We Need to Have Faith in the Government’s Sums

The Australian

By Graham Bradley
President, Business Council of Australia

The recent federal budget should be applauded on two counts: for its first steps towards spending restraint and for its investment in productive capacity, especially skills development, which will help us take full benefit from our lucky position as a major supplier to developing Asia.

These are two modest steps towards a more resilient national economy.

The challenge for the government is to build community support for the more comprehensive suite of economic reforms needed to secure Australia’s long-term prosperity when the China-driven commodity boom begins to wane.

Julia Gillard has highlighted the need for a commitment to further reform, and called for leadership from all sections of the community. The Prime Minister is right to do so. Now is the time for longer-term thinking on where our economy needs to head to afford us the quality of life and economic security we wish for beyond the China boom.

The path back to surplus depends mainly on a rebound in resource sector-driven tax collections but the government is also committed to capping its spending growth to 2 per cent in real terms. This restraint must remain as the centrepiece of future budgets until we begin to pay down the national credit card.

The budget makes it clear, however, that meeting the spending cap will become progressively more difficult, as our ageing population puts pressure on health spending and pensions. Achieving the target in the longer term will require a substantial program of structural reforms.

The budget has taken modest first steps to shore up the sustainability of the welfare payments system by pausing the indexation of family payment income thresholds, tightening eligibility requirements for single-parent payments and requiring more rigorous assessments for the disability support pension. These are welcome and necessary decisions and the government deserves credit for them.

Also, the changes made to income tests to improve incentives for people to make the transition from welfare into paid employment were overdue but critically important to increase workforce participation.

Reform leadership to ensure Australia can in future afford a genuine safety net and ongoing assistance for families with children will require more such measures to be considered and adopted.

Overall, this year’s budget enhances the government’s fiscal credibility. It should build on that credibility by squaring up to the next suite of major structural reforms, encompassing the taxation system, the functioning of our federation, infrastructure planning and delivery, flexible labour markets and the future of our healthcare system.

In terms of bold economic reform, the Henry tax review provides a good outline of some of the changes Australia needs to make, both to the taxation system itself and to the way it interacts with the welfare system.

We need a tax system that raises sufficient revenue to fund essential services into the future, including an affordable safety net for people in real need.

We also need to enhance the role of the tax system in supporting growth and productivity, and encourage savings to further strengthen self-reliance on our banking system, but also make the tax system much simpler.

In the long run, reform leadership around the tax system, carefully considered and effectively explained, will serve the country better than piecemeal measures. The forthcoming tax forum provides an opportunity for leadership in this area.

The ongoing reform conversation must be wide-ranging and encompass an honest population strategy, openly explained alongside the need for improved planning and infrastructure.

We need to get our federation working better. We need to refocus our healthcare spending on promoting wellness.

We need reduced business regulation and more coherent policies to promote innovation and entrepreneurship.

Any conversation covering future funding pressures must deal with fundamental questions about the rising cost of health and aged care. Do we expect them to be met predominantly from subsidies funded by taxpayers or should there be more focus on co-payments reflecting people’s capacity to contribute to these costs themselves?

Receptiveness to reform ideas will be enhanced if government provides greater transparency around its spending decisions to reassure the broader community, including business, that taxpayers are getting value for money.

It is with this objective in mind that the Business Council of Australia has called on the government to create a permanent, independent commission of budget integrity.

As well as being a good enhancement to policy governance, a strong, independent economic institution of this kind would reinforce public confidence and provide a good foundation for community support for further reform.