May 14, 2014

How tough was the budget? Not especially tough …

Last night's budget was only middling in its ferocity. And the period of low spending growth it forecasts it unlikely to be realised.

Bernard Keane — Politics editor

Bernard Keane

Politics editor

How tough was last night's budget? Prominent mediaphile Chris Richardson last night declared it was the toughest budget since 1996. And the government would like us to believe that all the pain inflicted on low- and middle-income earners was part of a new fiscal discipline. Well, the budget numbers can help us answer that question. According to the historical data to be found at the back of the main budget paper, the overall tax take will rise from 21.6% of GDP this year (estimated) to an estimated 22.1% of GDP in 2014-15, then to 22.5% the following year, then 23% and 23.2% thereafter. That 22.1% of GDP for next year will be the highest tax take since the last Howard budget, when tax:GDP reached 23.6%. Labor's tax take never got above 21.7%, in 2008, and in 2010-11 it fell to 20%. So next time the Liberals insist they're the party of lower taxes, bear that in mind. But it's spending where the real debate about tough budgets lies, of course. The budget forecasts a spending cut of 1.7% in real terms -- the biggest spending cut not since 1996 but since 2012, when Wayne Swan cut spending not merely in real terms but in nominal terms. Swan's 3.2% cut in real terms was the biggest cut since the 1960s -- but it was achieved partly by pushing spending back into 2013-14, when spending ended up growing by 8.9% in real terms. Except, that figure is itself the subject of fiscal trickery by Joe Hockey, because it includes his $9 billion gift to the Reserve Bank. Labor's Economic Statement on the eve of last year's election had spending growing at a more modest 5.7% in 2013-14, closer to the sorts of spending rises we saw in the last two profligate terms of the Howard government. Even so, that demonstrates why it is sensible to look at several years' worth of spending, rather than an individual year. As the government's own budget figures note, spending resumes growing in 2015-15, although initially slowly at first -- just 0.4%, then over 2%. If the government is able to perform to those estimates and forecasts, it will be the most prolonged period of low growth since the mid-1990s, when the Keating and Howard governments combined to keep spending growth contained -- Costello's draconian 1996 and 1997 budgets actually followed two years of sub-2% growth from the Keating government. But the modest cut in spending next year means this government will still be spending over 25% of GDP, falling only to 24.7-24.8% of GDP over the following three years -- around the level the Labor was spending from 2010 to 2012. What those figures don't show is the impact on tax and spending beyond forward estimates of a number of measures -- in particular, once changes to family tax benefit payments really kick in, once fuel excise indexation starts generating real revenue, once the government starts pulling back on its education payments to the states. And what the figures of course don't show either is that the government has based its budget numbers on worst-case scenario for the economy: it is predicting a slowdown in growth this calendar year; it has further downgraded nominal GDP forecasts; it says unemployment will edge back up; it forecasts a substantial deterioration in our terms of trade. All of those things could happen, of course -- especially if voters actually believe the government's rhetoric about a budget emergency and stop spending. But what's more plausible is that the economy performs more strongly than the lousy 2.5% predicted for next year. Any improvements on that rate of growth will feed into Joe's bottom line, giving him an opportunity to return to surplus more quickly... or to put it in a war chest for 2016. That's why it's not a good idea to hold your breath waiting for that forecast period of low spending growth to actually happen.

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7 thoughts on “How tough was the budget? Not especially tough …

  1. David Hand

    Well done Bernard. You’ve described the budget emergency quite well in this article.

    By pointing out that Labor spent around 25% of GDP while only collecting around 21% of GDP, you reveal that the Australia’s debt is growing so fast that if urgent action is not taken, we will join Spain and Greece by about 2030.

    Now if you could just write an article about the budget emergency you’ve described so the public is better informed, rather than accusing the government of making it up, the conversation about how we might move forward from here might improve.

  2. zut alors

    No, it certainly wasn’t tough if you’re a mining company.

  3. Bill Gates

    The biggest change factor in growing an economy is the people’s spending dollar after paying for necessities and Taxes.
    If you put taxes up you take money away from the consumer which in turn reduces Sales/Turnover and hence employment which directly affect tax income/budgets….ie shrinks the economy!
    If you decrease taxes, and stop increasing everything (Power,Rego,Insurance,Interest Rates,Land,Petrol etc)by more than the average wage rise, (currently over 10yrs everything inflates in excess of 100% but wages only rise by around 30%)then surely you would not shrink people’s ability to Spend/Buy.
    The right Balance needs to be attained not just for the Workers, but also for the Employers as they need us to buy their products.
    When will Labour & Liberals work this out? If you give too much to the worker…you hurt the Employer! Product becomes too expensive…moves to off shore production.
    But if you give too much to the Employer and screw the workers wages too low….then he can’t afford to buy!
    When will these Donkeys work out that neither Right Wing nor Left Wing Policies benefit our economic growth? The Old Politicians knew how to be fair to both the Left & the Right Views of Politics….they negotiated a fairer deal for all….or was that just a dreams I had as a younger man?

  4. Brad

    A couple of questions for you who are more familiar with economic issues:

    1) Given that most European (Germany, Austria) and Scandinavian (Norway) nations that I admire have tax:GDP around 40%, why is the 25% expenditure:GDP in Australia considered high?

    I’m concerned about inadequate maintenance of assets and 2nd rate amenity, e.g. I’d gladly pay more if it meant we could go back to hot-mix rather than chip-sealed roads. I’ve heard that in the ACT the budget allocation for maintenance is ~ 0.16% of the asset value, i.e. we’re assuming our infrastructure will last 600 years before we need to replace it. Yet we continue to build new assets (urban sprawl) without adequate provision for their maintenance. Isn’t higher tax:GDP required just to look after what we’ve already got?

    2) Assume I give an extra 10% of my income to the government rather than spending it in the shops. What difference does it make to GDP if the money is spent by the public or the private sector? I would have thought it’s close to a zero-sum game with the govt subsequently spending the money on wages within Australia and these wages just get spent in the same shops. Does the multiplier effect depend on the public/private trajectory? How much does repatriation of profits offshore by multinational corporations siphon out of the local economy?

    3) Why is ‘Growth’ so often referred to almost as an entity rather than simply the connection between demand and supply? Are economic forecasts that assume growth rates > 3% realistic? From what I can dig up it seems to me the GDP growth rate has been steadily declining over the past 30 years and seems to be settling in at 2-3%. Follow link to a chart and set start year to 1983:

    I await enlightenment…

  5. David Hand

    Hey Brad,
    Here are a couple of thoughts.
    Comparison with higher tax and spend countries needs to take into account payments for services that are not labelled tax. The total size of Australia’s government sector is about 35% of GDP.

    The challenge with increasing tax as a percentage of GDP is that it impedes economic growth. In theory, a dollar spent by government is the same as a dollar spent by private people. There are those of us who believe that individuals are much better at identifying where that dollar is best spent. It promotes economic growth more effectively because it is more likely to produce value.

    Economic growth represents an increase in the total amount of goods and services our economy produces and it is very important for the lower paid and younger demographic. A recession, where the goods and services produced is shrinking, drives up unemployment and disadvantage. Governments run deficits in such situations to make up the shortfall. That’s what we did in 2009.

    I don’t know if I’ve enlightened you but these are my thoughts.

  6. Brad

    Thank you, David, for some illumination if not enlightenment. A couple of follow-ups:

    Presumably the higher taxed European nations also disguise income/expenditure from being called taxes. Is this practise more extensive in Australia? Do I add 10% to the European figures.

    Is the ‘higher tax lowers growth’ argument proven mathematically or is it an article of faith that differs between economists? I come from a research scientist/engineer background in the physical sciences and have the luxury of relying on the conservation laws of energy, mass and momentum which can’t be disputed.

    Seems to me GDP is a flawed measure of a sound concept. I’d rather a dollar be spent on, say, improving the school oval than on digging a hole and filling it up again, yet both contribute equally to GDP.

    I heard a talk on radio recently where some fellow talked about a different indicator being used to assess ‘real’ economic progress. I think it was called GPI and it’s used by several state governments in the US. It discounts expenditure to fix stuff that shouldn’t have been broken to begin with.( Pardon my liberal paraphrasing). Do you anything about this alternative measure?

  7. David Hand

    Firstly I’m just a bloke who reads the newspaper and has a view about these things so I don’t profess to have expert knowledge.

    But a couple of responses.

    European governments are not homogenous in how they distribute taxes so it’s hard to comment. What is a factor however, is that if a country provides a service from taxes and another does not, the user pays factor distorts the tax as a percentage of gdp debate. If I have a free bus service in country A it looks like a higher taxing country but that because we don’t count the bus fare in country b as a tax even though the citizens of both countries may be paiying exactly the same money for exactly the same service.

    The higher tax lowers growth view is a widely accepted view of economists. It is why Labor and the coalition are so similar in their economic policy. Those who advocate higher taxes assume it will be easy to collect. At the same time the top 20% income earners pay about 75% of all income tax but they are also the people who generate most of the GDP we want our government to redistribute. The hard left which is most of Crikey’s commenters would favour a massive increase in taxes for high earners but don’t see the risk this brings of reducing economic activity.

    Next year’s GDP is not in a chest under Joe Hockey’s desk. It must be created by enterprising and working Australians. That’s why the growth story is in the budget. Believe me mate, the ALP would not raise taxes if they were in power. Deficits and hope, maybe.

    GDP is a crude measure but one economists favour.

    Digging a hole and filling it in does not contribute the same as a school oval because the oval has value. It educates students and can be rented out.

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