Is it too late to boast of our budget discipline?
I HAVE a terrible fear that, just as the rest of the developed world is demonstrating how much better off our three decades of budgetary discipline have left us, we're in the early stages of letting it slip.
I HAVE a terrible fear that, just as the rest of the developed world is demonstrating how much better off our three decades of budgetary discipline have left us, we're in the early stages of letting it slip.Australians have drawn many (usually disheartening) conclusions from the tribulations of the Europeans and Americans since the global financial crisis, but they don't seem to be getting the most obvious message: thank god we've kept our nose clean on the budget.You can look at the Europeans' problems and say the key to it is the unsound basis on which they built their common currency, but the euro wouldn't be in trouble were it not for the decades of fiscal (budgetary) indiscipline of so many of its member countries.They've gone for 30 years or more not bothering to balance their budgets and, as a consequence, building up huge levels of government debt. Add the crisis and its need to bail out banks and stimulate economies, and debt levels jump to the point where a banking crisis morphs into a sovereign debt crisis.This story of laxity is matched in the United States (not to mention Britain). Although America's long-term bond rates are extraordinarily low evidencing little sign of concern by the bond market it is clear the Americans face considerable difficulty getting their growing deficit and debt levels under control.In marked contrast, Australian governments federal and state have been obsessed by the need to restrain deficits and debt since the early 1980s, notwithstanding the ups and downs of the business cycle in that time.The development of a suitably responsible but cyclically flexible "framework" for the conduct of fiscal policy began with the Hawke government's budget "trilogy" and culminated in Peter Costello's charter of budget honesty and medium-term fiscal strategy, requiring the budget to be balanced "on average over the medium term".What makes our performance so remarkable isn't our early start in the design of budgetary commitments, but that successive governments have stuck to them.That's true even of our budgetary response to the financial crisis. Kevin Rudd was able to unleash huge budgetary stimulus because net federal debt had been eliminated. But the medium-term strategy effectively required the increased spending to be temporary, and so it was.Many Australians probably don't realise the Europeans' and Americans' budgets face enormously increased pressure over the next decade and more as the baby boomers retire. Why? Because governments long ago set up highly generous public pension schemes that haven't been adequately funded by employee contributions.Yet again, we're in the clear. The cost of our low, flat-rate, means-tested age pension will not blow out much as the baby boomers retire. (Admittedly, the tax concessions attached to superannuation are far too expensive, though that's not a baby-boomer problem. And the Rudd-Gillard government is taking steps to wind them back.)The depth of Australians' aversion to deficits and debt is well demonstrated by the opposition's success in frightening the punters over the modest rise in public debt following the financial crisis, and the government's manic determination to get back to surplus in 2012-13 come hell or high water.So, why my fear that, in terms of our commitment to fiscal rectitude, this is as good as it gets? That, just when we're witnessing the huge trouble we've avoided by being so disciplined, we're preparing to lurch into indiscipline?Because both sides of politics are gearing up for next year's federal election with wildly expensive commitments they'll have great trouble fitting into a balanced budget. And because, though neither side wants to admit it, the revenue side of the budget is in so much trouble.Each side is leading us down a different garden path. Labor is trying to buy the election with promises of vastly increased spending on a disability insurance scheme, grants for schools and much else. It's given us absolutely no indication of how it will pay for this spending "going forward".For his part, Tony Abbott is trying to buy the election with promises to abolish the two new taxes that raise about $10 billion a year, the proceeds from which are already fully committed. For good measure, he's promising to lower the tax burden generally.It's hard to believe either side would have sufficient discipline sufficient willingness to impose deeply unpopular spending cuts to pay for their promises and leave the budget bottom line heading ever further into surplus as we steadily eliminate the net public debt both sides profess to be so concerned about.And that's before you take account of the two complications Treasury secretary Martin Parkinson reminded us of in a major speech last Friday.First is that economic growth and hence, tax collections in coming decades will be slower for demographic reasons (more on that another day).Second, the serious structural problems on the budget's revenue side: income tax's loss of bracket-creeping power thanks to eight years of tax cuts company tax's problems with the miners' huge depreciation deductions and the evaporation of capital gains and the GST's problems with the return to normal growth in consumption and the changing pattern of consumer spending.All these weaknesses say it will be a long time before tax revenue returns to its earlier proportion of gross domestic product, if it ever does. "Combined," Parkinson says, "the slowing economic growth, rising expectations of government, and a constrained revenue base, are likely to force an explicit debate about the size and scope of government."Bring it on.Twitter: @1RossGittins
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