Budget surplus a distant dream as Coalition presides over spending surge

December 2, 2014

By Stephen Koukoulas

In opposition, the Coalition parties had a spokesman for debt reduction. Curiously, it is a position they dropped the moment they won the election and the reasons for doing that now seem clear.

Government debt is rising at a breakneck speed and when the mid year economic and fiscal outlook (Myefo) is released later this month, it will confirm wider budget deficits and rising government debt.

Before the 2013 election Andrew Robb was the opposition spokesman for debt reduction and time and time again, he bemoaned the level of government debt under Labor.

At various times he compared Australia’s debt level to that of Greece and Ireland and in 2012 he made the promise that “the top priority for a Coalition government would be slashing debt – the government should be paying down debt”.

Having now been in government for almost 15 months, the Coalition is floundering hopelessly on this commitment.

The level of gross commonwealth government debt has risen a thumping $75bn to a record $348bn. The level of net government debt has increased by $48bn to a record $226.4bn, according to the latest data up to September 2014. The figure will be higher still when Myefo is released and the forecasts will be for even higher debt.

In terms of “paying down debt”, this government has failed.

The increase in the budget deficit and rise in debt have been driven by several factors. Importantly, and something continually overlooked in most fiscal policy analysis, has been a surge in government spending.


Unnecessary payments of $8.8bn have been made to the Reserve Bank of Australia. The paid parental leave scheme, roads and infrastructure and defence and border protection are all areas that have seen substantial spending increases.

And the government’s decision to give up scarce revenue with the repeal of the carbon price and mining tax has made the budget position all the more problematic.

The budget has also been affected by the unexpected decline in the terms of trade and the commodity price free fall.

These swings in economic parameters can have a powerful impact on government revenue and therefore the budget bottom line and the fact that iron ore and coal prices, among others, have fallen sharply since the budget was framed in May has taken a bit more out of the bottom line.

The government has also had a hand in trash-talking the economy. By creating a mood of fear about a budget “crisis” or “emergency”, the government has left business investment sliding and consumer sentiment mired in pessimism.

When consumers are pessimistic, they tend not to spend, they building savings and the rate of growth is undoubtedly weaker than it would otherwise be. Weaker economic growth hurts government tax receipts.

This is the first government I can recall that continually talks down the economy in such a savage and persistent way.

Another element of the debt blow-out is the Coalition’s inability to galvanise support in the Senate to pass some of its measures designed to cut spending and boost revenue. This is a failure of process and management.

In colloquial terms, senior ministers in the new government should have been having more cups of tea with the crossbench members in the Senate in the weeks and months after the election.

They could have outlined their policy agenda, worked out areas of compromise needed to get their legislation through and worked to deliver their debt reduction agenda.

John Howard got a hostile Senate to agree to the goods and services tax, Julia Gillard did the same with a price on carbon. They negotiated and compromised.

It is very rare for a government to command a majority in the Senate but most governments understand this and have negotiated with the minor parties to ensure the smooth functioning of government.

The Coalition only has itself to blame for not getting enough of the Senate on side to deliver. These are excuses for the fiscal deterioration.

But it should also be remembered that the Coalition has had a few things that have actually helped the budget bottom line.

The incredible fall in interest rates paid on government bonds is saving the government up to half a billion dollars a year in lower interest costs.

And while there is a clear case to suggest the Australian dollar is still overvalued, it is around 85 US cents now, well below the 93 US cents assumed at budget time.

This helps the economy and the budget position as it supports the pace of economic growth and underpins a higher rate of inflation, both of which help to narrow the budget deficit.

The budget, fiscal policy and government debt have many moving parts. Often there is some offset when some factors go with you, while others go the other way.

In the last year or so there has been a strong skewing of policy decisions and economic parameter changes that have worked to make the budget deficit and government debt levels widen.

No one in the government now talks of “surplus” any more. It is just â”fixing the budget” or bringing the budget “under control”, whatever these mean.

Indeed, the way the government is spending and has given up compromising with the Senate on other policy changes, there seems little chance of a budget surplus for many years to come and the level of government debt looks like going up and up and up.