Long-Term Discipline and a Focus on Growth Must Drive Budget

The federal government needs to return to policy fundamentals and reset the medium-term fiscal strategy to better prepare Australia for looming international and domestic challenges, the Business Council of Australia says in its submission to the 2012–13 federal Budget.

“Australia’s ability to weather the global financial crisis has been the envy of many countries, but our current settings will not be sufficient to face the new challenges in front of us,” council President Tony Shepherd said.

“The global economy will be more volatile and uncertain for some time and we also face enormous economic adjustment challenges at home associated with competitiveness threats to some sectors and intergenerational issues such as the ageing population.

“We want Australia to be a beacon in the world for how to think ahead about looming challenges, but to do this we will need renewed discipline and a stronger focus on growth.

“We are proposing a new set of fiscal rules, which should be adopted in a bipartisan way, to boost the credibility of policymakers and build confidence we can maintain growth and our Australian way of life over the long term,” Mr Shepherd said.

The proposed new fiscal rules include:

  • ensuring discipline on the size of government by capping tax as a share of GDP 
  • putting aside money to repay debt and deal with future economic shocks
  • starting to provision for the pressures that are going to arise from our ageing population.

“We also want the government to stay on track with its current commitment to cap real spending growth at 2 per cent per year,” Mr Shepherd said.

“A strong first step would be to return the Budget to surplus in 2012–13, as planned. Of course, this may need to change if there is a serious deterioration in the global economy with flow-on effects for the Australian economy.”

“Should any stimulus be needed it should be applied to activities that will grow the economy, such as investment in economic infrastructure.”

Mr Shepherd said that while the council was asking government to put in place rules to ensure our economy stays strong, it must also be doing all it can to help the economy grow.

“Many businesses are struggling to be competitive with a high dollar and the changing nature of our economy. Our ageing population threatens to reduce the size of the Australian workforce and our capacity to pay for the future,” he said.

To grow the economy, the submission recommends a continued focus on reforms to help boost productivity in the areas of tax, labour market, infrastructure and regulation.

“On tax, as we outlined at last year’s tax forum, we think the government should develop an ongoing process for comprehensive tax reform over the next 10 years,” Mr Shepherd said.

“We also need strategies to increase the number of skilled Australians, maintain levels of skilled immigration, make sure skilled people can move from sector to sector, and break down barriers faced by under-represented groups of Australians.

“The cost of doing business is a big issue in Australia that is threatening our competitiveness. By complying with good regulation processes, government will lower business costs.”

The submission makes a number of further recommendations focused on enhancing fiscal discipline over the long term, improving the efficiency and effectiveness of government spending, and growing the economy, for example:

  • another across-the-board Commission of Audit
  • mechanisms to keep pressure on spending performance such as a Commission of Budget Integrity
  • a whole-of-nation Intergenerational report to raise awareness of looming fiscal pressures at both state and Commonwealth levels
  • Infrastructure Australia oversighting a proper priority list including fast-tracking of development approvals.

Why are we recommending new fiscal rules?

Rule 1: Permanently cap tax as a share of GDP at or below 23.7 per cent

The BCA considers it appropriate to maintain an explicit cap for the level of taxation as a share of GDP as a discipline to the size of government.Such discipline is essential, because ultimately it has fundamental implications for Australia’s competitiveness.

Our recommendation to keep tax as a share of GDP at or below 23.7 per cent – the level for 2007 08 – amounts to wanting the government’s current tax take rule to be set in stone for future governments. This discipline is needed to keep us competitive especially against other countries in our region, whose average tax to GDP ratio is around 12 per cent.

Rule 2: Prepare the Budget to make a one-off contribution equal to 3 per cent of GDP, roughly every 13 years, to help Australia weather the impact of a possible economic shock

We want the government to put aside money for a rainy day, once public debt has been paid down.

Past experience – including our success in weathering the global financial crisis – has shown that discretionary fiscal policy is most effective when it is deployed at times of major economic shocks and when that shock cannot be managed through monetary policy alone. Fiscal policy needs to be ready to play a counter-cyclical role when necessary to help reduce the extent of major economic downturns.

The government’s existing fiscal policy rules address cyclical readiness by ‘achieving budget surpluses on average over the medium term. While the government’s current rule – to aim for surplus – is right, an opportunity exists to strengthen the integrity of the rule with hard targets informed by the overriding objective of having fiscal policy ‘ready’ to deal with an economic shock.

The new rule contains an objective that after repaying debt, budget surpluses should be used to build a ‘recharge reserve’ that is equal to 3 per cent of GDP. This reserve could then be deployed quickly and effectively to boost the economy in times of major economic crisis.

Previous major economic downturns in Australia have been accompanied by deterioration in the budget deficit of an average of around 3 per cent as stimulus is rolled out. 

Rule 3: Set aside a modest proportion of future surpluses to plug the projected fiscal gap from demographic pressures

It is estimated there will be a combined fiscal deficit of 5 per cent of GDP between the Commonwealth, states and territories by 2050. Today, a budget deficit of that size would be equivalent to around $70 billion. 

Australia’s current tax arrangements and the current approach to government spending at all levels of government will not be able to sustain deficits of this size.

Our recommendation is for consideration to be given to targeting a modest proportion of the surplus in future to provision for the projected fiscal gap arising from future pressures from our ageing population. This will end the cycle of going in and out of net debt every time there is a major shock.