Audit means one thing: cuts
There was a certain audacity to the way Treasurer Joe Hockey this week went about announcing the government's long-promised audit of government finances.
Demonised during the election campaign by Kevin Rudd with his interminable "cut, cut, cut" scare, the new Treasurer confirmed the high-powered review of spending at the same time as he coolly revealed he would be lifting the debt ceiling to $500 billion. A staggering 67 per cent hike, or $200 billion.
Coupled with an $8.8 billion injection of funds into the Reserve Bank that will blow out this year's deficit to nearly $40 billion and talk of more borrowing for infrastructure, the Coalition's first two months in office hardly seem a model of budgetary rectitude. Voters could be forgiven for being more than a little cynical.
It was only a few days before polling day they learnt that the Coalition's fierce rhetoric about a "budget emergency" was a fiscal farrago. Its budget position was virtually identical to Labor's. Hockey was, naturally, having none of the criticism. Treasury advice was that the debt had blown out more than the peak identified by his predecessor, Wayne Swan, and was now tracking to more than $400 billion, and it was best to have a big buffer given global uncertainty.
Asked by veteran broadcaster John Laws if had changed his mind given "in the lead-up to the election you were at pains to point out that you don't solve a problem of debt by simply adding more debt to it", Hockey replied: "Not at all."
"[Swan] said the debt was going to go to $370 billion. He said that will be someone else's problem after the election. Well, meet 'someone else'."
A new government blaming the previous one is a time-honoured tradition and not without justification. Even so, many of the tax cuts and handouts of the Howard era play their part in the budget's structural problems. The Treasurer was on solid ground when defending the boost to the central bank's reserves, especially with ongoing global financial market volatility linked to the US debt crisis. And infrastructure spending is sorely needed to boost productivity and pick up the slack from the end of the mining investment boom.
The commission of audit that will scour the $400 billion annual budget for waste and efficiency gains is seen as worth pursuing. "The great thing about this review is we don't know the answers right now," says Deloitte Access Economics budget expert Chris Richardson. "There are lots and lots of nooks and crannies there. We know a lot less about spending and how we deliver government services than we do about tax."
It's a major reform undertaking, and raises important questions about the size of Australia's government, the fifth smallest in the industrialised world but with big expenses looming in the future.
For Prime Minister Tony Abbott, tax rises are not an option, even as the resources boom peters out and cuts tax receipts. Australia is also only just beginning to grapple with an ageing population. Then there is the impact of the new spending on disability insurance, schools and paid parental leave. These three programs alone will add an extra $20 billion a year to Commonwealth expenditure when fully operational.
The pressures in the medium and long term are immense. By 2050, spending on health and ageing is forecast to almost double as a proportion of overall government spending. The federal deficit could exceed 3 per cent of gross domestic product (GDP) and, combined with state government deficits, a shortfall of as much as 6 per cent of GDP for an eye-glazing combined deficit of $580 billion.
Abbott this week urged the audit commission to be "bold" but warned Australians "things will have to change and there will be some things that people don't like".
"But I think the public," he told Fairfax Media's Neil Mitchell, "understand that government has been living beyond its means."
The terms of reference for the audit are wide, but in the face of a renewed Labor campaign to portray the exercise as a diabolical "commission for cuts" Abbott and Hockey have repeatedly vowed not to break any election promises. That means health and education spending will not be cut overall.
The Coalition's generous paid parental leave scheme, the removal of the means test for private health insurance and expanded benefits for seniors will, presumably, also remain untouched. Defence spending has to rise to 2 per cent of GDP over the next decade, to a cumulative cost of $33 billion over that time. "Basically, about half the budget is off limits if you include the payments made to the states through the GST," said the Grattan Institute's John Daley.
That leaves welfare, which makes up 30 per cent of total federal spending including pensions, in the spotlight. The NDIS, as Abbott has re-renamed Labor's landmark DisabilityCare program, could also come under review. And the huge pool of small grants that now cost billions of dollars each year will be scrutinised. Think of the $50,000 to refurbish a surf club, the grant to an obscure research program or ongoing support for a small but electorally important rural industry. "There's been a massive proliferation of grants and programs," says Stephen Bartos, a former senior finance official now with ACIL Tasman. "Politicians love them. They tend to be introduced in elections but then exist in perpetuity. Community groups will squeal, but it has to be done."
The terms of reference specifically ask the audit to uncover "areas or programs where Commonwealth involvement is inappropriate". It raises the issue of duplication of federal and state governments.
Closely watched will be health, largely financed by the Commonwealth but mostly delivered by the states. Bartos says the Commonwealth spends $3.2 billion a year on health administration, 5 per cent of its total expenditure. Duplication is less pronounced in education, another dual responsibility, costing Canberra $258 million annually.
If big savings are to be made, however, John Daley says ending duplication, privatising assets and culling small grants won't get you there.
"If you look at the history of successful fiscal reform, it has tended to involved pulling both levers - revenue and expenditure," Daley says. "If it's only the expenditure lever, there's a bunch of people who will be losers ... you can share the burden better by using tax measures."
Certainly Labor has accused the government of stacking the commission with business lobbyists conspiring to unleash savage cuts that will hurt the community. The heavy involvement of the Business Council of Australia, the lobby group for the top 100 companies, is undeniable.
As well as BCA boss Tony Shepherd heading the audit, the head of its secretariat, Peter Crone, is the BCA's chief economist. Former Howard government minister Amanda Vanstone will be involved as well as three men with deep experience of the public service: Peter Boxall, Tony Cole and Robert Fisher.
All those involved are highly capable and intelligent, but the audit's composition remains skewed. Where are the community groups that represent those who actually receive government services?
There are also questions about perceived conflicts of interest given that - until Friday - Shepherd chaired Transfield Services, a company with more than $500 million worth of contracts with the government. Part of the audit's job is to find government areas to outsource, including privatising assets like Australia Post.
The most contentious conflicts for the BCA are in the tax realm, where it pushes hard for corporate tax breaks but resists cracking down on business welfare.
John Howard was the last prime minister to hold an audit, in 1996. His first budget wielded the axe, with the blame sheeted home to Labor and "Beazley's black hole", a reference to opposition leader Kim Beazley's stint as finance minister. Howard's first "horror" budget wielded the axe but, by the end of his time in office, government had grown substantially. It is unlikely the Abbott government will cut hard and early. It knows the economy needs budget support to ride through the current volatility.
Any major reforms taken from the audit will likely be introduced after the next election, a political necessity anyway. If promises must be broken, the best and most honest strategy is to take them to the people. Late yesterday, Hockey's office emailed: "We will deliver on our promises to the Australian people. We take our mandate seriously."
Chris Richardson cautions that the budget position may deteriorate further and quicker than is forecast. In opposition, the Coalition made huge political capital from the slippage in budget numbers, creating a sense of crisis around economic management. Along the way, Hockey cast doubts on the impartiality of Treasury, the department he now heads.
The Treasurer may face the same fate in government, leaving him in an extremely awkward position. The blame game can't last forever.
"The budget used to be boring," quips Richardson. "Now it's exciting."
RAZOR GANG: TARGETS OF
THE COMMISSION OF AUDIT
■ SENIORS Pension and related costs had risen sharply even before the impact of the ageing population. Eligibility, the asset test, and expansion of seniors cards entitlements under spotlight.
■ FAMILY BENEFITS, WELFARE AND ENTITLEMENTS A big part of the budget and not quarantined from cuts. Scope for improved service delivery.
■ HEALTH Promise of no overall cuts but audit will examine whether states should take over from Commonwealth, or vice versa. Rising costs of treatment and drug subsidies also a concern.
■ EDUCATION Coalition only promised to maintain Gonski funding for four years. Big hits to budget come after that.
■ AGED CARE Another fast-growing cost to budget that will get worse as population ages.
■ DISABILITY NDIS will cost Commonwealth $10 billion per year when fully operational and may cost much more.
■ GRANTS AND HANDOUTS Massive expansion of small grants to community groups due to electioneering has blown out costs.