Prepare to Share Pain

14 May 2009

The Australian

By Greig Gailey

President, Business Council of Australia

The government must tighten its belt and let the private sector grow, urges Greig Gailey in The Australian.

The economic facts laid out in this week’s Budget are serious enough to change the way Australians think about our national finances and future prosperity.

We should not underestimate our own preparedness to respond to our new circumstances.

The economic facts are these. The global recession and our attempts to minimise its effects are sending us towards more than $200 billion of government debt. At the same time, economic growth has slowed almost to a halt and is expected to contract next year.

The Budget does not forecast a return to surplus until 2015–16. Even that is based on six years of economic growth above the long-run Australian average, starting in 2011–12. Slower growth could push out the return to surplus to a decade or more.

Although we entered this situation in better shape than most countries, our fiscal position is not as strong as we thought.

The Budget shows that when you remove the effects of the mid-2000s resources boom, the government has been in deficit since 2006–07.

The federal government entered the global recession already spending more than it could afford. This structural deficit demonstrates the size of our problem.

Many of our budget problems were clear before this week. More than a year ago, in its 2008 Budget submission to the then new government, the Business Council of Australia argued that the headline surpluses in the mid-2000s had masked a deterioration in the Budget’s underlying strength.

Strong economic growth and surging tax receipts had allowed quantity of spending to replace quality of spending. The Budget was becoming, we noted, ‘increasingly sensitive to fluctuations, pressures and changes in economic growth, here and internationally’. In particular, the Budget was starting to rely too much on corporate tax receipts.

The 2009–10 Budget, however, makes the challenge obvious to all.

When Australia has faced such significant challenges in the past quarter-century, and governments have responded with bold reforms, the community typically has acknowledged the challenges and accepted them. We have reached such a point again.
There are aspects of this week’s Budget where the government shows it realises this. By phasing in a rise in the pension age to 67, in particular, it has made a change that will have implications for decades to come. It has begun to acknowledge the long-term challenge of population ageing, keeping people in work longer, reducing the demand for public pensions and changing attitudes to retirement.

We need a similar mindset to be adopted right across the federal Budget. There is scope for savings in many other government programs.

An example: The budget papers declare that Australia’s family spending payments are generous. What it says next suggests that generous is an understatement. ``Spending on cash benefits to families has been growing at about 9 per cent per annum on average over the past decade.’’

Most of those benefits – about $17 billion – are spent on the family tax benefit. Only grants to the states and the age pension cost more.

The Budget has tightened family payments this year, but more will need to be done.

The same is true for many other areas of spending. Health and defence, for instance, have undergone rapid growth during recent years.

For several years the BCA has been calling for a regular, five-yearly review of all budget spending and revenue policies. So far, governments have resisted this step.

But if the government does not opt for systematic review, it must make fiscal discipline a 365-day-a-year job, rather than a task it pursues in the few weeks leading up to each year’s budget. At the same time, the government must boost revenues.

That means, above all, aggressive pursuit of pro-growth measures beyond the Budget. It is economic growth that revives revenues.

This week’s Budget has presented substantial challenges. If Australia is to prosper during the next decade, there are bigger challenges ahead. They are challenges the Australian community should be willing to take on.



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