A budget surplus voters won't wear

The OECD has told Wayne Swan how he could run a $100 billion surplus if he wants one.

By InvestSMART · 14 Apr 2012

By InvestSMART ·
14 Apr 2012

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The OECD has told Wayne Swan how he could run a $100 billion surplus if he wants one.

THE OECD has told Wayne Swan how to get his budget back into surplus. Indeed, it has told him how he could run a $100 billion surplus if he wants one. But there's a catch - most of its suggestions would be political dynamite.

They include scrapping tax breaks for superannuation and for owner-occupied housing. An emissions trading scheme with a target of a 20 per cent cut from 1990 levels - and no compensation. A GST imposed on food, healthcare and financial services.

But in a new report to its 35 member countries, Fiscal Consolidation: how much, how fast, and by what means?, the IMF does not call on Mr Swan to do any of this in 2012-13. It says fiscal tightening must take account of economic growth in ''a consolidation strategy that could be implemented flexibly, capable of adjusting the speed and intensity as new information becomes available''.

International Monetary Fund chief Christine Lagarde gave the same advice overnight in a speech in Washington, urging countries that ''have the flexibility to reconsider the pace of deficit reduction this year, to limit the harm to growth.

''We need more confidence and demand,'' Ms Lagarde said. ''The immediate focus of policies must therefore be to support growth where it is still weak.

''Let me be clear: in many countries, especially in the advanced economies, fiscal adjustment is essential. But the pace of adjustment matters.''

The OECD report finds Australia has the lowest government debt of any of the 28 rich countries studied. Gross debt is a bit over 20 per cent of GDP here, compared with almost 100 per cent in the United States and more than 200 per cent in Japan.

The main thrust of the OECD report is to warn countries to adopt medium to long-term plans to get their debt back below 50 per cent of GDP, to give them the flexibility to handle crises at the same time as dealing with the costs of ageing populations.

Even Australia, it warns, will need to tighten its budget to cope with the healthcare, aged care and pension costs as its population ages. An IMF report earlier this week reported that the life expectancy of 60-year-olds in Australia is increasing at the rate of nine years every half-century.

The IMF suggests six reforms it estimates could improve federal and state budget bottom lines by 8.9 per cent of GDP, or roughly $138 billion a year. But few appear politically feasible. They include:

?Cut the greenhouse gas emissions target to 20 per cent below 1990 levels, driving up emissions permit prices, with no compensation (saving: $65 billion a year).

?Scrap tax breaks for superannuation and owner-occupied housing ($42 billion).

?Extend the GST to food, healthcare and financial services ($9 billion).

?Tighten eligibility for family benefits ($8 billion), and find savings in healthcare ($8 billion) and schools ($6 billion).

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Frequently Asked Questions about this Article…

What did the OECD say about running a $100 billion Australian budget surplus?

The OECD told Treasurer Wayne Swan it could be done — but only by adopting politically sensitive measures. Its suggestions include scrapping tax breaks for superannuation and owner‑occupied housing, imposing a broad emissions trading scheme (with a 20% target and no compensation), and extending GST to items currently exempt. The report made clear many of these options would be politically difficult.

How does the IMF say Australia should approach fiscal consolidation and the timing of budget cuts?

The IMF recommends a flexible, growth‑aware approach to fiscal consolidation. Its report says countries should adjust the speed and intensity of deficit reduction as new information becomes available and avoid measures that unnecessarily harm economic growth — a point IMF chief Christine Lagarde emphasized in urging jurisdictions to reconsider the pace of deficit reduction where they have flexibility.

What specific reforms did the IMF estimate could improve Australia’s budget, and by how much?

The IMF outlined six reforms it estimated could boost federal and state budgets by about 8.9% of GDP (roughly $138 billion a year). Key items cited were cutting the emissions target to a 20% reduction (estimated savings $65 billion), scrapping tax breaks for super and owner‑occupied housing ($42 billion), extending GST to food/healthcare/financial services ($9 billion), tightening family benefits ($8 billion), and finding savings in healthcare ($8 billion) and schools ($6 billion).

What do the OECD and IMF reports say about Australia’s government debt level compared with other rich countries?

The OECD found Australia has the lowest government debt among the 28 rich countries studied — gross debt a bit over 20% of GDP. By comparison the United States was close to 100% of GDP and Japan over 200%. The OECD warns countries should aim to get debt back below about 50% of GDP over the medium to long term to preserve flexibility for crises and ageing costs.

How could scrapping tax breaks for superannuation affect everyday investors and retirees?

The article notes scrapping tax breaks for superannuation (combined with removing breaks for owner‑occupied housing) is estimated to save about $42 billion a year. For investors and retirees, this would mean reduced tax concessions on retirement savings — potentially lowering after‑tax returns and requiring people to reassess retirement planning and expected income in retirement.

What would extending the GST to food, healthcare and financial services mean for consumers and investors?

Extending the GST to food, healthcare and financial services is estimated in the IMF analysis to raise about $9 billion a year. For consumers this would likely increase household costs for essentials; for investors it could change consumption patterns and have implications for sectors that rely on consumer spending, though the article does not provide sector‑level forecasts.

How would an emissions trading scheme with a 20% target affect the budget and markets?

The IMF and OECD materials suggest cutting the greenhouse gas emissions target to 20% below 1990 levels and not compensating emitters would drive up permit prices and could save around $65 billion a year for the budget. For markets, higher permit prices would raise costs for carbon‑intensive businesses and could shift investment toward lower‑emission industries, creating both risks and opportunities for investors.

Why do the reports stress medium‑ and long‑term planning for ageing populations, and what does that mean for investors?

Both organisations warn ageing populations will lift costs for healthcare, aged care and pensions; the IMF noted life expectancy gains (60‑year‑olds gaining about nine years every half‑century). They recommend medium‑ to long‑term fiscal plans to keep debt manageable (targeting levels below about 50% of GDP). For investors, this signals potential long‑term policy changes (tax, public spending priorities, and reforms in health and pensions) that could affect sectors tied to ageing and public finances.