Tighten your belts Australia, we can’t spare the fiscal flab
A donut here. A missed gym session there. We’ve all done it.
Too many calories in and not enough out. Over time, the weight starts to creep up and boom: you’re overweight.
It’s the same with the federal budget.
A decade of excessive spending and not enough tax reform has finally caught up with us, leading to an unsightly blowout in Wayne Swan’s budget bottom line. It’s our very own battle with the budget bulge.
The United States has the “fiscal cliff”. In Australia, we need to fight the “fiscal flab”.
Two veteran budget forecasting groups, Deloitte Access Economics and Macroeconomics, have now delivered their verdict on Swan’s mid-year budget update: It’s codswallop.
The federal budget is not in surplus by $1.1 billion this year but in deficit by $4.2 billion according to Deloitte and $7 billion according to Macroeconomics.
Both forecasters think Treasury has overestimated the revenue that will flow in the door from the China boom.
Of course, there’s no guarantee they’re right, either. All budget forecasts make assumptions about the future that may not come to pass.
But slim surplus or slim deficit, its clear Australia is suffering the same fiscal flab most governments around the world are struggling with.
Left to their own devices, politicians will blow out the bottom line just as we as a society have blown our waist lines.
Just as we prefer to stay on the couch and eat burgers and chips, politicians would prefer to spend lots of money and cut taxes. It’s the easy way. But it catches up with you in the end.
And just as old age makes us less mobile and more inclined to pack on the pounds, the ageing of the population will add to the strain on the budget body. Lower tax revenue from a smaller working aged population and higher spending on the elderly is about to throw our budget house into disorder.
As Deloitte’s Chris Richardson says, even if we do get into surplus this year “It’s a temporary respite. An ageing population and relatively rapid health cost growth threaten the longer term health of the Budget. The Budget – Australia’s national compact – remains in trouble.”
Of course, Americans do everything bigger.
In the US, excessive spending on national defence and generous tax cuts have helped blown out combined government debt to $US16 trillion.
Earlier this year, US Congress approved massive spending cuts and tax hikes in an attempt to trim the fat.
But as this “fiscal cliff” looms on December 31, its clear this approach to budget debt management is like a bulimic trying to purge their way to good health. It’s too much, too soon, and it’s too much of a shock to the body.
What all governments need to do is start making small, incremental but permanent lifestyle changes to reduce spending and reform the tax base.
It’s like weight loss – cut your calorie intake and increase your exercise and, over time, you’re sure to cut the fat.
In Australia, Swan must stick to his determination to get the budget into surplus. If the economy looks like its cooling too much, the Reserve Bank has ample room to respond with lower interest rates. This would help take some of the pressure off the Australian dollar.
But our politicians on both sides of the political fence are addicted to the sugary sweet effect on voters of budget spending and tax cuts.
According to Macroeconomics’ Stephen Anthony, a former Treasury official, the Rudd and Gillard governments have announced $120 billion of net discretionary spending, including $70 billion during the global financial crisis.
The Gillard government has gone some way to trim the fat by means testing the private health insurance rebate and cutting the baby bonus for second and subsequent children.
But it also has massive unfunded promises on the books, like funding Gonski education reforms and establishing a National Disability Insurance Scheme.
But it’s not just Labor.
The Howard government must bear responsibility for blowing much of the proceeds of the mining boom on tax cuts and wasteful spending on non-means tested handouts.
Abbott and Hockey have their own battle with the budget bulge, promising to axe the carbon and mining taxes while keeping tax cuts linked to them.
As any successful dieter knows, you can afford to eat big one day only if you are prepared to go extra hard in the gym the next.
But neither side of politics is working up the momentum for proper tax reform to abolish inefficient taxes and increase the big muscles of the GST or mining tax.
Higher taxes or lower spending: hard choices must be made.
We too must stop expecting things of government that it can’t afford to provide. When surveyed, Australians say we want both lower taxes and more spending on health, education and roads.
The fight against fiscal flab must start with us too.
Email: email@example.com Twitter: @Jess_Irvine
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