Finally, a mainstream commentator – Jessica Irvine – has nailed the dilemma facing the Federal Budget, irrespective of who wins office in the upcoming election. From News.com.au:
Australia’s economic party is well and truly over.
…Our once in a century mining boom is at an end and we have precious little to show for it.
Labor’s plan to return the budget to a slim surplus of $800 million in 2015-16 and $6.6 billion in 2016-17 is little more than a pipedream, if the success of previous forecasts holds true.
The surpluses are contingent on a sharp turnaround in Australia’s rate of national income growth from 3.25 per cent this financial year 5 per cent the next…These surpluses should be should be taken for what they are: a statement of ambition, rather than a reality…
…Despite appearances to the contrary, Australia’s current budget woes are not all Labor’s fault. The Rudd government inherited a structurally flabby budget from the Howard government, with too many cash handouts and unsustainable tax cuts. The budget would be in surplus today if personal income tax rates had not been cut eight years in a row.
Spot on. As noted earlier today, nominal GDP is the dollar value of what’s produced and earned. It’s also the measure that drives taxation revenue. Nominal GDP grew by just 2.0% in the year to December, far below real GDP growth of 3.1%. While the fall in nominal GDP below real GDP is unusual, having happened only a handful of times since the late-1950s, it has happened twice under the current Labor Government’s watch: during the GFC and currently – both on account of falling commodity prices (see next chart). Looking ahead, nominal GDP growth and, by extension, tax receipts are likely to remain weak as commodity prices and the terms-of-trade continue to decline.
The Howard Government, by contrast, experienced ever growing nominal GDP growth as commodity prices surged, whereby it reaped the benefits of growing personal and company taxes, not to mention increased capital gains taxes as asset markets boomed. It then gave away much of these windfall revenue gains in the form of pre-election bribes and tax cuts, placing the Budget in deficit as soon as the GFC hit and revenues stopped growing. Put simply, Howard’s reign was an easy time to be in government as revenues rose year after year and global economic conditions were benign. The current government has not been so lucky.
Back to Irvine.
Labor should feel rightly proud that its quick spending during the GFC helped to protect jobs. But its mismanagement of critical tax reforms, particularly the mining tax, will be felt by the budget for years to come. Gillard’s back down on the mining tax robbed Australians of a valuable gift, a chance to properly share in the riches of the commodities boom. This budget contains the optimistic assumption that mining tax revenue will grow from just $200 million this financial year, to $2.5 billion in 2016-17.
I’ll believe that when I see it.
Absolutely. Those who deride the Rudd Government’s stimulus in the wake of the GFC fail to recognise the precarious situation facing the global economy and Australia. While some of the expenditure was indeed ill-directed, such as increased subsidies to first home buyers, the stimulus overall did help stave off recession, helped of course by the rebound in the Chinese economy (due to its own stimulus measures).
That said, I also agree with Irvine that the Government has completely stuffed up the implemetation of key policy measures, such as the mining tax, thus wasting an opportunity to place the Budget on a more sustainable footing and set Australia up for the future.
Back to Irvine.
This budget does not solve the underlying structural problems of the budget. Australia’s short term budget crisis is about to link up with the longer term problem of an ageing population. Baby boomers are already beginning to retire. The ageing of the population will mean dwindling tax revenues and spiralling costs from here on in.
Indeed. As argued yesterday, Australia’s dependency ratio – i.e. the ratio of the non-working population, both children (< 20 years old) and the elderly (> 65 years old), to the working aged population – is projected to rise over coming decades as the large baby boomer cohort enters retirement:
Accordingly, the number of workers per dependent is projected to fall:
As is the ratio of employment-to-population:
As such, the Government will have a much smaller pool of workers with whom to collect taxes from, making it much more difficult for the Government to raise the required amount of tax revenue. Furthermore, the higher proportion of retirees and older aged Australians will increase the amount of health and aged-care expenditure, significantly increasing overall Budget outlays.
Back to Irvine:
The task of fixing Australia’s broken budget house will likely fall to an incoming Abbott government.
And if yesterday’s budget was a funeral affair, the Coalition’s first budget will be even more sombre.
Australia’s day of budget reckoning is yet to come.
Households should prepare to feel the pain. Higher taxes or less government spending, you haven’t felt the half of it yet.
Spot on, once again. Without radical reforms to the way taxes are collected and fiscal expenditures, the Federal Budget will remain in deficit for years to come, irrespective of which party is in office.
