Are these the deficits we have to have?

Shortly after Treasurer Wayne Swan told us that his bottom line was in great trouble because of falling revenues, the Grattan Institute published a paper telling us that all the Australian governments were facing great difficulty in balancing any budget — indeed, that we might expect budget deficits of around 4 per cent of GDP for at least the next decade. Joe Hockey was quick to declare that all bets were off as far as he was concerned, including his promise of bringing in a budget surplus in his first year. Further, he stated that nobody, including himself, knew what the correct state of the Commonwealth’s finances were, and that the Coalition would be inheriting a giant deficit when  it took office (I think he meant to say ‘if’).

That last shot is becoming traditional. It was the new Howard Government in 1996 that discovered a ‘black hole’ in the government’s finances when it gained power, which allowed it to announce all sorts of  ‘savings’ measures, including cutting funds to universities, about which I wrote the other day. Even without the Treasurer’s statement and the Grattan Institute paper, I would have expected Mr Hockey to make such a statement, though the practice has been to announce it once you have asked Treasury to provide you with a frank and fearless statement on your first day. ‘Zounds!’ you respond. ‘I didn’t think it was that bad!’

The Grattan Institute paper is a bit of a shock, because we have been told for so long how well the Australian economy is travelling. It isn’t forecasting a slump, though it recognises the possibility. What it does point to is that Australian governments have set in train a cycle of expectations that will ruin them if they don’t end it. The paper doesn’t use the term ‘entitlements’, which seems to me the word that best expresses how a substantial section of the electorate views the role of government, but you get something of the flavour in this section: ‘Over the last decade, governments have tended to “buy” reform, accompanying any budget pain with a budget gain. The GST, the carbon pricing reforms, and school funding all came with promises that all but the wealthiest would be “no worse off”.’

And the paper goes on like this: ‘Australia’s strong economy gives our governments more options than many of their overseas counterparts. But they need to explain to the public why balanced budgets matter, for our current prosperity and that of future generations. Everyone will need to give up something. Which brave leaders will step forward?’ I could have written that myself. The paper tells us that the Treasurers in our various governments will have to consider tax increases and substantial savings in expenditures in order to produce such a balanced budget. Can they do it? The paper seems to doubt that they will have the ticker.

The most likely cab off the rank, I think, is an increase in the GST, one that has been bruited about for a while. That has the useful advantages that the States and Territories share in the receipts automatically, and that we all contribute. There will be those suggesting that Ms Rinehart should provide what is needed, but she doesn’t have anything like the amounts that will be required. An increase in income tax is less likely, because it doesn’t possess the advantages of an increase in GST, and it would come as a great shock, given that there have been no such increases for a very long time. Indeed, all we have heard about for yonks are the reductions in income tax that our gracious government has been able to provide. And Australia has, relative to other countries in the OECD, a low-tax regime.

Perhaps the most interesting section in the paper is its quick reference to health-care costs, which it projects to rise by 2 per cent of GDP over the next decade. The cause is not, it says, Australia’s ageing population, but ‘changes to the practice of medicine’. We are taking health more seriously, even men, going to the doctor more often, having more tests and taking more medications. And the machines that are available are better and bigger and more expensive, and we use them more often. We are living longer and have better lives but, as the paper says, ‘someone has to pay for it’.

What is new? The paper is right to say that we have a political culture that politicians must address if we are not to slide into the deficit never-never land. Australia is not the USA, and cannot print money endlessly to deal with trouble now. No more can the USA, really, but the assumption is that the US economy will pick up quickly, and so far it has always done so. But, to repeat, we can’t do that, and sooner or later the Chinese appetite for our raw materials will slacken. When it does, the first casualty will be Australian government revenues.

Who will be the ‘brave leaders’ who step forward to tell us that the rosy days are over? If one of them is Mr Hockey, he needs to remember that much of our welfare system ensures that the middle class suffer no pain, and it is the middle class that will ensure that the Coalition will have a strong vote on election day.





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