A long slide towards debt leads to Waynes budget swansong

11/06/13 5:37 PM

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14 May 2013, 7.53pm EST

A long slide towards debt leads to Waynes

budget swansong
Phil Lewis
Professor of Economics at University of Canberra

D IS CLO S UR E STAT EMENT

Phil Lewis also has no relevant affiliations. During his career he has received funding from
many private and public sector organisations including most recently the ARC, NCVER,
DEEWR and the AFPC.
How did the Australian
economy, which boasts the
best performance of the
major advanced economies,
end up with an estimated
budget deficit of A$19 billion
this year and an estimated
debt of $178 billion?
The answer, of course, is
quite simple the failure of
successive governments to
live within their means.

Treasurer Wayne Swan has unveiled an $19.4 billion deficit,

but promises to be back in surplus by 2016-17. AAP

Last week I pointed out how

in the latter years of the Howard government, the Costello budgets included a raft of tax cuts
and handouts which eroded the healthy surplus. This was due to exceptional falls in
unemployment, jobs growth and wages growth which greatly increased tax receipts while
somewhat eroding the tax base.
Rudds two-and-a-half year leadership of the Labor government was characterised by high
spending, high debts and ill-fated economic policies. There were also a large number of
policy back-flips and policy failures. The period was also dominated by the global financial
crisis (GFC) and Australia was not alone in having to recalibrate its economic strategies to
respond to what has been a significant, world-wide phenomenon.
While the idea of stimulus spending was generally supported, the amount and form of the
spending has been the subject of considerable debate. Rudd took office in 2007 with net

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government saving of almost $45 billion and left office in June 2010 with an estimated net
debt of almost $42 billion.

Commonwealth of Australia

Click to enlarge
Far from addressing the budget deficit Swan has delivered more budget deficits through
failing to curb spending and/or widen the tax base, despite the Minerals Resource Rent Tax
and the Carbon Tax.
Among the expenditure cuts and tax savings is the axing of an $1.8 billion increase in family
tax benefits, due to start on July 1, which would have been worth between $300 to $600 a
year for families. The Baby Bonus will now be paid as part of the means tested Family Tax
Benefit A payments.
An income tax cut proposed for 2015-16 will be deferred. The tax cut was part of the carbon
scheme compensation package and would have increased the tax-free threshold from
$18,200 to $19,400. Savings of $900 million will be made over four years from changes to
superannuation tax arrangements by taxing earnings of more than $100,000 on
superannuation pensions and annuities will be taxed at 15%, instead of being tax-free.
Public service cuts over the next four years, including job cuts, will save $580 million, but it is
well-known that meaningful savings in government expenditure come from cutting programs
rather than public servants.
Although the government needs to pay for its additional expenditure promises there is also
the need to address the underlying structural problem of reducing existing expenditure. All
this is at a time when the carbon tax, Minerals Resource Rent Tax, and just about every tax,
is not raising the expected revenue and Treasurys forecasting performance is not looking
good.
Massive revenue write-downs have been made to tax receipts, with a shortfall of around $17
billion this financial year, more than $20 billion the following year and $60 billion over the next
four years. There are $43 billion in savings promised through a range of cuts.
A number of big ticket expenditure items are likely to blow out from original estimates. The
National Broadband Network (NBN) is a very costly project for which no one knows the
eventual true cost with any accuracy. The new tax (sorry Medicare levy) will only meet 40%
of an estimated cost of DisabilityCare, (formerly the NDIS) which will inevitably blow out (if

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the experience of the rest of healthcare is any guide). The Gonski recommendations may
very well be excellent, but few really understand them.

Commonwealth of Australia

Click to enlarge
No one trusts the estimates and most think that the government wont be around much
longer to implement even short-term measures, never mind the the savings to fully fund
priority investments for 10 years and beyond described by the Treasurer.
According to Swan we are an economy in transition. And how is this transformation to
occur? The resources boom moves from its investment phase to production (if prices hold
up). Our region is the fastest growing in the world providing opportunities for Australian
farmers, manufacturers and service industries. This will require a highly skilled, educated
workforce (hence Gonski reforms although it would seem the more highly skilled university
students can fend for themselves with $2.3 billion to be cut from universities).
As Swan put it,

You dont want to find yourself in the fastest growing region in the world, with yester
days economy.

Excuse me, but havent we been in the fastest growing region for some time now? Shouldnt
this investment have been done years ago?
And,

Cutting to the bone puts Australian jobs and our economy at risk, something this
Labor government will never accept.

No one is asking for drastic cuts, but simply for government to live within its means.

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