It explains why we are in the predicament we are in and why all the unfunded Labor fairy projects like Gonski, the NDIS were nothing but pipe dreams.
The rate and increase in spending under the ALP was massive- who knows what Bill Ludwig has done with it. No one else has seen a dime except illegal immigrants, the countries that deals could be done with and the companies that were brave enough to tender for yet another ALP fuckup cleanup job.
The Budget problem
In September 2013 the Coalition Government inherited a Federal Budget that had been heavily in deficit for six years and was projected to remain that way for at least another decade.
The immediate reason for the deterioration from the Budget position left behind by the Howard Government was not difficult to identify. If we compare Peter Costello’s final budget in 2007-08 to Wayne Swan’s final Budget in 2013-14, we see that over Labor’s six years in office:
● Spending rose from $272 billion to $411 billion – an increase of $139 billion.
● Revenue rose from $295 billion to $363 billion – an increase of $68 billion.
So under Labor, for every $1 in new revenue, the Government committed to $2 of new spending.
Dire as the recent past appeared, the near future looked worse. Labor had committed to several high-profile promises that if delivered would vastly increase outlays over the next decade, with much of their cost conveniently hidden beyond the Budget’s four-year forward estimates window.
Kevin Rudd’s 2010 deal with the states to fund hospitals, Julia Gillard’s 2013 ‘Gonski’ reforms to schools funding, and the National Disabilities Insurance Scheme (NDIS) are the iconic examples.
According to the Parliamentary Budget Office, these three types of spending will have a joint annual cost of $73 billion by 2023-24 (equal to 14 per cent of total Budget outlays).
However well intentioned the policy goals – and the case for the NDIS, to take one example, is surely compelling – these heroic commitments were made just as a flood tide of revenue from the resources boom was ebbing away. Now those promises stand out, like ships stuck on the mud, mocking the previous Government’s naivete for making them and our credulity for believing there was enough revenue to pay for it all.
But it wasn’t just new programmes. Spending on existing social payments was also projected to surge, in many cases reflecting wider eligibility, more generous rates or the inclusion of new services. Consider these forecasts from the Parliamentary Budget Office:
● In 2003-04, at the start of the resources boom, the age pension cost $18 billion. Last year we spent $39 billion. A decade from now the cost of the age pension will be $64 billion. Yes, there are more elderly Australians – but that is still a huge increase.
● In 2003-04, the Government spent $1.5 billion on childcare and parental leave. Last year we spent $7 billion. A decade from now, we will spend $18 billion. That twelve-fold increase is despite modest growth in the cohort of children with working parents.
● In 2003-04, the Government spent $8 billion on Medicare. Last year we spent $19 billion. A decade from now, we will spend $34 billion.
How did spending rise so quickly, with even larger increases in prospect? Why did Labor commit to costly new programs plainly beyond the capacity of the Budget to support without large tax increases?
How is it the International Monetary Fund, echoing our own Treasury, judges we currently have a structural Budget deficit – that is, a deficit after adjusting to remove the effects of the economic cycle – of $48 billion or 3 per cent of GDP despite our having avoided recession during the GFC and enjoying our most sustained period of favourable terms of trade in history?
Essentially, because from 2003-04 to 2013-14 the Budget received an unprecedented windfall of roughly $460 billion, mostly on the revenue side, during the initial phase of the resources boom. Spending and tax cut commitments rose rapidly, at first in line with the windfall, and and then under Labor in excess of it.
Treasurer Wayne Swan, speaking a language just steps away from the angry class warfare of a century earlier, condemned ‘greedy billionaires’ and extolled the merits of new spending initiatives to ‘spread the benefits of the boom’ (forgetting the exchange rate had already done this). A complacent optimism had washed over us like a comforting warm bath.
Unlike all previous booms this boom was going to persist. The Budget mused about prosperity underwritten by resources for ‘an extended period of time’. This time would be different.
Except that it wasn’t.
The nearly half-trillion dollar Budget windfall from the decade-long commodity price rally proved temporary, like all such windfalls, and ended emphatically with dramatic slumps in coal prices in 2013 and iron ore prices in 2014. But as Chris Richardson at Deloitte Access Economics points out, the commitments governments made during this period to income tax cuts or increased expenditure, all premised on revenues no longer being collected, are permanent.
Or as the Secretary to the Treasury, John Fraser, said recently, echoing his predecessor:
The reality is that Australia has spent its way to a structural budget problem. Government payments are growing faster than government revenues and without action, this trend will continue.
So we’ve been living beyond our means, and since 2008-09 we’ve been borrowing to fund the shortfall. Far from tightening our belts, however, under Labor we made grand plans to live even further beyond our means in the near future.
The inevitable result is debt. When the Howard Government lost office the Federal Government had $45 billion of cash at the bank (equal to 4 per cent of GDP). Seven years later, we are in net debt to the tune of $245 billion (or 14 per cent of GDP).
If we allow this situation to continue we will put the security of every family and every business at risk. The deficits continue, our debt and interest payments balloon – and all this at historically low interest rates. What happens when rates rise again, as they assuredly will?
When the global financial crisis struck in 2008 the fact that we had no net Government debt gave Labor virtually unlimited flexibility to respond with stimulus spending. How will we be placed if there is another GFC-like episode but we have accumulated a mountain of public debt?
Labor’s position is that our debt is low compared to other advanced economies. What isn’t stated is that high debt levels are one reason those economies suffered during the GFC and have experienced so anaemic a recovery since. Nor does it recognise that Australia is not like Europe or the US – we are a small economy dependent upon imported capital and exposed to massive external shocks.
Demographic change heightens these risks, as Treasury’s latest Intergenerational Report makes clear. We know that as our population ages there will be fewer and fewer workers to support a swelling number of retirees. Today there are 4.5 Australians aged 15 to 64 for each person aged 65 and over. In 2035 that ratio will be 3.2, and by 2055 it will be just 2.7. And it was 7.1 in 1970.
We know claims on pensions, aged care and health services are going to grow. We could and should prepare by living within our means today. But instead we are doing the opposite, passing onto our children not just the expense of supporting an army of retired baby boomers but also the cost of servicing the debt we ran up because we ignored the financial realities of our times.
Treasurer Joe Hockey’s 2014-15 Budget attempted to address these trends. Evidently by doing so it disappointed many in the community.
A number of its most important measures, which would have generated savings over the forward estimates of more than $25 billion, have been unable to secure support from the Senate cross benches and have been abandoned or modified.
It is in no way correct to say that the 2014-15 Budget was a failure. Many measures, amounting to a net saving over the forward estimates of $16 billion, have been passed. But we clearly haven’t been able to achieve the degree of fiscal repair and reform that was and is needed.
Why have the Budget measures been such a battle? At a mechanical, political level the answer is that Labor, the Greens and others in the Senate refuse to support them. That is their right.
But it is to Labor’s enduring shame that as custodians of the Budget during a period when almost three quarters of the resources boom revenue windfall flooded in, they turned a starting point of $45 billion of cash into $245 billion in net debt by the time they left office. In opposition, they then proceeded to block $25 billion of savings (including $5 billion they themselves originally proposed) while cynically and irresponsibly declining to offer a single alternative measure until the past week when they unveiled, perhaps predictably, a plan for higher taxes.
In the past fortnight, for the first time since the 2013 election, shadow treasurer Chris Bowen and assistant shadow treasurer Andrew Leigh have at least acknowledged there is a Budget deficit problem and promised an alternative plan. We will see if they deliver. The acid test will be whether Labor proposes a constructive alternative in the Budget-in-reply.
I hope they do. We need an evidence-based, spin-free, fair dinkum debate about the Budget position and what we should do to fix it. This May the spotlight will be on Bill Shorten and Chris Bowen as much as it is on Tony Abbott and Joe Hockey.
The more fundamental problem the 2014-15 Budget faced was that the public was not persuaded tough measures were necessary in the first place.
We – and I include myself and every member of the Government in this criticism – did not do a good enough job in explaining the scale of the fiscal problem the nation faces, and the urgency of taking corrective action.
In addition there was a deeply felt sense in much of the community that our proposed Budget measures were unfair to people on lower incomes when taken as a whole.
In my view the failure to effectively make the case for Budget repair was our biggest misstep, because it was a threshold we never crossed.
Once you’ve explained an issue often enough that people understand there is a genuine problem and “something” must be done, you can have an intelligent discussion about what that something might be – and just as importantly, your opponents will face public pressure to come up with their own “something” if they are not prepared to support yours.
But at least we have learned our lesson. The Intergenerational Report released last week by Joe Hockey provides a solid platform from which to reboot the Budget debate, and educate the public about the need for action