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Economy

Speech: National Press Club Address, CEDA Chairman Paul McClintock AO

CEDA Chairman Paul McClintock AO discussed CEDA's research report, Deficit to balance: budget repair options at the National Press Club on 29 March 2016.

Introduction

Firstly, let me acknowledge that we are meeting here on the land of the Ngunnawal peoples and I pay my respects to elders past and present. 

I also want to thank the National Press Club for the invitation to speak today and acknowledge your role, shared by CEDA, in providing a platform for driving discussion and debate of nationally important issues. 

And finally I would like to acknowledge the CEDA Board and Balanced Budget Commission members present, who have contributed to the report that we are releasing today.

A grave fiscal problem

You all know CEDA well – we have been driving policy discussion and debate through research and events across the country for 56 years.

We exist to promote the economic development of Australia, not the interests of our members. We believe that economic development, achieved sustainably and equitably, underpins the social development of our country. 

We do this by selecting topics we believe are key to the economic debate, commissioning research and then releasing it through events organised by our chapters in all mainland states.

So why have we decided to address the issue of fiscal policy so differently, releasing a policy paper – Deficit to Balance: budget repair options – with the endorsement of the CEDA national board and its very distinguished Balanced Budget Commission, and have it presented here by me as the National Chairman?



The answer is twofold. 

Firstly, we believe no economic problem, which is in our power to resolve, is graver or more urgent in Australia than the persistence of large budget deficits.

Secondly, we believe that failure to keep fiscal balance at the centre of economic policy is strangling the effort to design and implement a more appropriate tax policy. 

So, let me explain both.

Australia’s deficit problem is particularly alarming because despite a quarter century of sustained economic expansion, we have had eight years of deficit. 

Under current projections we’ve still got another four years to go.

This is not normal – our total estimated deficits from 2008/9 up to 2018/19 will be nearly as high in GDP terms as those incurred after both the recessions of 1982/3 and 1990/91 put together. And net Commonwealth debt as a percentage of GDP will be unprecedented. 

Despite promises from both major political parties to return to surplus this is yet to eventuate, and on current forecasts achieving sustained surpluses seems unlikely.

In fact, it is astonishing that we are on the cusp of an election campaign and there is so little focus on the deficit.

Perhaps this is because people assume it is going to be fixed based on current forecasts, but our paper reminds us that successive governments have been extremely poor at meeting surplus forecasts and the numbers look no more plausible this time around. 

It also reminds us that the forecast balance in four years’ time is based on the political quicksand of a 20 per cent increase in personal income tax collections in just the first three years, which history tells us will be impossible for our politicians to ignore.

In short we are seeing fiscal strength drain away and the solutions on the table don’t seem credible. 

Clearly the longer deficits continue, the greater the difficulty in returning to surplus.

Prolonged deficit also penalises today’s youth and future generations, who will end up paying for current spending despite Australians being wealthier than they have ever been. 

My generation is five times wealthier than my father’s generation – yet by running deficits during this period of economic expansion we are essentially saying that our increased wealth is not enough and we expect future generations to pay for our spending today. 

This is not just spending the inheritance – it is equivalent to racking up credit card debt and expecting your children or grandchildren to pay it off.

                            

This should be unacceptable and if you are under 30 you should be up in arms telling my generation that the current situation is completely unfair. 

In addition to the impact on future generations, deficit during this time is a huge risk for our economy more generally.

As a player in the global economy, running a large deficit means we don’t have the flexibility to respond to unexpected economic shocks. 
This means political choices to insulate and boost our economy become limited.

Deficit and the resultant interest on debt narrows government spending choices by reducing the Budget pool and diverting money that could otherwise be spent on delivering services and infrastructure.

Just look to the latest Intergenerational Report which shows by fiscal year 2055, the deficit will have increased from a projected base of close to zero to six per cent of GDP. 

Unless we act now the accumulation of interest payments will absorb a significant portion of government spending, reducing the pool available for needed services.

The second part of our reason for arguing the centrality of fiscal policy is its obvious impact on the tax policy debate.

When we decided in September last year to do this report, we were concerned that the tax reform debate was beginning to resemble an under 10s footy match.

The players had long gone from their set positions in pursuit of the elusive ball and now, six months later, there is a growing sense that at half time the referees went home … and quite possibly took the goal posts with them. There also seems to be a lot of balls on the field.

Now we accept that there are many reasons why political leadership is struggling with the long term tax policy issues, and all of them will need to be addressed in time.

But we do argue that the most significant reason undermining this process is that we are starting at the wrong place – the old joke about asking for directions and being told not to start from here comes to mind.

This is because too much of the pain of change is needed to make up for the deficit before any other incentives can be offered in return.

Top quality tax reform is a benefit of strong fiscal policy, and we have a much better chance of community consent to change if we fix the deficit first.

That repair process can also be the basis of getting the community back to an understanding that resources are not unlimited, and that when you reach the maximum level of acceptable revenue raising, that’s what will determine your expenditure – every extra dollar spent over and above GDP growth will need savings or greater tax.

Putting fiscal policy back in the centre also has the advantage that politicians do not need to demonise current programs, or citizens who utilise them.

It is very hard to get consensus if you have to attack the current benefit and its beneficiaries – it is much easier if you can argue that we just have a limited amount of money to go around.

Forming the Commission

In looking at this issue, the CEDA Board noted that the political community agreed that the Budget should be brought back to balance. So we established the Balanced Budget Commission.

The high-level Commission draws together experts from the public sector, academia and the private sector and full details are in our report.

These people were chosen because of significant experience working in economics and policy, having served under governments from both sides, as public servants at the highest level and leading economists.

They were tasked with coming up with options that are realistic and can help bring the Budget back to balance, bearing in mind the requirement to also sustain economic growth.

Taking into consideration Australia’s current position, CEDA went back to the start:

  • What is our fiscal objective? 
  • What are the rules? and;
  • How do we deliver a document that states a way forward which can be applied to the Budget next year and to the policies of the major political parties?

We also applied the overarching principles laid out in sage advice from former Prime Minister John Howard at CEDA’s Annual Dinner in November last year that any options must be practical and fair.

Firstly, the Commission’s approach was to set the parameters. 

The urgency of the issue meant we set fiscal year 2019 as the target date to return to balance – the end of the current forward estimates. 

We can see no benefit in delay unless there is a significant change to our economic performance. This is the first key recommendation.

The next was the “how to get there” and in particular what were the respective roles of revenue and expenditure – for this the Commission looked to history and long run averages.

The average share of tax to GDP in the years between the introduction of the GST in 2000-2001 and the GFC in 2008-9 was close to 23.9 per cent. 

This is consistent with the ceilings adopted by both Coalition and Labor governments and as a result, that’s the tax cap that we have chosen. 

The tax cap of 23.9 per cent is just common sense, as it is the ceiling that has been used by Treasurers Costello, Swan, Hockey and Morrison, the Intergenerational Report and the latest MYEFO and underpins the current government’s plan to return to surplus by 2020-21.

It is practical and not based on any sort of ideology – and because it is the historical average you could argue that it has, as a result, community consensus and acceptance – it is the norm.

Applying a tax cap of 23.9 per cent implies total revenue of 25.5 per cent when you add about 1.6 per cent for non-tax revenue. 

If 25.5 per cent is our total revenue target, then we need to cap expenditure at the same level to balance the budget. These caps on tax and expenditure are our second key recommendation.

Using publicly available data, this translated into the need to raise an additional $15 billion in revenue by fiscal year 2019, and to cut expenditure by $2 billion.

Raising an extra $15 billion is no small amount. While we believe our suggestions have the best chance of gaining community consensus, they won’t be painless.

Nevertheless, you may be wondering whether our focus on the short term fiscal solution, and the acceptance that it will need to rely primarily on increased revenue, appears in some ways to be letting the politicians off the hook on long term structural reform.

On the contrary I would argue that it is about getting us to the strongest starting line for that endeavour.

At the moment I can see another political term drifting past because we haven’t done this and we won’t be any closer to fixing either the deficit or the long term structural problems. 

Perhaps in more benign times we may have accepted this, but we can no longer afford to do so, as even if we balance the books in the short term, section five of our report shows that the long term challenge of maintaining balance remains. 

The latest Intergenerational Report suggests that a deficit could likely reoccur beyond 2019 as expenditure is predicted to grow faster than GDP.

This is where I should say that we see this report as focusing primarily on part one of the solution – unapologetically it focuses more on the revenue side to get us to the tax cap of 23.9 per cent and return us to balance.

However, to maintain balance and ensure the deficit does not reoccur there will also need to be a greater focus on expenditure post fiscal year 2019, part two of the solution. 

I predict that part two will be the much harder task because of its long term nature, its size and this focus on expenditure. 

But I also predict that if we do not respond to the current challenge in the way we are recommending today this task will be immeasurably harder.

Solutions

So the Commission set the balance timetable for fiscal year 2019, and it set tax levels at 23.9 per cent and expenditure levels of 25.5 per cent of GDP – it then developed some options, detailed in section seven of the paper, to see if it could meet the John Howard tests of being practical and fair.

I will start by saying that our numbers are based on a variety of published sources. 

The aim of this exercise is to show that it is possible for the government to balance the Budget with measures that would in most likelihood win community consensus as part of an overall plan to fix the Budget and which may be broadly acceptable to both sides of politics. 

We have selected the numbers and policies from a raft of measures and estimates available to the general public. 

Government and the Opposition – through the Treasury and Parliamentary Budget Office – have obviously got tools to do more precise modelling but we think our figures are definitely in the ballpark.

I also want to again provide a disclaimer that we don’t endorse any particular option – our point is to prove that the goal is attainable – that a fiscal year 2019 balance is entirely reasonable.

So what are the solutions

So we’ve analysed and put forward a number of revenue and expenditure measures that governments can choose from, and for full details I urge you to refer to options in section seven of the report. 

We excluded taxes or savings that were “off the table” for either the government or the opposition – although that is of course a moving feast.

This meant that on the revenue side of the equation, we ruled out higher personal income tax rates and changes to the GST very early on.

Given this, we were left with raising non GST indirect taxes, such as taxes on petrol, alcohol, luxury cars and tobacco, or raising direct taxes by reducing or removing taxation concessions, such as those available for superannuation and investment purposes. 

On the expenditure side, we have measures such as reducing the size of budgetary assistance to industry, improving public sector efficiency and some measures to reduce the growth of health-related costs. 

The report’s options are each designed to provide a practical and fair combination of measures – the first two lean heavily on superannuation, while capital gains tax features to some extent in all of them – as do the limited indirect taxes available. 

We have suggested five different packages, but of course you can all design your own. 

As I remarked earlier, getting back to surplus won’t be painless – some of it will be tough but we have tried to ensure almost all measures proposed will not affect the most disadvantaged in our society.  

In addition, it is important to note that we are not saying that the people who will be losers in implementing such measures deserve it. 

The reality is we do not, at present, have enough money to fund everything that needs to be funded, including important areas such as health which is predicted to grow at a faster rate than the economy in coming decades.

We believe that the series of measures we have put forward are the most palatable and realistic way we can balance the budget in the short term in order to then deal with longer term structural problems. 

In short, I will summarise with these key points from the CEDA report:

We are spending more than we are earning and we’ve been doing it for far too long.

It is taking too long to get rid of the deficit and the current path to fiscal balance proposed by government is not believable.
And while we need broader tax reform, that is best done during periods of fiscal strength.

On a happier note CEDA is here to help and we hope that politicians of all persuasions can use CEDA’s contribution today to recalibrate their approach and their ambitions.

If politicians want to set their sights on doing something useful in the next term – balancing the budget should be it.

Equally while many business organisations are urging powerfully for longer term tax reform, I hope they can support a return to surplus in the short term, so that then we can get to the long term reforms needed with more confidence. 

CEDA’s timing has been chosen because the lead up to the Budget is the time national attention is focused on this issue. 

Hopefully this report will help influence how people assess the coming Budget and inform policies in the next term of government and those put to the electorate over coming months.

The reality is getting community consensus around structural economic reform, such as tax reform, is a long process and it won’t happen in the run up to this election. 

However, getting the deficit under control in the short term will help clear the air to start this important conversation.

 



Check against delivery.

This speech was presented at the National Press Club on 29 March 2016 by CEDA Chairman Paul McClintock AO.

Read and download Deficit to balance: budget repair options here

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