No. 100

STONE the crows! All of a sudden the devilry is out of deficits.

Bob Gregory and Peter Sheehan are arguing that things have changed since the Budget estimates were adopted, that GDP and unemployment are not growing as expected and now is not the time for the government to be looking to balance the budget.

It’s only temporary mind, until the tax revenues from all the enormous investment in minerals and energy projects now being made kick in. But just for the moment, “it is no longer appropriate for the Australian government to pursue a budget surplus in 2012-13. It should move away from this target and adopt a much less restrictive fiscal policy more supportive of economic growth.” [i]

The astute David Uren agrees:

The time for big spending cuts was in last year’s budget or, better yet, in the Treasurer’s first budget in 2008. With unemployment already rising, there is a risk that cutbacks could entrench a downturn. [ii]

The argument would make even more sense if unemployment had not dropped last week slightly to a seasonally adjusted 5.2 per cent in the month to 10 October yet who are the Crows to quibble?[iii]

Even the less dry than economically arid Alan Mitchell argue that while a return to surplus is essential getting the permanent spending cuts to secure it matter more than the year it occurs in: “The quality of the measures to repair the budget is more important than whether the budget returns to surplus next year or the year after, or even the year after that. [iv]

Granted, the Crows can’t help wondering whether accepting a deficit one year sets a precedent for Canberra keeping in the red indefinitely, while always promising a return to surplus when quality cuts are sorted out.

After all, there are more votes in spending than surpluses. There are always good causes to fund with increased discretionary spending, which added on to unavoidable fixed costs give governments an easy explanation of why it is important to return the deficit to surplus, just not now.

We saw an excellent example of virtuous spending without regard to economic impact this week when the Prime Minister committed the Commonwealth to chipping in $2bn over seven years for poorly paid care workers on agency payrolls which are funded by Canberra. [v]

It is hard to argue with the emotion – the decision covers 150,000 workers who do difficult and demanding jobs for bugger-all. The Prime Minister made the case for the increase, pointing to tertiary qualified workers with five staff earning $38,000 for year. [vi] And the way its advocates point to 80 per cent of beneficiaries being women makes it hard to argue with – nobody wants to argue for a status quo that seems sexist.

But there are problems with the decision that demonstrate the damage well-meaning reforms that are budget blind can do.

While the Crows might be missing something, is this not pattern bargaining where an industry-wide increase is negotiated, regardless of circumstances and comparative productivity in different firms and agencies across an industry, which the Government argues is outlawed under its Fair Work legislation? [vii]

Public sector union chiefs will use it to manipulate the Fair Work system, making productivity irrelevant to wage claims. The Australian Nursing Federation is already in on the act, demanding the deal extend to aged care nurses. “The Government must be consistent here, if it is serious about assisting low paid workers, particularly women, then it has to include those working in the aged care sector,” says ANF Federal Secretary Lee Thomas.

And why not? Without the discipline of a surplus borrowing the $500 million Ms Thomas says this will cost is not worth worrying about. [viii]

But it is, as the OECD explained last week in a paper showing how welfare spending has grown over the last 20 years. Between 1980 and 2007, OECD members increased public social expenditure from 15.6 per cent of GDP to 19.2 per cent, with health and pensions accounting for most of the outlays.

And this is not all the work of the extravagant Europeans, once different tax treatments and private benefit spending are accounted for – outlays in UK, Japan and Europe are much the same. Perhaps, surprisingly for all who assume the US is a plutocracy where all but bankers are under-privileged, the Yanks spend around the same as everybody else.[ix]

But our expenditure is increasing faster than just about everybody else, including the US.

Taking 1990 as a baseline, US real health and welfare spending doubled by 2007 while GDP was up 65 per cent. In the EU, the increase in outlays was 85 per cent while GDP grew at the same rate as the US. In contrast, our spending was up 110 per cent, supported by an 80 per cent rise in GDP.

Admittedly, a good deal of the increases comes from the inclusion of information on public servant superannuation in the data in the middle 1990s and retiree savings concessions and family tax benefits in the last decade.[x]

There is comparatively good news in the data. Compared to the Japan we have expenditure under control. On a 1990 baseline of 100, Tokyo’s social spending went to 205 in 2007 while GDP rose to a touch over 120. And while our 2007 health spending (8.3 per cent of GDP) was well over the OECD average (6 per cent) Australia’s pension spend was close to average (7.4 per cent here compared to 7 per cent of GDP overall).[xi]

And while the tests may be generous, at least we make an effort at targeting welfare spending. Australia has the highest percentage of health and pension outlays in income tested programs in the OECD. (However the Europeans are not as profligate as appears, taxing welfare benefits.)[xii]

Good, but not good enough. An ageing population and the inevitability of a slowing economy as the rate of increase in Asian demand for minerals and energy exports comes off we have to slow spending, less demand for pensions and healthcare crowd out every other public service.

According to the 2010 Intergenerational Report total age related health and welfare spending is set to rise by 4.75 per cent of GDP, to 27.1 per cent between 2015-16 and the middle of the century a $60bn increase in current dollars. [xiii]

And it is not just demographics doing this there is always a demand for new spending on improved services. As Treasury points out, PBS spending on new drugs rose by well over $1bn in the last decade or so. [xiv]

There will always be new drugs, new pressure for improved assistance for the old and the indigent and new wage demands from workers in the health and welfare sector.

And the only way to stop them overwhelming government is for the budget to be kept in surplus over three to five years – which means only adopting increases in recurrent spending that are paid for in the present

On Friday the Prime Minister came as close as she is likely to guaranteeing a surplus budget:

Have no doubt: the Government will hold our fiscal discipline.

It is vital at a time of heightened global instability and intense market scrutiny of high sovereign debt levels.

The recent turbulence in global markets is due in very large part to the failure of too many Governments around the world to develop and then deliver credible fiscal paths back to surplus.

We won’t make that mistake. [xv]

The Crows hopes she doesn’t. In an era of ever-increasing demands from an ageing population that are politically impossible to ignore and others, like paying welfare workers more that are very hard to reject, every budget deficit is a step down the European road, the one that ends at Athens.

ENDNOTES


[i] Bob Gregory and Peter Sheehan, “The resources boom and macroeconomic policy in Australia,” Centre for Strategic Economic Studies, Victoria University, November 2011 @ http://cfses.com/documents/AER_No_1-Executive_Summary.pdf recovered on November 12

[ii] David Uren, “Cuts now will imperil economy,” The Australian, November 8

[iii] Australian Bureau of Statistics, “Labour force Australia, October 2011,” November 10 @ www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0 recovered on November 12

[iv] Alan Mitchell, “It’s quality that counts,” Australian Financial Review, November 9

[v] Ben Packham, “Low earning community sector workers set for pay boost under Labor equal pay push,” The Australian, November 10

[vi] Ben Schneiders, “20% wage boost for low-paid workers,” The Age, November 10

[vii] Brad Norington, “Pattern bargaining is out: Gillard,” The Australian December 9 2008

[viii] Australian Nursing Federation, “Aged care workers must be included in wage claim,” November 10 @ www.anf.org.au/html/media/news_media_111111.pdf recovered on November 12

[ix] OECD Directorate for Employment, Labour and Social Affairs, “Social, employment and migration working papers,” @ www.oecd.org/els/workingpapers 3 recovered on November 12

[x] OECD op cit 12

[xi] OECD op cit 12, 17

[xii] OECD op cit, 19, 26

[xiii] Treasury, “Intergenerational report 2010: ageing pressures and spending,” @ www.treasury.gov.au/igr/igr2010/report/html/05_Chapter_4_Ageing_pressures_and_spending.asp

[xiv] Intergen report ibid

[xv] Julia Gillard, “Address to the Business Council of Australia Annual Dinner,” November 11 @ www.pm.gov.au/press-office/address-business-council-australia-annual-dinner-sydney recovered on November 12

'2012