Monday, April 22, 2013

Grattan: Why we're facing a decade of deficits

Australia faces a decade of budget deficits with the annual total set to pass $60 billion in 2023 unless governments take tough action to “share the pain,” a leading think tank has warned.

The Grattan Institute’s assessment comes as Treasurer Wayne Swan confirms the budget had taken a $7.5 billion hit since the mid-year update in October.

“We have seen a really unique event in our economic life,” Mr Swan told the ABC from Washington where he has been attending international meetings.

“We have seen the terms of trade come down but the dollar didn't move. That's caused a hit, if you like, a sledgehammer to revenues in the budget since the mid-year update of something like $7.5 billion.”

“And of course the impact won't just be in this financial year, it will also be across the forward estimates.”

The Grattan Institute says while notionally on track to surplus at the moment, the combined total of state and Commonwealth budget deficits should reach 4 per cent of gross domestic product by 2023, which is around $60 billion in today’s dollars and would be around $100 billion in ten year’s time.

“Initiatives such as national disability insurance scheme, the education reforms, direct action on climate change and parental leave are only a small part of it,” Grattan Institute chief executive John Daley said.

“The big driver, costing $30 billion, is extra spending on health. Contrary to popular belief the extra spending isn’t being driven by aging. It’s that compared to ten years ago today’s 60 year olds see the doctor more often, have more tests, face more operations and take more drugs. We are getting something out of the extra spending, more people are staying alive, but the question is - who is going to pay for it?”

The Institute also believes welfare spending will have to climb in part because the present Newstart unemployment allowance is unsustainably low...

It says company tax revenue, mining and carbon tax revenue and general tax takings will slide as a proportion of the economy as the price of exports slips.

“The problem is the attractive solutions won’t buy that much money,” said Mr Daley. “Cutting middle class welfare won’t be enough, Australia doesn’t have that much. Even if you axed the baby bonus, the schoolkids bonus and parts of Family Tax Benefit B that go to high earners you’d only make $4 billion.”

“Eliminating government waste won’t help much either. Axing the Commonwealth departments of education and health might save the wages of $5000 public servants, but that’s only around half a billion.

The Institute says the gap can only be closed by higher taxes, meaning the days of “painless” budget fixes are over.

“The places to look are company tax and company tax concessions, income tax and goods and services tax. The old idea that you can introduce a change with no losers (at least none earning less $100,000) won’t work.

“Everyone will have to share the pain. Victoria’s Kennett showed what could happen in the early 1990s. It was explicit about saying that everybody was going to have to share in bringing the budget back into surplus.”

A spokesman for Mr Swan rejected the suggestion the Treasurer would not take hard decisions saying its new spending on schools was funded by cutbacks in other areas.

It had tacked health spending by means testing the private health insurance rebate and “cutting the millionaires’ dental scheme.”

Mr Swan told the ABC he was not going to make up for a shortfall in May’s budget by “savage cuts”.

“That would not support jobs and growth and it would lead to higher unemployment,” he said.

In today's Sydney Morning Herald and Age


The Grattan Institute’s 2023 forecast

$30 billion - Extra health spending

$7.5 billion - Extra welfare spending

$7.5 billion - Gonski and other initiatives

$7.5 billion - Weaker company tax

$7.5 billion - Weaker mining and carbon tax

Total deficits of all Australian governments, in 2013 dollars

Grattan Institute, Budget Pressures on Australian Governments April 201

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