Opinion article

Budget deficit: time to fix the problem

Following CEDA's release of its research Deficit to balance: budget repair options, Dr John Edwards discusses the urgent need to reduce the deficit.

Beginning with CEDA National chairman Paul McClintock’s address to the National Press Club at the end of March and concluding with a lunch in Brisbane on 19 April, CEDA has now offered its case for the urgency of federal budget repair across the country. Everywhere, from the talk to national reporters in Canberra through lunch time presentations in Sydney, Melbourne, Adelaide and Brisbane, the message has been the same: the federal budget deficit is a grave problem, but one we can fix.

CEDA’s decision to address the deficit issue arose from a meeting of the National Board of CEDA in September last year. Concerned by the continuing deficits, shocked that the problem was getting so little public attention, the board resolved to create an expert Balanced Budget Commission to research the problem and present solutions.

The Commission members included secretaries of the Department of Prime Minister and Cabinet, former high officials from state governments and economists with policy experience. Over several meetings the Commission chaired by Paul McClintock agreed the deficit was a grave problem. It also recommended a remedy, of which more below.

As CEDA’s document Deficit to Balance: budget repair options explains, the federal government has now been in deficit for eight years and expects to be in deficit for at least another four. Australia has of course run deficits before, but after economic slumps – notably the recession of 1981-82 and the recession of 1991-92. And even so, the deficits were in the earlier case eliminated in five years and in the later case seven years.

Today’s deficits have been running longer, and compared to GDP will soon be bigger than the combined total of both of those previous deficits. Yes Australia is now in the 25th year of an uninterrupted expansion. It’s true that the government spent big in the immediate aftermath of the 2008 Global Financial Crisis, but that was eight years ago. Like all deficit episodes, this one sends the bill for a share of today’s government spending on health, education, defence and social security to the next generation of taxpayers. It is, as Mr McClintock told the NPC, as much a moral issue as an economic one.

The longer the deficit continues the more debt the Commonwealth owes, and the bigger the interest bill. Within a year or two Commonwealth net debt will reach a new record high.

It’s true that Australia’s deficits are less than those of say the UK or the United States or many European nations. But when we take public debt interest into account, that is not necessarily so.

Putting aside public debt interest payments so we get a more accurate picture of how current revenue compares to current spending on health, education, pensions, defence and so forth, Australia’s national fiscal deficit is according to the recent IMF Fiscal Monitor quite formidable.

At 1.4 per cent of GDP Australia’s national fiscal deficit is pretty close to that of the US (1.8 per cent) and the UK (1.6 per cent). It’s a bigger deficit that Spain (0.9 per cent) or Greece (0.6 per cent, in 2015). It’s well above Ireland, Iceland and Italy, all of whom were hit hard by the GFC, and all of whom are now running substantial surpluses when public debt interest is excluded.

What to do about it?

The CEDA Balanced Budget Commission took the simple and straightforward approach of looking for express or implied agreements in Australian politics over the last decade or two.

It noted there was almost universal agreement that the Commonwealth budget should be balanced, on average or over the economic cycle.

It noted that both major political parties when in government have nominated a federal tax cap of 23.9 per cent of GDP. This was the cap used by Treasurer’s Costello, Swan, and Hockey, and it was most recently confirmed in Scott Morrison’s Mid Year Economic and Fiscal Outlook.

It is also, as it happens, the average tax to GDP share of the years between the introduction of the goods and service tax and the GFC. So a federal tax share of 23.9 per cent of GDP is something the major parties agree upon, and the Australian electorate has come to accept. Non tax Commonwealth revenue is usually around 1.6 per cent of GDP.

The arithmetic is then straightforward. If we want the Commonwealth budget to be balanced and with a tax share of GDP no more than 23.9 per cent, spending has to be constrained to 25.5 per cent of GDP. That is the core of the CEDA solution.

The Commission decided to propose achieving balance in 2018-2019. The government’s published budget estimates for that year (with an allowance made for included spending cuts which are unlikely to be agreed by the Senate) shows that to achieve balance in that year with tax at 23.9 per cent of GDP and spending at 25.5 per cent of GDP we need $15 billion in additional tax, and $2 billion in spending cuts.

Having identified the method and the overall numbers, the Commission then proposed a set of options for raising the additional tax and making the spending cuts. They are all specified in the document. We chose measures which were part of the public debate, which would we thought be broadly acceptable given the gravity of the problem, and which if adopted by a government of one major political party were unlikely to be reversed by a succeeding government from the other major political party. Readers can make their own decision about how far we have succeeded in meeting those tests.

Has the CEDA document and the CEDA presentations on this issue made a difference? Well, let’s see.

Already I think there are plenty of signs that addressing the deficit is a more pertinent issue in Australian politics than it was a few months ago.

Preparing for an election campaign, both the government and the opposition seem to recognise that whatever else they present, they also need to have a plausible plan to deal with the deficit. The next few months will tell.

Read Deficit to balance: budget repair options .

Watch highlights from the National Press Club Address by CEDA National Chairman Paul McClintock AO.

About the authors

John Edwards

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Dr John Edwards is an economist who is a member of the CEDA Board of Directors, Board of the Reserve Bank of Australia, Visiting Fellow at the Lowy Institute for International Policy and Adjunct Professor at the John Curtin Institute for Public Policy at Curtin University. In January 2012, he was appointed one of three members of the Australian Government's Review of the Fair Work Act. Read more about Dr Edwards.