“Although it is usual for bad spending decisions to cumulate over the life of a government, the quality of spending decisions of late worsened more than usual,” this morning's Access Budget Monitor says.
Since the Howard government released its Intergenerational Report in 2002 making the case for spending restraint Access says it has boosted spending by an extraordinary $40 billion per year and handed out tax cuts worth $45 billion per year and set to climb...
The Access report says in many circumstances tax cuts are welcome.
“For 30 years, politicians have been able to pump out tax cuts in an election year, confident that the increased demand from lower taxes would lead to a bigger Australian economy and more people in jobs.”
“But that’s not what you get when the rivets are already popping. When we’re already at full stretch, and we add another tax cut, we don’t get a bigger economy and more people in jobs, we get a bigger import bill and higher prices.”
The report says that under current conditions the tax cuts promised during the election campaign “will equal interest rate increases”.
Asked by the Canberra Times whether the incoming government should abandon the $31 billion of cuts it promised in solidarity with the Coalition the chief economist at Access Chris Richardson replied: “the economic answer is yes.”
But he said “the political answer is that it probably has no choice but to go ahead with them”.
“That means that its razor gang is going to have to cut harder”.
Mr Richardson described the fiscal largess of the Howard Government as “huge”. Whereas the Keating Government had been criticised for promising away tax cuts well in advance in return for wage moderation, the Coalition had promised away tax cuts well in advance “in return for nothing really”.
The tax cuts meant that when the minerals boom slowed in a few years' time the budget surplus would drop from its present 1 per cent of GDP to 0.6 per cent “and then head further south”.
This would happen at a time when the Intergenerational Report had made clear that the increasing cost of health care was set to “bugger the longer term budget position”.
Labor should be attempting to improve its budget position by about $85 billion a year – the amount that the Coalition had allowed it to worsen since 2002.
This would mean cutting spending by about one-third, unless the government also also increased taxes or withdrew its promised tax cuts.
Fortunately “this incoming government has before it a particularly rich vein of potential savings to improve the value for money being offered to the public”.
The more that Labor succeeded in trimming waste the more it would take pressure off interest rates.
On Friday the new Treasurer Wayne Swan committed himself to a root and branch review of government spending but said the promised tax cuts would be delivered.
He defended the $31 billion of extra cuts as needed to bring an extra 65,000 people into the workforce.
The outgoing Treasurer Peter Costello on Friday declared Mr Swan the “luckiest lotto winner in the history”.
He said there was “no incoming Treasurer in the world” that would inherit a set of books like that the ones the Coalition had handed over.