30 November 2015
by Jacob Greber

Australia drifting inexorably to bigger government on $120b budget blowout

"We're in this mad world, where the new Treasurer keeps up the old Hockey line that 'Australia does not have a revenue problem' while everyday coming out with new ideas on how to raise revenue.

A top budget expert warns Australia is inexorably drifting towards bigger government because the federal government appears unwilling to curb spending despite tax shortfalls that will contribute to $120 billion of budget deficits over the next four years.

Predicting deficits as far as the eye can see, Deloitte Access Economics partner Chris Richardson blames China's slowdown and falling national income from commodities for 90 per cent of the deterioration, which has worsened the fiscal bottom line by $38 billion since the May budget.

In the mid-year update in a fortnight, Treasurer Scott Morrison will most likely unveil an underlying cash deficit in 2015-16 of $40.3 billion – some $5.2 billion more than foreshadowed in the budget and a significant deterioration from last year's deficit of $37.9 billion, Mr Richardson estimates.

An election in 2016 means the Coalition government is unlikely to make tough and unpopular spending cuts in next year's budget, meaning the deficit will remain at $34.2 billion in 2016-17, he said, followed by shortfalls of $25.8 billion and $19.6 billion across the following two years.

A fresh wave of bad news in the mid-year budget update will return the national focus to the state of the nation's finances, a topic that has been buried in recent months by leadership change, terrorism and foreign investment.

In the latest biannual Deloitte budget monitor, released on Monday, Mr Richardson argues there is an urgent need for a national debate about the sustainability of the budget, as well as what changes to the tax system would mean for prosperity, plus the big social choices facing voters on issues such as the national disability insurance, education and old age pensions.

Proper debate absent
In the absence of a proper debate, Mr Richardson warns, the tendency of the Senate to support spending and tax increases – without ever supporting expenditure cuts – means "we're drifting towards bigger government without consciously making that decision."

While he said Deloitte supports a national disability insurance scheme – expected to cost 1 per cent of GDP when up and running – it should be possible to fund much of that cost plus budget repair from spending cuts.

"After all, the past decade-and-a-bit of policy decisions favoured spending increases over tax cuts by a ratio of four-to-one," he said.

The findings bolster repeated calls by Reserve Bank of Australia governor Glenn Stevens of the need for voters to recognise that while they have told politicians they support extra spending they still haven't yet voted for the extra taxes to fund those choices.

"The longer that spending goes without being addressed, the more likely it is that governments let the tax take creep up over time," Mr Richardson said, in a reference to so-called "bracket creep", in which rising wages push income earners into higher tax brackets.

The latest budget writedowns follow the now familiar script of ever collapsing revenue expectations that have become entrenched since late 2011, when the commodity price boom peaked.

Over the past four years, Treasury has been forced every six months to wipe tens of billions from its revenue predictions because of the falling terms of trade, weaker-than-anticipated company profits and the softest wages growth on record.

Economic growth is expected to remain weak in the year ahead following a dramatic collapse in business investment spending as the resources boom enters its closing stages, with not enough alternative drivers of growth to make up for the drop.

"Don't underestimate how tough this is," Mr Richardson warned. "The budget boom of the past decade continues to become a budget bust."

Double damaged
He estimates that China's slowdown, falling commodity prices and weak wage growth has cut $4.6 billion from revenue in 2015-16, just four months old, with the damage almost doubling to $8 billion in 2016-17.

"While China is cutting revenues, Canberra is still adding to spending," he said, pointing to $67 billion of spending cuts over the next decade that have been marooned in the Senate.

Another bad news budget may renew speculation about the need for even more monetary policy stimulus, particularly if the US Fed delays its first interest rate hike in almost a decade in December, or commodity prices continue to fall.

Reserve Bank board members meet on Tuesday for the last time in 2015, with a so-called shadow board made up of former board members and macroeconomic specialists urging the central bank to remain on hold at 2 per cent.

The shadow board has placed a 22 per cent probability for a rate cut in December, down four percentage points from a month earlier. Six months from now, they have a 60 per cent probability of a rate hike.

"Australia's unemployment rate fell in October from 6.2 per cent to 5.9 per cent, although the accuracy of recent ABS numbers is questionable," said Timo Henckel, chairman of the shadow board. "Employment, both full time and part time, has expanded and the participation rate reversed its recent decline. These are all positive signs."

Shadow treasurer Chris Bowen seized on the pending write-down as making a mockery of the Coalition's promise to turbo charge the economy and deliver surpluses.

"What they've delivered is the opposite with blow out in deficits and growth forecasts that continue to be slashed in every budget update," Mr Bowen said.

"The Abbott-Turnbull budget legacy is deficits blowing out as far as the eye can see, a rising tax burden and spending at GFC levels.

"We're in this mad world, where the new Treasurer keeps up the old Hockey line that 'Australia does not have a revenue problem' while everyday coming out with new ideas on how to raise revenue.