Abbott’s Fiscal Churn

May 13, 2014

13 May 2014

The macroeconomic end point of the Abbott government’s first budget is remarkably uninspiring, particularly given its own judgment that Australia is facing debt and deficit ‘crisis’.

In terms of repairing Australia’s finances, the budget is a small beer effort, especially for a first budget of a new government after a thumping election win eight months ago.

Compared with the estimates in the Mid Year Economic and Fiscal Outlook in December 2013, the cumulative reduction in the budget deficit is a paltry 1.1 per cent of GDP over the three years to 2016-17. This means that the budget is forecast to remain in deficit in 2017-18.

The government could have chosen to return to surplus before then had it hiked taxes a little more or held back on its rather generous spending commitments to select parts of the economy.

Quite remarkably, the budget also fails to arrest the rise in net government debt, which is forecast to be higher as a share of GDP in 2017-18 than it is today.

The budget shows that Mr Abbott leads a high-spending government. The level of government spending will average 24.9 per cent of GDP over the four years to 2017-18. This is an insignificant 0.1 per cent of GDP lower than the average spending of 25.0 per cent of GDP under the previous Labor government in the period from 2008-09 to 2012-13, a time which obviously included the massive fiscal stimulus measures undertaken as the global financial crisis loomed. In the last three years of Labor, government spending averaged 24.6 per cent of GDP. In the last year of the forward estimates, government spending will still be 24.8 per cent of GDP.

For the record, each 1 per cent of GDP is approximately $16.25 billion in 2014-15 dollars.

The Abbott government is planning to spend more than the average of the last three years of the Labor government in every year of the forward estimates. Mr Abbott’s fiscal effort is a far cry from the average spending to GDP ratio of 24.1 per cent under the Howard government.

There is also a massive contrast in the current outlook for government spending compared with the Howard government’s first budget in 1996. In the first four years of the Howard government, government spending fell by 2.4 per cent of GDP to 23.3 per cent. The Hawke government ‘banana republic’ spending cuts were staggering with government spending falling 4.4 per cent of GDP in the four years to 1989-90, when spending dipped to 22.9 per cent of GDP.

These were genuine spending cuts.

The ‘tough’ decisions in the Abbott government budget are obvious and will have a high impact on those effected, but they do little more than fund a raft of its pet spending projects. The paid parental leave scheme, defence, the Medical Research Future Fund, roads, airports and infrastructure are big ticket items that receive the bulk of the money saved from elsewhere in the budget.

This shows that the rhetoric of the budget crisis and need for fiscal repair was, and still is, without foundation. A truly tough budget would have made the tax hikes greater and the spending cuts would have been made without spending offsets elsewhere. The spending cuts would have been broader.

Now to the tax and revenue side.

The budget does confirm that tax and other government revenue will be the driver of smaller deficits.

The budget shows that the tax-to-GDP ratio will rise from 21.4 per cent in 2012-13 to 23.2 per cent in 2017-18. This is a tax take that no Labor government has ever bettered in the 45 years back to 1970-71.

The end point is that this is a budget where the government has squibbed on the decisions needed to return to surplus in a timely fashion.

There have been some tough and inevitably unpopular policy decisions, but they should have yielded a more favourable return to the budget bottom line. Alas, the government has seen fit to use the money saved from these tough policy decisions to pump into other parts of the economy and it has relied on a higher tax take to make a few baby steps along the way to an eventual surplus.

In terms of fiscal consolidation, the first Abbott budget is a very small down payment.

By Stephen Koukoulas, Research Fellow