It’s a Different Economy, Stupid

25 February 2008

The Australian
p. 8.

By Greig Gailey
Business Council of Australia

Federal budgets are seen predominantly through a short-term lens. Speculation on possible new spending and tax cuts in the weeks leading up to the budget culminates in wall-to-wall coverage and analysis on budget night, usually followed by a week of political and public debate. After which we can usually expect little more to be said.  

This short-term and often fragmented focus underplays, even trivialises, the budget’s strategic importance for Australia’s future prosperity. Each year, Australia’s federal budget, and the spending and revenue-raising contained within it, represents nearly 30 per cent of the country’s economy. The budget is the cornerstone of the federal government’s contribution to economic growth and prosperity, not just for budget week or even that fiscal year, but well beyond. Yet, as fundamental as the budget is to Australia, it has been some time since it has been viewed, or constructed, as the strategic government activity that it should be.  

It’s telling that budget processes and objectives have not been subject to major review since the National Commission of Audit in 1996. Over that time, the economy has changed substantially. The duration of economic and employment growth has been remarkable and unemployment now stands at record lows.  

New technologies have accelerated capital and knowledge flows, opening Australia to new opportunities but also heightening the impacts of global competition. The ongoing expansion of China has underpinned significant and long-term demand for Australian products and resources. This has benefited companies and shareholders, but has also dramatically boosted government resources.  

A strong economy generally delivers strong revenues to the federal government. In recent years, though, this traditional windfall has been magnified by the benefits of the global resources boom. These changes have seen Australia’s economy transform from one in which too much supply often competed for scarce demand, into one in which the building blocks of future growth – labour, skills and infrastructure – are increasingly in short supply.  

Yet recent budgets have been largely framed around the previous economic paradigm, one which results in governments adding to the competition for scarce resources rather than enhancing Australia’s capacity to grow.  

By seeking to address key economic and social challenges with ever-higher spending and returning what is left over as tax cuts further inflating demand and consumption recent budgets have exacerbated rather addressed the problems of a capacity-constrained economy. Analysis provided for the BCA’s Budgeting for Prosperity submission by Access Economics shows that since 2002, the federal government has received $87 billion in unexpected revenue.  

Of this total, $40 billion has been used to deliver additional spending, $45 billion has been accounted for by personal tax cuts and $2 billion has gone to the Future Fund. Yet while spending growth in some areas has grown seemingly unchecked, spending on education, a key investment to relieve capacity constraints and increase productivity, has been modest.  

In short, there has been a growing misalignment between recent budgets and the requirements of what is a fundamentally changed economy. The revenue surge has undermined the levels of fiscal discipline needed to make sure the windfall gains from 16 years of continuous growth are invested in better supporting future growth and improving in a sustained way the circumstances of those most disadvantaged in our society.  

Given the size and influence of the budget and growing disconnect between it and the economy, major reforms are now an economic imperative. There is a need to refocus budget priorities and processes to ensure the government’s fiscal policies complement business activity, meet the needs of the economy, and deliver improved social prosperity.  

The BCA welcomes signals from the new federal government that it intends to put spending on a more sustainable footing, improve fiscal accountability and use the budget to address serious structural barriers to future growth. The Rudd Government’s first budget is both a real opportunity and challenge to ensure the federal budget supports Australia’s future prosperity. It may never have a better opportunity than early in its first term to rein in spending in the short term and lift fiscal performance over the long term.  

Budget action needs to involve: a freeze on real spending for the next three years to deliver cumulative savings of $32 billion; immediate review of areas where spending is growing significantly or projected to grow, such as defence, health, social security and welfare; a comprehensive review of all budget spending and revenue policies every five years that uses a framework similar to the 1996 National Commission of Audit; adopting a charter of budget quality that includes cost–benefit analysis for all new programs; and elevating reform of federal-state fiscal relations as a priority for ‘new federalism’ reform agenda in 2008.  

The government’s first federal budget will create the foundations for its broader reform agenda and decisive action should be taken. At the same time, current budget challenges highlight the broader issue of the role and performance of government in meeting the economic and social challenges now facing Australia. Too often we have seen governments acting in ways – ranging from knee-jerk regulation to a lack of strategic planning for new infrastructure – that are counter to future growth and prosperity.  

That may have been tolerable in the past. But in a capacity-constrained economy where the costs and impacts of ill-considered government activity and intervention reverberate far greater, it should not be acceptable. Possibly the biggest challenge for the Rudd Government and Australia’s governments generally is a need to re-think the role of governments within an economy that has changed almost beyond recognition over the past 20 years.  



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