Act now on budget deficit or our kids will bear the burden

This essay by Jennifer Westacott was published in The Weekend Australian on 25 February 2017. It was the fourth Priorities For Prosperity essay -- a series exploring the challenges of ensuring Australia's future prosperity.

You can’t say we weren’t warned about the federal budget. For almost a decade, the ­nation’s foremost economists and policy experts have been raising alarm about a perfect storm brewing on the nation’s balance sheet, fuelled by an ageing population, spiralling federal costs and deepening debt.

Yet too many politicians accept deficits as normal, kicking the can down the road and shifting the burden on to future generations. Government efforts to turn the tide are welcome, as is the passage of new budget savings this week, but there is still a long way to go. If the energy situation is a master­class on anything, it shows where endless politicking and policy paralysis can lead: higher household bills, businesses on the brink and dwindling faith in the electricity system. If our leaders, state and federal, fail to agree on a systematic strategy to repair the budget, the impact will be devastating.

However, the markers around this debate are about to change. Australia’s budget chickens are coming home to roost.

A big reality check is expected in 2020, when annual real spending growth ramps up to about 3 per cent, soon outpacing projected growth in the economy. The International Monetary Fund has estimated this would progressively lock in a structural deficit of at least 3 per cent of GDP, or $50 billion in today’s terms.

The window to contain spending growth is closing rapidly. There is, at most, eight years left to put the budget on a sustainable footing before we have only bad options: extra taxes on households or blunt spending cuts. Taxes would need to rise by more than $5000 a household just to close a deficit of $50bn. Further tax hikes would be needed to begin paying off the accumulated debt. Relying on bracket creep alone would force about 1.5 million more workers into the top marginal tax rate.

This isn’t some hypothetical ­future generation of taxpayers. These are the students, appren­tices and young workers of today who would be forced to accept crippling levels of tax to subsidise the self-serving generations who came before them.

Massive tax increases clearly are not sustainable and would slow growth by discouraging economic activity. One stark example is the company tax rate which, at 30 per cent, dissuades businesses from investing and innovating in Australia because there are better returns elsewhere. When countries such as Britain, the US and France are reducing their tax rates to lure investors, we could be increasing our tax burden.

Only sustained economic growth can deliver more jobs, higher wages and a strong revenue base for better public services across the long term. People earn more when they work for profitable companies that invest and improve their productivity. Higher tax rates that inhibit growth deliver less revenue over time.

Bankrolling ever higher spending through burgeoning debt is also a bad option as it would leave no buffer to respond to economic shocks. It would erode our ability to invest in new physical or social infrastructure, and surrender ­opportunities to encourage innovation and job creation through tax reductions.

The underlying problem also wouldn’t go away. Federal government spending would continue to climb unchecked, reaching more than 30 per cent of GDP by 2055, compared with just over 25 per cent today. Deficits aren’t an escape route, they’re just a credit card issued by foreign lenders.

In the event of a crisis, a future government could be forced to make savage austerity cuts that inflict enormous social harm and disruption. Slashing $50bn a year would be equivalent to cutting one-third of today’s social security ­budget.

None of these options is acceptable, but such limited choices are inevitable unless parliament takes control of the situation now.

It doesn’t have to be this way. Ideally, the budget should speak to how prosperous we are as a country. Can we provide better living standards for Australians and world-class essential services? Can we ensure well-paid, meaningful jobs for people while providing a social safety net for those in genuine need? Are our cities liveable and is our environment healthy?

Locking in enduring prosperity requires us to overhaul the way we think about government spending and smash the illusion that more money necessarily means better outcomes.

The debate over Australia’s flatlined school testing results, notwithstanding billions of additional funding, is a salient example. The federal government spends $440bn each year, accounting for more than a quarter of the economy. It should be obvious that such a massive segment of our country should function as well as possible without duplication, overlap and inconsistency.

All services should be delivered in the most efficient, prioritised and targeted way.

An effective budget strategy is to slow the rate of spending growth and achieve better outcomes. This is the crux of good budget repair: when done properly, it means services are better, not worse.

New Zealand is a leader, pushing agencies to find innovative ways to deliver services. Since 2012 the proportion of citizen-government service transactions completed digitally has risen from 30 per cent to 50 per cent, along with big gains in areas such as childhood immunisation and post-school education and training.

Good budget repair is not about ad hoc, kneejerk “fixes” hatched with an eye to the next Newspoll. Value for money is key to safeguarding the services that underpin fairness and opportunity for the community.

Long-term budget improvement will sometimes require upfront investments — in systems, infrastructure and people — and ongoing finetuning, but it’s worth it. Just as companies use technology to deliver better services at lower cost, efficiencies can be found throughout government. Surely we can use technology better to limit the need for multiple identity checks in the welfare system. Competition and market mechanisms constrain companies from creating their own bloated bureaucracies, and government agencies should face similar tests.

Frontline public servants are often the first to privately complain about waste and mismanagement in their own agencies. They know how to save money while improving outcomes.

For instance, public health spending across the federation has seen compound annual growth of 7 per cent over a decade, reaching $108bn in 2014-15, equivalent to ­almost 60 per cent of personal income tax.

However Bruce Robinson, who headed the federal government’s medical benefits scheme review, says it “has been estimated that 30 per cent or more of health expenditure is wasted on services, tests and procedures that provide no or negligible clinical benefit, and in some cases might be unsafe and could actually cause harm”. The Productivity Commission has suggested “the efficiency of the health sector could be increased by up to 20 per cent by bringing performance up to best practice across a range of areas”.

There is a political challenge here. It’s hard to communicate that containing growth in spending in health and education doesn’t mean reduced outcomes. However, the conversation must be had.

The longer action is delayed, the worse the problem will become and the more abrupt and blunt the inevitable adjustment will be. Australia’s next-generation budget architecture should cap taxation around 22 per cent of GDP and limit real spending growth to about 2 per cent of national income until a sustainable surplus is achieved. The independent Parliamentary Budget Office needs broader responsibility for identifying significant risks and trends in the size of government.

Efficiency isn’t just for the big departments. Every one of Australia’s 1200 federal government bodies should have its rationale and performance questioned.

All levels of government face this challenge. The ditching of the federalism white paper isn’t a free pass on tackling needless duplication and unclear lines of responsibility.

Some would believe the government has solved the budget problem; it hasn’t. The razor-thin surplus projected in 2021 is becoming increasingly shaky as it is built on optimistic assumptions and savings measures blocked in the Senate.

Lacklustre economic growth and languishing business investment, coupled with heightened global uncertainty, make taking action more, not less, urgent.

This will be one of the last parliaments to have the luxury of leaving this problem for a future generation to fix. If nothing changes, the next government will be running out of palatable and sensible options.

Jennifer Westacott is chief executive of the Business Council of Australia.