States jam ‘mediscare’ into Scummo’s budget black hole

Yesterday we heard from Grattan:

…there have been a notable absence of savings measures in the past two budgets, other than the now almost obligatory measures to extract more efficiencies from the welfare budget.

Budget consolidation has mainly been a revenue story. Revenues have increased by a full 2 per cent of GDP since 2013-14. Growth in income tax receipts through bracket creep, commodity price windfalls and Future Fund earnings are the heroes of this story.

It looks like the record of a government that should take credit for some incremental belt-tightening and (largely) resisting the temptation for cash splashes. But the government wants to lay claim to a bigger legacy. It claims to have set Australia on a path to eliminating net debt by 2030, while giving the largest personal income tax cuts since the Howard government.

This version of the legacy is more fantasy novel than historical account. The government’s steady downward trajectory on debt relies on it achieving ever-growing surpluses building to almost 2 per cent of GDP by 2029-30.

Sounds impressive, especially when you take into account the tax cuts announced in the past two budgets are together worth more than $300 billion over the decade. That’s because these fantasy surpluses are born on the spending side of the budget – payments as a share of GDP are projected to fall by 1.5 per cent of GDP by 2029-30. Achieving such a reduction would require significant falls in spending growth across almost every major spending area, during a period when we know that an ageing population will increase pressures on many components of spending. The Parliamentary Budget Office’s best guess is that ageing could wipe $36 billion off the bottom line by 2028-29.

This is the problem with attempting to create a legacy in the medium-term estimates – these aren’t intended to predict what the budget would actually look like under the current government in a decade. The medium-term estimates assume a world of steady trend growth and no new spending announcements – other than for infrastructure and pharmaceuticals. To believe these figures you would have to believe the Coalition would contest another three elections without spending an additional dollar.

Hiding behind the medium-term estimates is not just rhetorical flourish. The government has used these estimates to justify substantially boosting the size of its tax cuts for high-income earners from 2022. Take away the optimistic assumptions and its not at all clear these are affordable.

So the ultimate legacy of this government could well be a budget heading back to structural deficit towards the end of the forward estimates. If only they could have been happy with just average.

If the $40b needed budget cost savings measures are plugged in we will get a hit to growth in 2030 of…wait for it…1.5% of GDP. Needless to say, the states are not happy, via the AFR today:

The Treasurers of Victoria, Queensland, Western Australia the ACT and the Northern Territory have written to federal Treasurer Josh Frydenberg calling on him to “confirm that there will be no further funding cuts to hospitals, schools, infrastructure and other essential services that Australians rely on.”

…It notes the forecast $40 billion cut in spending “is more than the Commonwealth’s entire annual contribution to the states and territories for health ($22.8 billion) or education ($21.5 billion) in 2019-20”.

“The Abbott government promised that there would be ‘no cuts to education’ and ‘no cuts to health’ and then in its first budget proposed cuts of $80 billion from school and hospital funding.

This appears to be taking on the dimensions of an election defining issue.

Perhaps politicising the Treasury was not such a good idea after all.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. So the Coalition have fudged the numbers in order to give Tax breaks to the big end of town and low-and-behold they will end up having to pay for it by removing services for the great unwashed?? I, for one, am utterly shocked by this.

    • This has been lib policy at a state and federal level for 30+ yrs. Sell off state / federal income producing assets, cut business taxes, cut personal taxes at the top end, and when you hit a budget hole cut welfare and gov services.

  2. proofreadersMEMBER

    “Perhaps politicising the Treasury was not such a good idea after all.”

    Nah, just collateral damage?

  3. SamscoutMEMBER

    It’s a pathetic stunt. Health and education funding are at record levels. The state labor governments are in a mess. Queensland has been destroyed by labor. 40 maternity wards closed.

    • People don’t have the money to make babies anymore. We just import adults from the third world instead.

  4. 2030 is so far away… The estimate is not only way off the actual number and can be considered at this stage an indicative number only.

    How many elections (assuming a full 3 year cycle) away is that?
    At least 3 elections away.

    Isn’t government budgets about choices and what type society / community we want to craft?