Will the Abbott government ultimately be judged a great reforming
government or the worst money manager since Whitlam? In a delicious
irony considering all the phoney outrage Abbott & Co expressed on
the subject in opposition, this judgment will turn on how they respond
to the budget's deep structural problems.
That conclusion leaps out
from John Daley's latest budget report for the Grattan Institute.
Normally, governments muddle through, taking some tough measures but not
enough. In this case, however, Tony Abbott will need to take a lot of
tough decisions or be judged a failure who ran a permanent budget
deficit and incurred ever-mounting public debt because he lacked the
guts to make us pay our way.
Daley finds that, on existing
policies, federal and state governments face a decade of structural
(operating) budget deficits, which by 2023 could reach 4 per cent of
gross domestic product, or $60 billion a year in today's dollars.
About
a quarter of this $60 billion arises from the Coalition's election
promises. Some of these - the disability scheme and increased education
spending - were common with Labor, but not the replacement of the carbon
tax with "direct action" (which adds $5 billion a year), nor the more
generous paid parental leave scheme.
Three-eighths of the $60
billion arises from the projected increase in spending on healthcare.
This comes not so much from ageing as from the unceasing increase in
both the supply of and the demand for ever-more-effective, but
ever-more-expensive health technology.
One-eighth of the $60
billion arises from "welfare" - mainly, the sad fact that we won't be
able to keep widening the income gap between sole parents and people on
the dole, and the rest of us, including even people on the pension.
That
leaves about a quarter of the $60 billion explained by the likelihood
that our return to normal cyclical conditions will involve significantly
lower prices for mineral exports and thus lower tax collections.
We
can't grow our way out of this deficit. Being "structural", it already
assumes the economy is back to growing normally. And above-average
growth has much the same effect on both sides of the budget.
With one
exception, the only way a structural deficit can be reduced is to make
explicit decisions to cut spending or increase taxes. Worse, you have to
resist the temptation to make any further unfunded spending or tax-cut
decisions just to stop the structural deficit getting bigger.
The
exception is bracket creep, which Daley estimates could contribute about
$16 billion a year to closing the $60 billion gap. No doubt we'll get a
lot of creep, though you can't avoid income-tax cuts for a decade.
Daley's
report explodes some budget myths. One dear to the Coalition's heart is
that the problem can largely be fixed by eliminating "waste and
extravagance", including a bloated public service and (narrowly defined)
middle-class welfare.
Sorry, there just aren't enough savings in anything you could do that is remotely feasible. You're talking chickenfeed.
Then
there's business' dream that the solution is simple, if a little
difficult politically: just cut government spending to fit (and cut
company tax while you're at it). When last week's report card from the
International Monetary Fund appeared to advocate "sizeable cuts in
projected spending", the usual suspects raised a rousing cheer.
Sorry,
leaving aside changes to the age pension, the best Daley can come up
with on the spending side would produce savings of just $25 billion a
year.
These would require reducing spending on infrastructure by a
third, halving federal and state industry support, increasing
university HECS fees, greatly increasing school class sizes and getting
rid of the industry subsidies hidden in the pharmaceutical benefits
scheme and defence spending (think subs).
The truth no one wants to know is
that we won't get the budget back to structural balance without explicit
tax increases. Daley shows, however, we could go a long way by getting
rid of some inefficient and unfair tax expenditures, such as the capital
gains tax exemption for the family home, the 50 per cent gains-tax
discount and negative gearing (worth $22 billion a year in total).
But
Daley's big one is retirement income support. Phase up eligibility for
the pension or access to super to 70 and save $12 billion a year.
Include the family home in the age pension assets test and save $7
billion. Make the super contributions tax fairer and save $6 billion a
year.
What's that? You don't see Abbott and Joe Hockey doing anything
much on that list? Well, stand by for endless budget deficits and
ever-mounting government debt. No guts, no avoiding disgrace.
