Quality - and not just quantity - counts in budget saving and spending

This opinion article by Business Council chief economist Adam Boyton was published in the Financial Review on Thursday 20 December 2018.

After 11 budget deficits, and six years after Wayne Swan forecast a surplus in his 2012-13 budget, it is now increasingly likely that the budget will finally get back into the black.

Yet a surplus itself isn't an end goal. It's what a surplus can enable you to do that matters. Likewise, when it comes to government spending it's not the amount we spend that counts, but what we actually get for that spending.

Now that the budget is almost back in surplus we can start making real inroads in to what is around the highest level of net debt as a share of GDP for at-least half a century. That matters because while our government debt levels may be low by international standards, Australia's households are among some of the most indebted in the world. At the same time falling house prices have the potential to take half a trillion dollars from household sector wealth. Given that backdrop, getting government debt as low as possible is a sensible way to help restore our national balance sheet. The stronger our financial position, the more flexibility we have as a nation to deal with economic shocks. And getting the budget into surplus and keeping it there is the most feasible way to do that.

That then invites the question of how to best lock in a surplus. Stronger economic growth is, of course, an imperative.

But this return to surplus is not just about growth and the revenue side, or even a lucky revenue windfall. Yes, it is true that revenue is running ahead of budget forecasts. And yes, Australia's companies will pay $94.5 billion in tax this year, up $3.3 billion on the budget forecast. But you need to be in a position to take advantage of luck when it eventually breaks your way.

Getting the budget into a position where it can take advantage of a little luck has meant years of restraint on the spending side. In fact, if we adjust spending by the federal government for population and inflation, then it has risen just 0.7 per cent over five years.

It has been that focus on the spending side that has been instrumental in restoring the health of the budget.

This is in fact nothing new. The return to surplus in the early years of the Howard government came off the back of spending restraint, as did the move into surplus under the Hawke/Keating government in the 1980s.

In fact, for those who might think the spending restraint over the past few years reflects some radical neo-liberal agenda, the past few years have nothing on the Hawke/Keating government. Over the five years to 1990-91, the Hawke/Keating government cut spending per person after inflation by almost 9 per cent.

But spending restraint is not an end in itself. And neither is a budget surplus and low debt.

The real ends are a fiscal position that provides policy flexibility if the global or domestic economy was to weaken; and efficient public spending that enables our desires for quality schools, hospitals and a social safety net to be met now and into the future.

Anyone can spend. Spending sustainably, efficiently and effectively is more of a challenge.

Indeed, as the OECD noted in their most recent review - albeit in the typically dry tones of econocrats - "Australia would benefit from higher public spending efficiency".

In less dry tones, when it comes to government spending, fairness and compassion is not a question of how much we spend. It is a question of how well we spend.

Measuring the effectiveness of some elements of public spending is difficult. But with the MYEFO showing federal spending approaching half a trillion dollars, ignoring the question of value for money would seem costly, to say the least.

That said, in some areas we can get a reasonable sense of how well we are doing. Take education. We know from the OECD's PISA survey that the performance of some of Australia's high school students has fallen over the past decade or so, both versus other countries and in absolute terms. Yet over the same period spending on education has risen significantly. This is not an argument to spend less, of course. It does, however, suggest we might be able to spend in a more effective way.

In the run-up to an election, it's likely we will be bombarded with a range of promises to spend more.

In the end though, it's not how much we spend that matters. It's how well we spend it.