Federal Budget emergency a false alarm, prominent economists tell CEDA

The Federal Government has "talked itself into a budget emergency" but its tough love budget and the National Commission of Audit have provided the chance for some much needed economic spring cleaning, a CEDA forum in Perth has heard.

The forum, led by prominent economists Bank of America Merrill Lynch Chief Economist, Saul Eslake, BT Financial Group Chief Economist, Dr Christopher Caton and IBISWorld Founder and Chairman, Phil Ruthven, heard that the National Commission of Audit failed to establish that the government debt was in crisis.

"I don't think they convincingly established the case that Australia is facing a budget emergency," Mr Eslake said.

"After all, on their own business as usual scenario net debt by 2023-24 would reach 17 per cent of GDP.

"Now that compares with just over 18 per cent of GDP when John Howard came to office in 1996, it compares with an average of all advanced economies of 73.5 per cent of GDP, which I'm not suggesting we hold up as a benchmark or an aspirational target, but nor is it one that would keep me or anyone else awake at night."

The forum heard rather than being in crisis, the "set and forget" budget position was declining in the medium term due to the falling labour participation rate and age-related budgetary pressures, including a rapidly rising health budget.

Australia would also need to focus on improving productivity into the future, the forum heard.

Dr Caton said Australia had raised living standards in Australia over the past decade through the "kindness of strangers" - by selling them goods at a higher price than we buy them and borrowing at a low price.

Australia had also increased the labour force participation rate with women returning to the workforce after having children, Dr Caton said.
These growth strategies were no longer available with the labour force participation rate falling and the terms of trade declining, he said.

The forum heard that while the Commission of Audit had produced good ideas, it had focused too much on spending cuts rather than broadening the tax base.

Reforming the taxation system by reducing negative gearing, means testing the seniors card and family tax benefits, taxing trusts as companies and rebalancing some superannuation tax concessions, would have been more beneficial than introducing a deficit levy and cutting spending, the forum heard.

"I would rather have seen a 2.5 per cent increase in the GST and exemptions removed," Mr Ruthven said.

"That brings us right back to a balanced budget within two to two and a half years - then get on with business.

"A number of areas did make sense - removing subsidies to businesses that are dying. I've always regarded those subsidies as fiscal morphine.

"In other words they are not going to recover the patient but they are going to give it a peaceful death and we've seen that in the car industry.

"We would have been better to have put that money - $30 billion over the past 10 years -into the growing industries where you'll create more jobs and more wealth."
With China expected to have 112 million outbound tourists by 2020, tourism, not agriculture, was likely to be Australia's main single source of export receipts over the next decade, Mr Ruthven said.

"If we got 20 per cent of the Chinese tourists, which shouldn't be too difficult to achieve, it would almost take us to (the equivalent of) mining export receipts," he said.

Yet Australia would also need significant cultural change to provide a more welcoming attitude to tourists and foreign investors in the agricultural sector, the forum heard.