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.

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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7 thoughts on “It’s time to grit our teeth and face fiscal reality

  1. Nightingale John

    Does Stephen have no suggestions as to how the ‘realities of time’ should be faced? Or has Crikey cut the interesting part of the article off?

  2. stephen bartos

    thanks John – yes, there are things we can do; I’ve written about these in other media, but I’ll see if Crikey wants me to follow them up here as well.

  3. Dogs breakfast

    Yes, Australia has a budget problem, but it is in the definition of the problem that one finds dissension, and different responses.

    I would suggest, as SB implies, that it is not a budget problem, but a political one.

    We are not a highly taxed nation, we do not get a good return on our mineral wealth, we do allow tax minimisation through superannuation, negative gearing, use of trusts, captial gains tax, and we do not tax superannuation pensions even if they are receiving $1m per annum (as was reported in smh for one lucky retiree.

    We have ample scope to pay for the Gonski education reforms (even with giving money hand over fist to wealthy private schools) and to pay for the NDIS, as long as we are prepared to pay taxes.

    An informed debate, and a media that was responsible rather than alarmist, is necessary, and many Australians would be happy to pay their share of taxes to pay our way and even to accumulate some wealth for the future.

    I’m no fan of John Howard’s, but he was right that Australians require fairness in the tax process for them to jump on board. Even just a little bit, but the way we are being played by multi-nationals and the very rich are able to massage their taxes sees many less than happy to pay their way.

    It’s a budget problem, but the problem arises because of the political problem. We aren’t spending too much, we are taxing too little, and no politician is game to say it.

  4. Vince Black

    Stephen, given that our ageing population is steadily reducing the ratio of the working age to non-working population, would it nor make sense for our Federal tax system to reflect that change by lessening its revenue dependence on direct income taxes while transitioning to broader based consumption and property taxes which would be borne by a much greater proportion of the Australian community, and particularly those who benefit most from our fortunate country?

  5. Abdullah WIlliams

    “The problem is that our budget position is getting worse”

    So what should we do? Spend billions on a expensive PPL scheme? Spend billions on fighter jets that nobody else wants? Spend hundreds of millions on a divisive religious brainwashing program for schoolchildren? Hide billions in the Reserve Bank that could otherwise be spent on reducing our debt and interest repayments? Should we cut lose billions by scrapping the Carbon tax?

    Meanwhile tax rorts for corporates and the wealthy continue, and nobody dares tackle the negative-gearing tax scam.

  6. Jeremy Gaynor

    Is this government or the last engaged in real reform thinking and policy? – or charades recriminations one upmanship etc. Keating Hawk and Howard look balanced in contrast

  7. JohnB

    SB, if and when you return to these pages with the foreshadowed suggestions for remedying the future budget problems, how about reflecting on Ken Henry’s recommendations, their merits and what happened to them?

    My point is that very little of this is unexpected, even the current downturn in mining industry expansion. Advice has been offered but the political will has been weak.

    Speaking of mining industry expansion: Now that the expansion phase is nearing completion, should we not be in the highly productive, profitable and hence taxable phase?

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