Budget Gives the Government a Golden Opportunity to Reform Fiscal Policy

The Age (Business)

By Greig Gailey
President, Business Council of Australia

Each year, the federal budget, and the spending and revenue contained within it, represents nearly 30% of the Australian economy. Because of its size and scope, the budget has profound implications for almost every area of economic activity in which businesses, households and investors engage.  

Yet, as fundamental as the budget is to the economy, its processes and strategies have not been subject to major review or reform since the National Commission of Audit in 1996. Since then, the economy has changed substantially and has expanded by close to 50%.  

Employment is at record highs, and skills shortages, rather than unemployment, are the key forces of labour market trends. The rise of new trading partners, especially China, has underpinned significant and long-term demand for Australia’s resources.  

The overall impact of these changes has made Australia a textbook case of a capacity-constrained economy. Domestic demand continues to outpace domestic production and inflationary pressures are building. These present new challenges not only for business but also for governments.  

More than ever, governments need to focus on fiscal policies and broader reform agendas in areas such as infrastructure, education, skills and workforce participation that collectively enhance the nation’s capacity to grow. 

But recent federal budgets have not kept pace with the economy’s structural needs. Instead of focusing on policy settings that invest in those areas of the economy that drive long-term growth, recent budget spending has remained fixed on driving even greater demand and consumption in the short term.  

Of concern is the potential lack of sustainability of recent increases in spending levels.  New spending has been allocated in recent years nearly as quickly as new revenue has been generated on the back of the strongest period of economic growth in decades.  

Of the windfall revenue flow to government of $87 billion, almost all has been spent ($40 billion) or returned to taxpayers as tax cuts ($45 billion), fuelling consumption and building inflationary pressures. As a result, recent budgets have fallen short in contributing to productive investments in areas such as education needed to underpin longer-term social and economic prosperity.  

The focus of spending appears to have been on delivering something for everyone, which has diluted the impact of this spending in terms of improving levels of social prosperity, particularly for those facing the greatest and most entrenched disadvantage.  

As the Business Council of Australia outlined in its federal budget submission released yesterday, it is imperative that the May budget puts spending on a more sustainable footing overall and redirects government resources to supporting growth in the long term and improving outcomes for those most in need of assistance.  

To a large extent the government’s first budget will create the foundations for its broader reform agenda. How much is achieved in this budget will set the tone and expectations for the government’s broader reform agenda. The BCA’s overall recommendation is for the 2008–09 budget to focus on three key priorities:  

  • Restoring the underlying integrity of Australia’s budgetary position through a comprehensive review of government expenditure and priorities.  
  • Tighter spending controls (including a focus on explaining the objectives and outcomes of spending).  
  • Greater accountability for achieving policy outcomes.  

The key recommendation is for a freeze on government spending in real terms for the next three years. This would deliver $32 billion of cumulative savings while still increasing spending in line with inflation and allowing for a redirection of spending to invest in areas such as education.  

The BCA’s Budgeting for Prosperity submission calls for a major budget expenditure and revenue review every five years using a framework similar to that of the 1996 National Commission of Audit. It also recommends a ‘Charter of Budget Quality’ that includes a rigorous process of cost–benefit analysis for all new programs to underpin ongoing budget accountability.  

The BCA believes that given the outlook for inflation, strong fiscal discipline is needed now. Yet equally important is restoring the budget as a strategic facilitator for, not a barrier to, economic growth and social prosperity.  

The Rudd Government’s first budget provides a key opportunity to reform fiscal policy to ensure it is suited to Australia’s prosperity.  

BCA Budget Submission 2008-09: Budgeting for Prosperity