This opinion article by Jennifer Westacott, Chief Executive of the Business Council of Australia, was published in The Australian on 18 April 2015 under the title ‘Federal budget provides opportunity for fundamental policy reset’.
As next month’s federal budget approaches, it is important that we understand that strengthening our fiscal position is ultimately about strengthening the Australian economy and protecting living standards.
This task will only be achieved by slowing the trajectory of government spending. The challenge is to lay out a medium-term budget and savings strategy to do this.
It will require an honest and mature discussion with the community about what governments (taxpayers) can be expected to pay for — a renegotiation of the social contract. It will require transitions and incremental adjustments to help cushion impacts, and bipartisan commitment.
The latest Intergenerational Report projects that on the current policy settings, federal government spending will reach 31 per cent of GDP by 2054-55 (compared with about 26 per cent this year). The report also implies substantial shifts in the spending burden of health and education to the states and territories.
Imagining that we can tax our way out of our fiscal predicament by permanently increasing federal taxes from the 20-year average of just over 22 per cent of GDP to punitive levels of over 26 per cent excluding non-tax revenue (in terms of today’s economy, an additional $60 billion) is shockingly misguided. Projections for ongoing and increasing budget deficits and net debt of about 60 per cent of GDP by 2055 have already factored in tax revenues above their long-run share of GDP. Higher taxes would only discourage investment and participation, and depress urgently needed growth and job creation.
Taxation reform is needed to reduce impediments to growth and job creation by reducing disincentives to work and invest, and to make the revenue base more stable. But ad hoc tax change ideas claiming to raise a billion dollars here or there — in most cases from business — must be assessed on their merits rather than populist appeal. Far from closing the fiscal gap, proposals like the one put forward by the opposition to tighten thin capitalisation rules are more likely to exacerbate the problem by compromising investment in Australia.
The tax white paper process is the right opportunity for a systemic review and shouldn’t be pre-empted or cherry-picked, adding more uncertainty and complexity, and risking unintended consequences for the economy.
Our budget bottom line will also benefit from growth-promoting reform such as improving the higher education and workplace relations systems, and removing some of the dead weight of regulation. But economic growth alone will not be enough to close our widening fiscal gap.
Our population is ageing and workforce participation will decline. The terms of trade have fallen from record highs, and will have fallen further with recent iron ore price declines.
The reality is that the next decades of economic and income growth will come predominantly from investment and innovation that lifts productivity — investment and innovation that is being undermined by increasing debt and diminished fiscal resilience.
Measures to slow public spending are never easy. It is understandable that they are opposed by groups who are adversely affected — both the providers of services and the beneficiaries.
But equity has many dimensions. We shouldn’t forget the intergenerational implications of foisting debt on future generations who have no voice, or vote. What’s more, better targeting of services to the most vulnerable in our community, better program design and more efficient service delivery should promote equity while delivering better outcomes. Purposeful, consultative and incremental reform can achieve this dual outcome.
In the high-cost welfare program — consuming a third of commonwealth and state taxes — the McClure review has outlined a four-pillar approach to promote simplicity, strengthen individual and family capability, engage with employers and build community capacity to deliver a coherent system that is socially and fiscally sustainable.
The review looked to New Zealand’s model of targeting and investing in individuals to enhance their prospects of working. It’s a model that not only leads to better outcomes but also saves money over the medium to longer term.
Our aged pension and retirement income system requires holistic review, including of eligibility and concessional arrangements. While there may appear to be scope for bringing forward changes, great care needs to be taken to avoid unintended impacts that will inevitably lead to policy revision or reversal in an area where people have made their own irreversible decisions.
In healthcare, getting this right involves better targeting of treatments, incentives for leaner management, removing barriers to more flexible skill mixes and innovative approaches to service delivery. It also requires consideration of the level of subsidised access and encouraging greater self reliance in line with a person’s capacity to pay. The Business Council supports the government’s intention to hold the line against further fiscal deterioration in next month’s budget.
Increasing spending would muddy the message on Australia’s fiscal predicament and deepen the community’s understandable cynicism.
While we have advocated that this budget should seek only modest fiscal correction, this should not be misinterpreted as letting governments or the parliament off the hook on the need for fiscal reform. Quite the opposite. Fiscal sustainability is not just the responsibility of this government. It is the responsibility of the parliament, including the opposition and crossbenchers.
What is required is a fundamental policy reset and the May budget is the chance to provide the community with a coherent narrative, a plan and the institutional architecture to progress structural spending reform to achieve strategic fiscal goals.