The handout blowout that's costing the budget

It was Labor’s misfortune to first win office 24 days after the stock market peaked in 2007 and then to just win again three years later as the 10-year commodity price boom was coming to an end.

That’s life: you don’t always get to choose your moment and it’s true that some elections are good ones to lose.

The timing of Kevin Rudd’s moment in 2007 and Julia Gillard’s in 2010 means that the number 200,000,000,000 will be hung around the party’s neck like a dead albatross for a generation. That’s the aggregate budget deficit that will have been incurred by the ALP between 2007 and 2013. It’s an unhappily round number.

It assumes the 2012-13 budget outcome will be around $25 billion, which we won’t know 'til election time, and doesn’t include the 2013-14 deficit, likely to be another $15 billion or so unless big cuts are made in this month’s budget.

Despite that $200 billion number there is no immediate crisis. At 20 per cent of GDP, outstanding debt will not cause bond yields to rise or Australia’s AAA rating to be lost.

The ‘crisis’ is that it won’t be easy for either party to find a path back to surplus because it’s a moving target – revenues have not finished falling. And the real issue is the ‘structural balance’, which excludes cyclical factors. It’s estimated by consulting firm Macroeonomics to be $41.3 billion in 2013-14, falling to $21.1 billion in 2014-15 and then ongoing at about that level without more revenue and/or less spending.

There are four big problems for revenue: commodity prices, and therefore resource company profits, have not finished declining; mining and energy depreciation charges are much larger than expected; ‘stateless’ technology firms – the new big profit earners – are avoiding billions in tax by using tax havens; and the consumption tax is too narrow and too low.

The two high profile problems – that the carbon tax and the mining tax won’t raise what was expected – are insoluble. Australia cannot have a carbon emissions price out of step with the rest of the world and there can’t be a workable resources rent tax that sits alongside state royalties; it’s one or the other.

In fact there’s not much to be done about any of those revenue problems, beyond the proposed increase in the Medicare levy to pay for an increase in payments for disability.

GST changes have been ruled out and the only thing that can be done about Google etc paying no tax is to expose them, which probably won’t work.

And there is really only one big problem with spending: Australia’s means testing regime is too loose. Too many people are getting too many benefits they don’t need because successive governments have tried to buy their votes. The health and welfare systems have been used as political tools, not safety nets.

What’s more, expectations in this area are still being raised, not reduced, by both parties in 2013, even though the budget balance has deteriorated by more than $20 billion.

The ALP is still promising to increase education spending in line with the Gonski recommendations and go ahead with the National Disability Insurance Scheme, while the Coalition is sticking with its paid parental leave scheme.

As a result of poor means testing the health budget is out of control and ‘middle class welfare’ is blowing a huge hole in the budget. 

In my view the number one reform to public finances should be the creation of a single, consistent and simple means test across all health and welfare programs, and possibly education as well.

Primary health care and public hospital entry should be means tested for a start, and the pharmaceutical benefits scheme should also be better targeted (even very rich retirees get subsidised drugs).

The income tests for Family Tax Benefits A and B, which cost $20 billion a year, are far too high, which also results in the Schoolkids Bonus and the Baby Bonus also being poorly targeted as safety net measures.

Childcare fee assistance costs $4.4 billion a year, parents’ income support $5.3 billion, higher education support $7 billion, private health insurance subsidies cost $4.5 billion, and the first home owners’ grant costs $270 million (and does nothing but push house prices up).

Better means testing of welfare and health services would save billions. In addition, the Federal Health Department employs 4,759 people: what on earth do they all do, if health services are supplied by the states?

The disability support pension currently costs $14.8 billion a year. To this the ALP proposes to add an NDIS, to be called DisabilityCare, at a cost of $8 billion, partly offset by a 0.5 per cent addition to the Medicare levy, which will raise $3.2 billion.

It’s possible, but so far unstated, that the rest of the NDIS will be funded by a reduction in the current disability support pension. If so, that will probably remain unstated – a quiet double shuffle.

Stephen Anthony of Macroeconomics says about $8 billion per year is spent on procurement of capital equipment and buildings. “We understand that none of these contracts include explicit economic incentives which allow the contactors to benefit if they save money for the Australian government. Why not use contract incentives?”

Irrigation infrastructure and water buybacks will cost $4.5 billion in 2014-15. These are just handouts to irrigators: there is no requirement for cost recovery.

And so on. What’s really needed is a spring clean for the public finances, which usually requires a change of government.

If the ALP can get in first, that might help get that $200 billion albatross from around its neck.