If I were the Treasurer, I’d take a long holiday.”

John Quiggin, professor at the School of Economics at the University of Queensland, blamed the current situation on the government’s mishandling of tax reform.

“In my view, the best source of [funding for] the NDIS is probably an increase in the Medicare levy. On social savings, [the best option] is super, but they’ve made a hash of that. That’s the biggest saving. Then you’re down to various things that are more on the tax reform front, things like treatment of interest.

“The big money is in super, but it doesn’t look like they’ll be able to get anything there and you need a once-and-for-all reform, not just trimming away around the edge. What they need to do is admit that they couldn’t afford the tax cuts they gave out under the Rudd government [promised by John Howard’s government]. The budget’s been suffering from that ever since. If we’re going to afford major items, which we need, we should get a greater revenue share. You could cut Defence, but I don’t imagine the government will want to do that.”

Bill Mitchell, economist and blogger didn’t see the need to decrease spending at all.

“I think it’s an absurd thing to try to reduce the budget deficit at the moment. I’d be looking to use those Gonski-style investments [as a reason] to expand the budget deficit. The household sector is saving right now, at 10% of income. It has gone back to a fairly typical behavior, which they abandoned in the late 1990s up until the [global financial crisis], where savings dropped to almost zero. Households are returning to normal so the government has to return to normal, which included running small deficits.

“My view is at the moment we have 12.5% labor under-utilisation and GDP growth slowing, too slow to grow employment. We have a mining boom that’s starting to taper and the investment associated with that starting to stop. So if the government continues to try to pursue a surplus or offset other expenditures then the economy will slow even further and unemployment will rise.

“I wouldn’t be hiking taxes at this stage, and I wouldn’t be cutting taxes. There’s definitely room for tax reform, but they seem to have squibbed that … I would increase spending growth and push aggregate demand up a bit. We have no inflation problem at the moment and an employment problem. I would be creating a virtuous cycle of increased education spending, to fix the effects of the previous attempts to run surpluses, which resulted in the degradation of our public education system.”

Alan Oster, chief economist at NAB, suggested changes to the public service but couldn’t make the call on government spending.

“You need to know the details. The honest answer is that any economist sitting in the market doesn’t know. As a general rule, I’m not that uptight about getting back to surplus right away. I think what’s actually happening at the moment is that they’re shuffling money around.

“I’m not in the camp that says you should be playing with superannuation. I’d be looking for things that should be improving efficiency. I wouldn’t want to be scorched earth with the public service, but I think you need to take a look at it. And I think at some stage they’ll need a resource rent tax. Unlike the current model, you need a clean break. A project has a resource rent tax and that price is X. Now that won’t help you over the next year, but it will help you over the next 20. I think the focus should be more on sustainable surpluses into the medium term.”

Peter Fray

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