Opinion article

Budget 2016: Wishin' and hopin' won't deliver surplus

CEDA Chief Executive Professor the Hon. Stephen Martin discusses if the 2016 Federal Budget reduces the deficit.

The Federal Budget is built on a house of cards and while it introduces some positive measures, the deficit still looms large and there continues to be no credible plan to return to surplus.

CEDA’s March report, Deficit to balance: budget repair options, sets out a realistic path to surplus that could be achieved by 2018-19.

While some of the revenue raising measures suggested in our report have been taken up, unfortunately that revenue is not being used to tackle the deficit.

It seems that there is no longer a budget emergency, notwithstanding the ballooning level of debt far above the figure that triggered this description by the Abbott government in 2013.

On the evidence on Tuesday night, tackling the budget deficit is a low priority – except the problem is the Reserve Bank of Australia (RBA) rate cut this week would suggest otherwise.

The RBA decision to lower interest rates shows it is concerned about the economy – it shows our economy is vulnerable. If there was a global economic shock tomorrow, Australia is not in the position it was in 2007-08 when government could spend to help insulate its worst effects.

Unfortunately, the Budget does not reflect this growing concern about this evident weakness. In fact, quite the opposite.

The economic growth assumptions underpinning the Budget forecasts are way too optimistic and unrealistic – a senior Treasury official acknowledged at a CEDA event only earlier this year that they are poor at forecasting in uncertain times.

Is a revised downward GDP growth rate really expected to leap back? Is unemployment really going to be 5.7 per cent when resource states are already feeling the pinch and regional unemployment numbers are much higher?

While the Government’s forecast timeline for return to surplus hasn’t been pushed out further from the Mid-Year Economic and Fiscal Outlook (MYEFO), the economic plan mapped out by government to return to surplus remains like the lyrics from a Dusty Springfield song – wishin’ and a hopin’.

Without a genuine economic plan that takes some hard decisions outside the electoral cycle the deficit is likely to continue for many more years than forecast and potentially threaten our Triple A credit rating.

The Budget papers finally acknowledge there is a revenue problem stating that “lower-than-expected taxation receipts remains a major challenge…and underlines the importance of continued spending restraint”, yet this hasn’t translated into action nor does it appear that this has been factored into the path to surplus, in fact spending has increased.

Despite the announcement of major spending reduction policies such as achieving efficiencies in the public service, government expenditure is estimated to grow by $20 billion to $445 billion in 2016-17.

Expenditure as a share of GDP is expected to remain the same in 2016-17 at 25.8 per cent and while it is forecast to drop over the forward estimates, the decline will be slower than forecast just six months ago at MYEFO.

A number of the other measures in the Budget also appear to be piecemeal. The Government’s small attempt to address bracket creep through the tax reduction for those earning more than $80,000 is recognising the problem but a little pointless.

Bracket creep does need to be addressed through a comprehensive tax reform package but after the deficit has been removed.

Superannuation concession reductions, lifting the tobacco excise and tackling multinational tax avoidance are all good measures that could help reduce the deficit and have been previously recommended by CEDA. However, most of the revenue raised through these measures is being spent rather than being used to tackle the Budget deficit.

The other concerning factor is that if the deficit isn’t the Government’s priority then the focus needed to be on growing the economy.

However, measures to grow the economy, such as the company tax rate reductions, are limited and often slow to trickle out, meaning there will be little impact in the next few years when we need it most.

By not addressing the deficit problem the Government is leaving our economy very exposed.

We’ve managed to return to surplus relatively quickly in the past, even after recessions. This time, there’s no recession but we’re struggling to return to balance – there is no excuse.

We have had more than a quarter century of economic expansion yet we are now in the eighth year of Federal Budget deficit with four more to go – to be running a deficit in this part of the economic cycle is quite frankly ridiculous.

One of the comments that I have been hearing about the Federal Budget is that is lacks the infrastructure spending boost that we need, but that this is unsurprising because it wouldn’t be possible without pushing out the deficit further.

This is a clear example of how deficits reduce Government spending options and the Government’s failure to deliver a credible economic plan to surplus means we are only going to see more of the same, and most likely for much longer than forecast.

About the authors

Stephen Martin

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Professor the Hon. Stephen Martin
Chief Executive, CEDA

Professor the Hon. Stephen Martin has had a long and distinguished background in the Australian Parliament, academia and the private sector.

Read more about Professor the Hon. Stephen Martin.