NATSEM BUDGET 2016: The Budget Getting Nowhere Fast
Whatever your politics, there will be one thing in the May 3 budget you probably didn’t expect when you voted at the last election. Despite the Coalition’s repeated pledges at the time to get the budget back into surplus, three years later, it is in no better shape now than it was then.
Labor’s last budget in 2013 forecast a surplus of $6.6 billion in 2016/17. But when the Coalition got in and scrapped the carbon and mining taxes, Treasury revised that to a deficit of $17.7 billion. The spending cuts in its 2014 budget trimmed its estimate back to $10.6 billion, but then it blew out again, and again, and again, until by December’s midyear update, it had risen to $33.6 billion. No one is expecting it to be much different after next week’s budget.
That is virtually the same deficit as we had when the Coalition took office. Had it just left Labor’s budget unchanged, the budget papers imply that the 2013-14 deficit would have been $36.4 billion, and even that was inflated by the fiddles Labor used to move spending out of 2012-13. The 2016-17 deficit could well end up higher than that. According to NATSEM’s estimates, we expect a total debt of more than 270 billion dollars in 2015-16, this is equivalent to the sum of earnings if everyone in Australia between the working age of 15 and 64 worked full time with an average wage for nearly 12 weeks.
This is not what we expected. Former Treasurer Joe Hockey warned us from opposition that he could not promise when the Coalition would return the budget to surplus, because he would give the economy’s needs priority over those of the budget. Fair enough, we said, but we expected to be getting close by now.
Instead, as Hockey’s successor Scott Morrison has conceded, everything the Coalition saved by its spending cuts has been spent on other priorities, or given away as tax cuts to business. In its first two years in office, the Coalition in fact spent or gave away far more than it saved. The budget papers report that its decisions collectively worsened the deficit by $11.7 billion in 2013-14, by $1.8 billion in 2014-15, and by $4.8 billion in 2015-16.
The Coalition almost certainly did not expect to be in this position either. It had an easy run in government during the long boom before the 2008 global financial crisis, with the world economy growing as fast as 5 per cent, and with rising export prices flowing into its tax revenues. Now, the world economy is growing at barely 3 per cent a year, and falling export prices until recently have been bleeding its tax revenues.
Australia’s budget deficit is now among the dozen highest in the developed world. And The International Monetary Fund estimates (see: http://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx) that excluding interest bills, Australia’s ‘primary’ or underlying budget balance in 2015 was the sixth highest among the 39 advanced countries.
That seems odd. Our economy suffered relatively little damage from the global financial crisis, and has kept growing. Unemployment is below its long-term average. Interest rates are at record lows. We have just been through one of the biggest investment booms of the past 40 years. Our governments are not spending big less on infrastructure; their infrastructure spending is now at its lowest for almost a decade. Why should we be running bigger budget deficits than countries in worse shape than us?
Economists argue that the anxiety the Coalition fuelled about the deficit when it was in opposition has given way to complacency now that it is in government. Both major parties in turn have now failed to fix the deficit, so neither of them wants to talk about it. And it’s the last thing the Greens care about.
Yet it matters. The Federal government is spending $1.10 for every $1 it earns. You can’t go on doing that without making yourself vulnerable to investors losing their trust in you. And if that happens, like a family that has run up a big credit card debt, life becomes quite uncomfortable. Your options become very limited.
Let’s look at some of the issues.
Why is the budget position so much worse than we were told it would be?
It’s partly a revenue problem, or a web of revenue problems. The latest official estimate, the Mid-Year Economic and Fiscal Outlook issued in December,
(see: http://www.budget.gov.au/2015-16/content/myefo/html/index.htm) estimated that the actual budget balance in 2016/17 will be $37.9 billion worse than was forecast three years ago. Of that deterioration, almost 95 per cent ($35.8 billion) would be due to revenues falling short of expectations, and barely 5 per cent ($2.1 billion) due to spending exceeding what Labor had planned.
It’s the same story if you compare it to the equivalent forecasts in the Coalition’s first budget two years ago: the spending estimate has risen just $1.4 billion, but the expected revenue to pay for it has shrunk by $21.7 billion. When Treasurer Morrison tells us we have a spending problem, not a revenue problem, he is being politically correct, but economically incorrect. We have both.
In the eight years after the Howard government introduced the GST, its revenues averaged 25.4 per cent of the nation’s output, or gross domestic product (GDP). The latest estimate is that revenues next year will be 24.1 per cent of GDP. That’s a hole of more than $20 billion a year, compared to the tax collections Peter Costello enjoyed as Treasurer.
Apart from the goods and services tax (GST), which it gives to the states anyway, all of the Commonwealth’s key tax bases have fallen short. There are different reasons behind each, so we’ll take them in turn.
Income tax. Between Labor’s 2013 budget and last December’s update, Treasury’s estimate of income tax receipts in 2016-17 has shrunk by more than $14 billion: partly because we now have fewer jobs than it had expected back, but mostly because they’re not paying as well as expected. In Costello’s last three years as Treasurer, the national accounts estimate, average wages grew by 15.4 per cent, roughly 5 per cent a year. In the past three years, they have grown by 4.7 per cent, or 1.5 per cent a year.
In Costello’s last three years, the nation’s total wage bill grew by 28 per cent. In the past three years, it grew by 8.6 per cent. We both lose. We don’t have the income we expected, and the government does not have the income tax it expected to take off us.
Then there’s company tax. The Australian stock market is dominated by banks and resource stocks, and while the banks have continued to push their profits higher and higher, the steep plunge in world prices for coal and iron ore mean mining companies have had less and less to share with the taxman.
One important exception to that trend has been the unexpected rebound in iron ore prices to around $US70 a tonne, from barely half that level at one point last year. The industry warns that it won’t last. If next week’s budget assumes that it does, to make its numbers look better, that could seriously damage its credibility in the markets – and the electorate.
A second problem is the spreading corporate culture of getting around tax laws by shifting profits into tax havens. Tax avoidance strategies which directors and executives would have shunned in the past are becoming mainstream. The last official estimate of company tax revenue next year is $11.2 billion than the forecast three years ago; on one report, it will downgraded even lower in next week’s budget.
Customs and excise duties shrank by about $3 billion in the gap between those two forecasts, and will shrink more in Tuesday’s budget. Every free trade agreement means more goods come in free of customs duty, and the latest update estimated that will cost us $1 billion next year. People are drinking less and smoking less; each big hike in tobacco excise has been accompanied with a fanfare of forecast big gains to revenue, which then failed to eventuate. The Coalition is likely to make similar claims when it hikes tobacco taxes next week.
Even fuel taxes have fallen short of expectations. The government, which likes to wave a low-tax scarf, has tried to minimise tax rises by hiking user charges, such as visa fees. But that rebounded when the prices charged so far exceeded the actual cost of issuing visas that, under the rules, they had to be reclassified as taxes.
And then there are (or were) our old friends the carbon tax and the mining tax. In 2013, Labor counted on them to raise $5.6 billion in 2016-17, but next Tuesday night they will be missing – and the Coalition failed to introduce new revenue sources to replace them.
So is it only a revenue problem we have?
No. In the eight years before the GFC, when our budgets were mostly in the black, spending averaged 24.2 per cent of GDP. Next year, according to the latest update, it is projected to be 25.8 per cent. That’s roughly $25 billion a year more spending than we used to have – and that’s relative to the scale of the economy, which is growing anyway.
For populist reasons, ambitious decisions have been made by Labor and Coalition governments without adequate revenue sources to fund them. The Gonski reforms to raise education levels have wide public and expert support, but the Gillard government pledged to implement them without any idea how it would pay for it. It was virtually the same with the National Disability Insurance Scheme (NDIS), although there we at least had the fig leaf of a small increase in the Medicare levy.
The Coalition likewise has splashed out billions of extra money for the Reserve Bank, road building, defence, its ‘Direct Action’ subsidies to reduce greenhouse gas emissions, and a host of interest groups and favourite causes, large and small, without facing up to the need to pay for them. For all its spending cuts, it has actually spent more each year than Labor proposed to do – in its first year, much more. Instead of cutting spending, as it pledged, it has instead transferred it from one set of areas to another.
It’s not the main reason the budget is still in deep deficit. It’s just that the Coalition government’s decisions, in net terms, have widened the gap we expected it to close.
Why hasn’t the Coalition cut spending?
One reason why balancing the budget has slid down its list of priorities is that it senses that Australians don’t really see it as a priority. Yes, we expect our governments to deliver budget surpluses, and mark them down if they don’t. But we don’t want them to get there by doing anything that makes us pay more tax or cuts back services we use.
After the 2014 budget, polling by Essential Research found overwhelming opposition to most of the Government’s big savings measures: cuts to future hospital funding, cuts to university funding, cuts to funding for the ABC, the decision to cut 16,500 public service jobs, the $7 Medicare co-payment, lifting the pension age to 70, and increasing fuel taxes.
Voters did support the big cuts to future foreign aid budgets, but strongly opposed the other big saving: cutting $80 billion over a decade to funding to the states for schools and hospitals. There seem to be few significant spending cuts that the public supports, and those public opinion gets worked up about are things like MPs’ perks, which are trivial in a budget spending more than $400 billion a year.
The Abbott government failed to seriously argue the case for its spending cuts, before or after the 2014 budget. Similarly, conservative columnists in the papers generally shy away from making the case for spending cuts in any area. But if they want smaller government, they have to bring people with them, and persuade public opinion to expect less and live with less, as Joe Hockey tried to do in his “age of entitlement” speech.
It says a lot about Australia’s political culture that Hockey gave that speech in London. And that the only big spending cut we support has been cutting developed aid to the most poor and vulnerable people in our neighbourhood.
Does it matter?
In the short run, no. In the long run, yes.
Australia still has low government debt, and the economy is too fragile to warrant a slash and burn approach. With our urban population growing by more than 250,000 a year, we desperately need our governments to lift their spending on infrastructure to match population growth. With a positive political culture, that could be done while being paid for by tax reforms to lift revenue and improve economic growth.
But the lack of any consensus between the two main parties, and their common culture of 24/7 opposition to any saving the other proposes makes it difficult for any government to take a hard decision and expect to see it adopted.
The Federal government can’t go on spending $1.10 for every $1 they earn, or even $1.05, without the country running into big costs down the track.
Tim Colebatch is former economics editor of The Age, and a regular contributor to Inside Story.