Time Running Out to Get the Budget Back on Track

The government’s execution of its fiscal strategy is not working and needs a major rethink and urgent action, the Business Council of Australia’s submission to the federal budget says.

“The budget must include a clear and sensible path back to surplus starting with an independent review of the size and scope of government and its approach to spending, not ad hoc new taxes and revenue grabs which will harm growth,” Business Council Chief Executive Jennifer Westacott said.

“Our research shows the government has spent more than it should in recent years. Just as GFC-related stimulus was being unwound, new spending programs started to build and amount to a $49 billion impact on the budget over the forward estimates,” Ms Westacott said.

“Spending is not being fully offset with real savings because it has relied on revenue growth which hasn’t eventuated, and because more than half of the $28 billion in recent savings claimed by the government have been made up by timing shifts that have no lasting budget benefit.

“Funding the government’s growing spending is getting harder, with worthy but high-cost policies such as the National Disability Insurance Scheme and Gonski reforms requiring up to a combined $17 billion of new funding annually in coming years, depending on how much the cash-strapped states can chip in,” she said.

The Business Council submission includes analysis by Deloitte Access Economics of the impact of government policy decisions and approach to spending in recent years and over the forward estimates and beyond.

The council estimates that for the government to meet its commitment to run surpluses on average over the medium term it would have to deliver, consistently, growing surpluses into the next decade to offset its deficit budgets which have totalled 12 per cent of GDP since 2008.

The council believes the minimum requirement for the government to achieve this goal is to deliver surpluses which will have to grow to 1 to 2 per of GDP by 2016–17 and beyond.

“With revenues expected to be volatile over the forward estimates, the government should be reprioritising outlays, and pulling back on new spending commitments until there is greater certainty over how they can be paid for,” Ms Westacott said.

The submission calls on the government to commit to the following four key actions:

  • undertake an independent review of the size, scope and efficiency of government
  • a refreshed set of fiscal rules including building to delivery of consistent surpluses, a hard cap on tax as a share of GDP, and putting aside a proportion of future surpluses to build firepower for the future
  • improve productive capacity by lifting infrastructure investment, and dramatically improving the planning and prioritisation of infrastructure projects
  • develop a blueprint for long-term comprehensive tax reform.

“When the global financial crisis hit in 2008 the government spent big to stimulate the economy, and we generally supported this as important to support jobs and growth,” Ms Westacott said.

“But since 2009 new spending and high-cost policies have been committed to in the hope they would be funded by growth, and revenue from volatile new taxes such as the mining tax and the carbon tax.

“While genuine structural savings were made in the government’s early years, such as increasing the aged pension age, they have been few and far between since.

“The size of Australia’s fiscal challenge reinforces the importance in this election year of all parties putting forward economically responsible policies which support confidence, growth and jobs and which do not undermine the budget position.

“Everyone needs to consider the challenges and trade-offs of funding new commitments to avoid facing more dramatic future measures such as higher taxes and slashed services which will drag down Australian living standards over the long term.

“The election environment provides an opportunity to remind ourselves why sticking to a credible medium-term fiscal strategy,  including a clear pathway back to surplus, matters to every Australian.

“We need a plan to build sustainable surpluses for the future so we can pay down debt, build resilience to future economic shocks and put aside money to cover the rising costs which will be coming as our population ages in the years ahead.

“It is a task that requires tough decisions about government spending and structural change in the budget, because there is very little capacity for business or the community to keep paying to plug short-term budget holes.

“We must remember if we continue to attack business we compromise our competitiveness, add to costs and put jobs at risk.

“The Business Tax Working Group showed that the government had already picked the low-hanging fruit in the tax system and that there were very few options within the current tax system for further targeting business tax arrangements without seriously risking competitiveness and jobs.

“Continuing to increase spending without asking the tough questions about the size and scope of government and the long-term structure of the budget will only make the task of returning to surplus much more difficult.

“High-cost promises, the impacts of the ageing population, and continuing global economic volatility will place greater pressure on the budget in years to come, making it critical the government acts now to start building up a sustainable fiscal war chest for the future,” she said.

BCA Budget Submission 2013–14: Towards Fiscal Repair

Risks around Australia’s Fiscal Position (report by Deloitte Access Economics)

Reforming Federal Finances (report by ACIL Tasman)