By Greg Jericho Wednesday 27 August 2014
Photo: The Government's confused and overblown rhetoric on the budget didn't help the sales pitch. (AAP: Lukas Coch)
There is still time for the Government to frame the budget discussion around the medium to long-term rather than the present "emergency" rhetoric it has used, writes Greg Jericho.
It's August and yet the May budget is still in play. In a practical sense this isn't much of an issue - the supply bills have passed so there are no concerns about the Government running out of money in the next few months ala 1975.
But it has led to some rather tangled footwork from the Government over the past couple of weeks to explain what is going on.
The budget message couldn't even stay straight for one week. Last Monday, for example, we had Trade Minster Andrew Robb suggesting the current Senate shenanigans over budget measures would "affect the perception of sovereign risk in Australia". By Wednesday, however, Treasury released figures showing most of the savings measures over the next four years have already been legislated - so no crisis at all, apparently.
The problem of course was the long lead-up to the budget was filled with budget emergency talk, and then when it was delivered it was found that the emergency really only was to arrive after the next election.
Selling a budget is hard enough without doing it by lying. The budget was never in such a state that massive cuts needed to occur now. What was always the issue was the structural deficit - and that was also going to be a medium to long-term issue.
And that is what was mostly addressed with the 2014-15 budget. Some of the cuts, such as those to schools, are put off so far into the future they didn't even register in the budget papers. Others, like changes to the aged pension, don't kick in for three years and come after an election during which time who knows what may be promised.
Unfortunately for Joe Hockey he used the Costello 1996 rhetoric, forgetting that in 1996 Australia's GDP was growing by about 4 per cent per annum; by contrast Australia's GDP is now running at slightly below the long-term trend rate of 3.2 per cent, and is expected to fall below that rate when the June quarter figures are released next week.
Cutting severely now would have been idiotic. As the RBA governor, Glenn Stevens, told the House economics committee last week, "the economy does not really warrant draconian fiscal tightening right now".
Governor Stevens went on to suggest that the issue was in the medium to long term, noting:
In the medium term ... we as a community have decided we want to do some very big, very costly and very good things in the public space, but we have not actually taken the decisions that secure the funding for those things, so far as I can see. That is not catastrophic today, but it is going to be a medium-term issue if we do not address it.
He argued that if we put it off for years, "we would get away with that for a while, but then we will find that the day will come and it will be much harder."
He noted the cost of putting it off is that "you do get really draconian measures almost forced on you".
Governor Stevens' line was so logical that even the Government realised they should start using it. Thus on Monday, Barnaby Joyce told ABC's AM program:
We either accept that we've got a debt problem and we've got to turn it around or we basically say 'no, this is only a small melanoma on our arm and if we just wait long enough, it'll go away'. No, as a financial melanoma, it will kill you.
As ever with Joyce, however, his line that "it will kill you" over-egged the situation, as did his suggestion that if we don't start consolidating the budget now "in five or 10 or 15 years time, the chickens will come home to roost and we'll be closing down hospitals, we won't have an ABC, we won't be able to defend ourselves because we will have run out of money".
The Australian Government is not about to run out of money. At worst our debt will rise, credit agencies may downgrade our rating and the interest rate we pay on our debt rises. This is not something to welcome, but given this Government got into trouble selling the budget due to language that it couldn't back up, Joyce might be best to rein it in a bit.
The Parliamentary Budget Office (PBO) late last week also assisted the Government by releasing its report on projections of government spending over the medium term.
It showed that the Government's measures did reduce spending, but that spending in areas like aged care, pension and higher education would continue to rise in real terms - just by not as much.
The report found that the program with the biggest growth from 2012-13 to 2024-25 was the Government's paid parental leave scheme:
Embed: Annual Real Growth in Government Expenditure
But mostly that is because it comes off a very low base, and because the much more costly NDIS is not counted (because there wasn't one in 2012-13).
But in the years till 2024-25, the NDIS comes second only to GST transfer payments to the states in terms of share of total growth in government spending:
Embed: Share of total growth of government expenditure to 2024-25
Just 3 per cent of the growth in Government spending to 2024-25 is accounted for by the PPL - the same amount as is expected to come from increased spending on Disability Support Pensions (DSP).
With regards DSP, the PBO report shows the impact of the proposed tightening of eligibility is negligible. While the growth in DSP spending will be less due to measures in the May budget, the decline is overwhelmingly due to changing the indexation to CPI rather than the current indexing by the highest of CPI, male total average weekly earnings, or the Pensioner and Beneficiary Cost of Living index.
Embed: Annual Growth in Disability Support Pension Expenditure
Regardless of the budget measures, the PBO notes from 2017-18 there will be an increase in the growth of spending on the DSP - purely because this is when the eligibility age for the Age Pension begins to increase from 65 years to 67 years. This is expected to see an "increase in the flow of people to the DSP within this age cohort".
As I noted in March the trend increase in DSP numbers is not so much due to bludgers on welfare, as it is the ageing population.
Similarly with aged pensions spending growth will be less, such that by 2024-25 the PBO expects government expenditure on the Age Pension to be $67.9 billion as opposed to $74.8 billion were the indexation not changed.
Embed: Annual growth in aged pension expenditure
Of course because the report only looks at budget decisions, it doesn't look at the impact on the budget of other areas of aged spending such as the growth in tax concession on superannuation.
The report suggests government spending in the medium term does need to be constrained, otherwise a greater increase in taxation would be required. It argues that the risks ahead, however, "reinforce the need for fiscal consolidation in order to establish a fiscal buffer against the possibility of adverse economic shocks".
And certainly that is prudent and wise. But the PBO only looks at the impact of the measures on spending in total terms - it doesn't make any judgement on which households will shoulder most of the burden of these cuts, nor whether similar - or more efficient or equitable - savings could have been made through other measures.
There is always more than one way to cut a budget. The Government's confused and overblown rhetoric on the urgency and reasons for the cuts it made has seen voters judge the budget harshly rather than perhaps in the light that either the PBO or the RBA governor might view it.
There is still time for the Government to frame the discussion around the medium to long-term rather than the present "emergency" rhetoric it has used.
But that still doesn't address the fairness aspect; for that it needs more that the PBO and the RBA's help - it needs new policies.
Greg Jericho writes weekly for The Drum. His blog can be found here. View his full profile here.
There's still time to talk their way out of it - The Drum (Australian Broadcasting Corporation)
