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The Budget needs to drop the stinginess and focus on the present

David Bassanese
Wednesday, April 29, 2015

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By David Bassanese

Heading into the next Federal Budget round, the Abbott Government has tried hard to prep the electorate for another likely tight-fisted document by releasing the latest version of the Intergenerational Report (IGR).

The IGR has been heavily criticised for being an overly politically crafted document – so much so that even its chief spokesmen – Dr. Karl Kruszelnicki – has distanced himself from it. Despite multi-million dollar ads still running around the country, Dr Karl has said he “deeply regrets” his involvement and will donate his fees to charity.

Even Treasury has seemingly washed its hands of the report, with officials claiming it was produced “by the Government.”

Yet how bad is the IGR really? And what does it really say about out longer-term fiscal outlook?

To my mind, the various projections in the IGR are not unreasonable. But the Government seems to have really gone overboard worrying about tomorrow to the detriment of today.

For starters, the IGR provides a “previous policy” scenario which shows fiscal projections based on all government policies in place prior to the detested 2014-15 Budget.

The political manipulation was for Government members to suggest - when spruiking the IGR publically - that this represented “Labor’s policy”, as if to suggest any future Labor Government would not do a thing to tackle budget challenges.

The second scenario was the fiscal outlook based on “currently legislated” policies – or those measures in the 2014-15 Budget that managed to be passed by the Senate, or did not need its approval.

The third and final scenario was that based on “proposed policy” – or what the Budget would look like in 40 years time if all the 2014-15 Budget measures were implemented.

So how bad does the Budget look? The general public impression is that population ageing will cause a surge in unproductive elderly Australians that could bankrupt the State by running up a huge pension bill. Yet it turns out the projected increase in pension costs is quite modest indeed.

 Payments for pensions are currently worth around 2.9% of gross domestic product (GDP), and based on currently legislated policies will rise to 3.6% of GDP by 2054-55 – or by less than 1% of GDP. In fact, if the Government had its way and all its policies from the 2014-15 Budget were implemented, spending on pensions would actually fall over the next forty years to only 2.7% of GDP.

Note, moreover, this still allows for around 67% of those of pension age to still receive some pension in 40 years time - only slightly down on the 70% of elderly Australians today.

Health care spending is a bigger problem. Spending in this area is projected to rise – from around 4.2% of GDP today to around 5.7% of GDP based on current policies. But the Government’s outstanding policy measures it wants the Senate to pass will only scale back this cost to 5.5% of GDP by 2054-55. So the Government is wearing a lot of political pain for relatively little long-run gain.

Note, moreover, the National Disability Scheme is not the huge drain widely assumed. Net cost to the Federal Government will rise to around 0.8% of GDP by 2054-55 (75% of the 1.1% of GDP cost).

All up, based on current policies the Government projects the underlying Budget deficit will reach 6% of GDP by 2054-55 – which in large part reflects the accumulation of interest payments due to rising net debt. Net debt to GDP will reach 60% of GDP – not great but not too bad either (as the Prime Minister himself has suggested).

But if all the Government’s 2014-15 Budget measures were passed, the budget would in fact move to an underlying surplus of 0.5% of GDP by 2054-55 - and we’d be sitting on net Government assets worth a whopping 15% of GDP.

The Government claims that budgeting for such a large cash pile in 40 years is good, as it would then allow some tax relief or an ability to spend on “productivity enhancing” investments.

But given the weak state of the economy today, and the already desperate need for more infrastructure spending, it begs the question – why are we waiting 40 years?

The Budget outlook on current policies is not great, but the Government’s ambitious proposed policies seem harsher than really needed.

By pushing for such tough Budget measures – which make the Budget much healthier than it really needs to be – the Government seems to have unnecessarily over reached, and should be focusing more on present needs.

Published: Wednesday, April 29, 2015

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