PBO warns again on Budget

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ScreenHunter_3902 Aug. 22 15.25

By Leith van Onselen

The Parliamentary Budget Office (PBO) has issued another warning that that government spending would balloon to nearly $700 billion over the coming decade without reform. From The Australian:

Warning of future economic shocks, the independent agency forecasts a rise in government spending from $384 billion to $682bn over the coming decade as health and education outlays continue to grow.

Federal spending on schools, defence and childcare will continue to grow faster than the economy but the strongest surge will be in Tony Abbott’s paid parental leave scheme, at 12 per cent per year…

The PBO also warns of an “even greater share of the burden” being imposed on Australians through higher taxes, especially personal income tax, and how this leaves the Budget exposed to future shocks, including to commodity prices:

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The budget already assumes a “significant increase” in revenue as tax collections grow from 21.4 per cent of GDP in 2012-13 to 23.9 per cent of GDP in 2019-20.

In an important warning, the PBO concludes that Australians cannot rely on the recovery in tax revenue to balance the budget because of the risk of economic downturns.

It is also worth pointing out that the credit rating agencies (CRAs) have demanded that the government provide a credible path back to surplus, or risk Australia’s AAA rating. While it would be easy to sweep aside the CRAs concerns as being irrelevant, the fact is Australia’s banking system is tied to the sovereign rating, so if Australia is downgraded, then so to are the banks. This raises a whole bunch of issues for bank funding and access to international capital markets, which are fundamental to keeping one half of Australia’s ‘houses and holes’ economy alive.

Hence the need for reforms to both the revenue and expenditure sides of the Budget.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.