How the forecasts have changed.
Had it not been for the booming, confident presentation by Scott Morrison of the latest mid-year economic and fiscal outlook this week, it would have been easy to conclude that this was just another Wayne Swan special.
The messages were the same: the economy is heading in the right direction; the way back to budget surplus is on track but we need to be “patient and measured”; and all new spending has been offset by “saves” (a horrible term introduced by Swan but now copied by Morrison).
Swan’s predictions turned to dust; Morrison’s are likely to end the same way. Delaying the year when the much-vaunted balanced budget will emerge has become something of an art form for all recent treasurers.
The real problem for this federal government, like the Labor one before, is that there is no political appetite for cutting government spending.
This is matched by the relative absence of any electoral constituency for lower government spending because so many households are recipients of government transfers and many pay no net tax.
You only have to look at the figures. Nearly half of households pay no net tax; they receive as much, if not more, in government transfers than they pay in taxes.
Even if we ignore age pensioners — more than three-quarters of those aged 65 and older receive a full or part age pension — we note that about 85 per cent of single-parent households pay no net tax and a quarter of couples with children are let off the hook entirely.
It is hardly surprising that there is such strong resistance to any move by a government to curtail spending on entitlement programs or in-kind benefits when such a high proportion of the population are not contributing to their cost.
Of course, no one begrudges the support provided to those on very low incomes, especially those who find themselves in diminished circumstances through no fault of their own. But when the support is increasingly snaffled by the middle class, the moral case for large-scale government transfers becomes much more ambiguous.
But one of the lessons of the past half-decade is that poor spending programs are incredibly difficult to reverse. Households quickly factor in any new transfers and benefits into their private budgeting calculations. Any withdrawals are then seen as harsh and/or unjust.
Ronald Reagan surely was right when he observed: “No government voluntarily reduces its size. Government programs, once launched, never disappear.”
Take the paid parental leave scheme. It defies common sense that better-off women can avail themselves of employer-funded leave at full replacement wages, then top up this payment by accessing the government scheme (18 weeks at the national minimum wage). After all, the vast majority of low-paid women simply make do with the government scheme. By any measure, this is unfair.
But when it came to modifying this arrangement — it was put in place by the Gillard government to appease the public sector unions whose members were likeliest to benefit from the two payments — there was a crescendo of complaints, including the accusation that any change was somehow discriminatory.
When it is deemed fair that a public servant on $120,000 a year can receive more than $44,000 in paid parent leave after having a baby but it’s OK for a shop assistant on $35,000 to receive only $12,000, our moral compass somehow has been misplaced along the way.
It’s hardly surprising that government spending remains essentially out of control.
In 2007-08, the federal government paid out $272 billion (in real terms) or 23.1 per cent of gross domestic product. Mind you, no one was really squealing then about how inadequate or insufficient these outlays were. The next year, government spending rose by $44bn or nearly 13 per cent.
Fast-forward to this financial year and the outlays are estimated to be $428bn or 25.9 per cent of GDP. This is down only marginally from the peak spending of the previous Labor government (26 per cent in 2009-10) that was rationalised as a response to the global financial crisis. In other words, government spending jumped to a new plateau and has never returned to anywhere close to the 2007-08 figure.
The reality is that the Coalition government has achieved very little in terms of reining in government spending, let alone actually cutting it year-on-year, which would lead to much more rapid fiscal consolidation.
(It is interesting to note that Swan did manage to cut government spending marginally between 2011-12 and 2012-13, but bear in mind that at the time the iron ore price was around the $US130 a tonne mark — now under $US40 — and some tricky accounting was used to achieve the result. It was also short-lived, with real government spending increasing by close to 8 per cent in 2013-14.)
One of the factors driving Canberra’s relentless urge to increase government spending is the Keynesian Kool-Aid that is liberally dispensed by bureaucrats and advisers and eagerly imbibed by all politicians. It just never seems to be good time to restrict the growth of spending.
Take this naive homily spruiked by the Treasurer about the supposed perils of rushing back to surplus: “Extreme responses would place a handbrake on household consumption and business investment growth, and will necessarily threaten the fresh momentum emerging in our transforming economy.”
This is another Swan-like statement, if there ever were.
If we look at the next few years, federal government spending continues to grow strongly, falling only slightly to 25.5 per cent of GDP in 2018-19, from the present ratio of 25.9 per cent.
And note the MYEFO figures contain the $80bn removed from state funding for hospitals and schools, as well as several savings measures from last year’s budget that are unlikely to eventuate — at least $13bn in total.
On the revenue side, the MYEFO figures point to a return to the long-run average, with government revenue predicted to be about 24.8 per cent of GDP in 2018-19, compared with revenue in 2007-08 of 25 per cent of GDP. (Some higher percentages recorded earlier in the decade were the result of the unusual confluence of rising commodity prices, before the hike in mining investment, and strong capital gains.)
It is a complete myth peddled by left-wing commentators (and even some sensible journalists) that the budget is in a pickle because of revenue.
Over-estimating future revenue streams, a favourite tactic in recent budgets, then finding the projections are not met is not the same thing as saying that we have a revenue problem.
We either have bureaucrats at Treasury who are incapable of providing accurate forecasts of future tax receipts — just check out the mistakes that have been made in respect of superannuation taxes — or treasurers too willing to put a positive spin on future revenue to paint an excessively rosy picture of the likely state of the budget. It is probably a bit of both.
Had governments managed simply to spend at the long-run average of government payments as a percentage of GDP in this decade, the budget would be back in surplus and government debt would be significantly wound back.
Tragically, Morrison’s best-case scenario is that, all going well, we should reach a balanced budget position in 2020-21, with a surplus recorded in the next year. But the surplus quickly peaks and begins to decline to insignificant numbers. There is absolutely no prospect that any debt will be repaid during the next decade or so unless a government decides dramatically to change tack.
The costs of rising government debt are beginning to mount, with interest payments predicted to exceed $20bn a year. Recall that $20bn buys a lot — it would pay for all family tax benefits or about 40 per cent of the cost of the age pension. It would make a substantial contribution to the cost of running the National Disability Insurance Scheme.
No doubt, the government thought it handled this week’s MYEFO release as well as could be expected, with most commentators lapping it up and supporting the Coalition’s continuing endorsement of big government and high taxation.
The Treasurer was remarkably sanguine about the total rise of $26bn in budget deficits across the forward estimates. He compared the path back to surplus to some sort of meandering family holiday drive with the potential for road blocks and delays. His inference was that it was just as annoying that voters should query the likely timing of a budget surplus as it was for the kids to keep asking when the family would reach its destination.
By the same token, for many voters, a future of high taxation is seen as neither here nor there because they simply pay so little, or none at all, in net terms. That the top 10 per cent of income earners pays half of total income tax revenue suits them down to the ground.
The one benefit of bracket creep (taxpayers automatically facing higher average tax rates) — on which the improvement in the budget figures contained in MYEFO continues to significantly rely — is that more and more households will be dragged into having to pay net tax.
Across time, the constituency for restricting the growth of government spending should expand.
While bracket creep has some insidious effects — it is hidden, regressive and affects work effort — it just may be preferable to some of the sillier and economically damaging suggestions to repair the budget that have been doing the rounds.
And on that note, isn’t it passing strange that there should be a full-blown inquiry into tax reform being undertaken by this government but no investigation into reforming government spending?
It tells us that all governments are essentially the same unless jolted by a potentially catastrophic reality or an out-of-the-ordinary personality or two. Sadly, neither of these conditions now exists.
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