Published in The Weekend Australian on 30.11.13
Australia’s on-again, off-again budget emergency is on again. But this time it’s real, it’s lurking just around the corner of the four-year budget period and it’s worsened by the unaffordable promises of the new government.
When from Opposition the Coalition declared a budget emergency back in May, it alleged the government didn’t have a revenue problem; it had a spending problem. Yet as a share of the economy, government spending in the four-year budget period would be little changed from that during the last four years of the Howard government, despite the extra health and pension costs associated with a continually ageing population.
The Coalition’s critique that there was not a revenue problem ignored page one of the May budget papers, which revealed revenue write-downs in the preceding few months of $60 billion, taking total revenue write-downs since the global financial crisis to a staggering $170 billion.
If revenue as a share of the economy had been the same as in the last four years of the Howard government, instead of a budget deficit of $18.8 billion in 2012-13 there would have been a surplus of more than $10 billion.
From the May budget until two days before the federal election the Coalition promised to tell the Australian people what it would do about the budget emergency it had declared. When it revealed its emergency response was to improve the budget bottom line by a tiny $1.5 billion a year the Australian people were left wondering whether the emergency had been a false alarm. But the Coalition went further, promising no cuts to programs and benefits beyond those it had already announced. Government service delivery could be made more efficient through an audit commission’s work, but there would be ‘no surprises and no excuses.’
Since the formation of the new government, revenue estimates have been downgraded further. Government promises will make a bad situation worse, especially beyond the present four-year budget period.
The government has promised to keep the previous government’s tax cuts without the revenue from a carbon price. It has pledged to use new spending on its direct action plan to achieve the bipartisan commitment to a 5 per cent reduction in carbon emissions by 2020. It is repealing the mining tax. It is abandoning the fringe benefits tax changes for motor vehicle leases announced by the Rudd government. It is introducing a much more expensive paid parental leave scheme. It is scrapping the previous government’s policy of reducing the superannuation tax concessions for 16,000 of Australia’s wealthiest retirees. And it has announced it will not proceed with new limits on the amount of interest that can be deducted for income tax purposes by Australian affiliates of foreign companies that lend money to them.
When added together, the cost of these revenue and spending decisions explodes after the four-year budget period.
Over the four years to 2016-17 the cost of the direct action plan of paying emitters to reduce their emissions is capped at $3.2 billion. But over the subsequent three years to 2020, the cost of direct action grows enormously if the government is to achieve its promised 5 per cent emissions reduction target.
During the four-year budget period the cost of scrapping the mining tax isn’t very great. But the mining tax revenue is projected to grow strongly thereafter, as the huge deductions for the original cost of building the iron ore and coal mines are used up. The big mining companies that pay the mineral rent tax signed up to this, assured they would receive big up-front deductions while paying a reasonable amount of rent tax later.
As more and more very wealthy Australians retire the cost of scrapping their reduced superannuation tax concessions will grow exponentially. This measure was to make a significant contribution to funding the National Disability Insurance Scheme and the needs-based school funding system.
By the time of the May 2014 budget, the true cost of these policy decisions will begin to show up, as one of the hidden years, 2017-18, makes an appearance in the budget papers. By then it will be clear there is a true budget emergency, exacerbated by promises of the new federal government.
Perhaps the government didn’t know or appreciate this when it was making its promises of tax reductions and spending increases. Unless the government starts revisiting these promises it will need to lift the debt ceiling well beyond the $500 billion it wants the parliament to approve before Christmas. It could start by abandoning those promises the community doesn’t support – repealing the mining tax and introducing an extravagant paid parental leave scheme. Yet the overwhelmingly popular needs-based funding system is looking like the big casualty. That would be an economic and social tragedy.