BUDGET 2013: Spending like a sober sailor

Nudged along by softer public final demand, overall government spending as a percentage of GDP is falling.

This is the budget where the government is spending like a sober sailor.

Sober, rather than drunken, because public final demand is falling by 0.5 per cent in 2012-13, recording zero growth in 2013-14 and edging up by just 0.5 per cent in 2014-15. This weakness in such a large part of the economy is in the context of real GDP growth of 3 per cent, 2.75 per cent and then 3 per cent, respectively, over those three years. This means that government spending as a share of GDP is falling.

Looking at it from the perspective of the private sector, private final demand is growing at a solid 4 per cent in 2012-13, 3.5 per cent in 2013-14 and then 2.75 per cent in 2014-15.

Of course, this three-year profile for public demand comes after the quite massive stimulus in the period from 2008-09 to 2009-10 when fiscal policy loosening was the order of the day as the world teetered on an economic depression.

Public final demand in this example includes Commonwealth, state and local government spending. The cuts in the state government sector are making an important contribution to this structural decline in the size of government.

At the Commonwealth government level, spending is forecast to rise by what appears to a strong 4.3 per cent in real terms in 2013-14. But this follows a record large 3.2 per cent cut in real spending in 2012-13 so taking the two years together, real growth in spending is averaging just 0.5 per cent. Taking this average over a longer time frame, over the four years from 2010-11 to 2013-14, average annual growth is about 1.5 per cent.

As a share of GDP, government spending will be 24.5 per cent in 2013-14, down from the recent peak of 26.1 per cent in 2009-10, and it is about the average level of the past 35 years.

On the revenue side, there is a gentle recovery. From 2010-11, when the tax-to-GDP ratio fell to 20 per cent (which was equal to the lowest since 1978-79), Treasury is forecasting a pick-up to 22.2 per cent of GDP in 2013-14 and then 23 per cent of GDP in 2015-16, when the budget is expected to return to surplus. That 23 per cent will be the highest reading since before the global financial crisis in 2007-08, the last Costello budget, when the tax to GDP ratio was 23.7 per cent.

By way of a benchmark, the average tax-to-GDP ratio over the past 35 years has been about 23 per cent.

The pushing out of the return to budget surplus by two years means that net government debt will peak at 11.4 per cent of GDP in 2014-15. This is an upward revision from 10 per cent of GDP at the time of the Mid-Year Economic and Fiscal Outlook. For the government sector as a whole, which includes state and local government as well as the Commonwealth, net debt will peak at 14.9 per cent of GDP. As Treasury is at pains to explain, this is one-fifth the average level for that year of the advanced economies as a whole and one-sixth the average level for the G7.

In all, the macroeconomic picture presented in the budget is very much in the groove. Spending-to-GDP remains around the long-run average, the tax levels are low but recovering, while net government debt has inched up but is at a level that should be of no concern to ratings agencies or foreign investors.

Stephen Koukoulas was senior economic policy advisor to Prime Minister Julia Gillard between September 2010 and July 2011.