From The Financial Review
In its first budget the Government dabbled with a theme of spending restraint and return to surplus. Then came Senate obstruction and backbench jitters. Now, as the Government prepares its second budget, it is dabbling with a theme of “nothing dramatic”.
This is a mistake. Yes, the Government’s second budget must be different from its first. But the case for spending restraint and a rapid return to surplus is as strong as ever.
This time last year I presented my version of what the budget should look like. Once again, I have a view as to what needs to be done.
Looking back on last year
Last year I proposed an immediate return to surplus, achieved solely through spending cuts. These included: a 10% reduction in the salaries of public servants and politicians; abolishing Family Tax Benefit Part B and the Schoolkids Bonus; freezing other welfare payments; withdrawing the age pension for those with million-dollar-houses; means-testing Medicare; halving higher education subsidies (while retaining higher education loans); and abolishing corporate welfare including funding for the ABC and SBS.
I also proposed a freeze to the minimum wage to promote jobs and growth, which would boost the budget through additional taxation revenue and fewer dole payments.
As it happened, the Government’s budget and my approach had some similarities. But the Government was far too tentative. It didn’t propose an immediate return to surplus and it lacked a clear and simple story of why a surplus was important.
It squibbed on its election commitment to cut 12,000 public servants. It proposed a $5 cut to Medicare subsidies for GPs, but then tried to buy off voters by reserving the potential savings for medical research. It proposed a freeze on only some welfare payments, and meek cuts to higher education subsidies. And the Government merely sought to constrain, rather than abolish, corporate welfare including ABC and SBS funding, and Family Tax Benefit Part B. In short, it was half pregnant.
As a result, Commonwealth Government spending is set to grow rather than fall this financial year, both in real terms and as a share of GDP. Despite the Government seeking to blame falling commodity prices, this addiction to spending is the primary cause of our deficit of more than $40 billion this year and $30 billion next year.
Some may say the Government’s timidity was justified because even its timid spending cuts were blocked in the Senate through the opposition of Labor, the Greens and various cross benchers (but not me, I hasten to add).
But if your bills are going to be blocked, they may as well comprise coherent and consistent legislation that you can take to the next election. And if you’re going to lose the votes of those who believe in the age of entitlement, you may as well take an axe to their entitlements rather than a butter knife.
In the end, most of the Government’s timid spending cuts were passed via annual appropriation bills (the sort of bills that Malcolm Fraser blocked to precipitate Whitlam’s dismissal). This suggests a means by which the budget can be balanced this time.
A new approach — targeting annual appropriations
The legacy of the Whitlam dismissal is that Labor will never block annual appropriation bills. As a consequence the Government could, and in my view should, use these to bring the budget back into surplus.
More than $30 billion of annual savings could be achieved through annual appropriation bills. This would deliver a surplus in the next financial year based on currently available numbers. (If falling commodity prices cause significant damage to next year’s finances, cuts of more than $30 billion would at least reduce the budget deficit to single figures.)
But delivering $30 billion of annual savings through appropriation bills is not straightforward, because only about a third of the Commonwealth Government’s spending is authorised in these bills. In a scandalous disregard for accountability and democracy, most spending enjoys an enduring authority granted by parliaments of the distant past and can only be halted with new legislation. These enduring authorities cover welfare payments, Medicare rebates, university subsidies and the transfer of GST revenue to the States. Labor, the Greens and many of the crossbench would block any attempt to undo these enduring authorities.
So my plan is to cut more than $30 billion out of annual appropriation bills, which usually authorise around $140 billion in spending. This would apply across the breadth of the public service, as indicated:
Stop annual appropriations for: Cuts in spending by ($ billions):
New policy and capital spending (not including defence) 5.3
Foreign aid 4.7
Various Commonwealth healthcare programs (including acute and primary care, mental health, health infrastructure grants and workforce training) 4.4
Healthy lifestyle promotion (not including immunisation) 0.4
Assistance to industry, agriculture and exporters 3.9
Sports (including ASADA), Arts, ABC and SBS, media regulation, phone and call subsidies 3.0
Research (including medical, marine, nuclear, renewable energy, CSIRO and ad hoc ARC grants) 3.0
Indigenous programs 1.9
Ad hoc grants for infrastructure, regions, schools and clean energy
Agencies responsible for human rights, families, gender, Australia Day and Canberra 1.9
10 per cent of Commonwealth public sector pay 3.1
To begin with, I would not allow any spending on new policies or capital equipment (other than defence equipment) in the annual appropriation bills. Typically, more than $5 billion of such spending is unveiled each year. New policies should be thought of as a luxury only available to governments that can live within their means. We don’t have such a government. And capital spending, other than on defence equipment, ought to be the responsibility of State and local government anyway.
I would then cut various existing programs that are not protected by an enduring appropriation.
A good number of these may actually be unconstitutional, given the Commonwealth has no explicit authority in section 51 of the Constitution. In recent times, whenever the High Court has had to rule on the constitutionality of such a program, it has struck it down. But many continue because it is difficult to get the High Court to consider each one and Governments have been content to preserve them in the meantime.
A long line of programs should face the chop
I would cut foreign aid. Aid is a poor diplomatic tool, as indicated by Indonesia’s rejection of Australian Government pleas for clemency for the Bali 9 ringleaders. Apart from the commitment of military and public health resources in response to natural disasters, the Government does not need to be philanthropic on our behalf. Individual Australians who care about conditions in other countries can and should be encouraged to make donations from their own wallets.
I would cut Commonwealth spending on the health bureaucracy, because healthcare is a State responsibility and government support is best provided directly to individuals rather than to health departments and institutions.
I would also cut spending that promotes healthy lifestyles, as how we live is none of the government’s business. I would nonetheless retain spending on immunisation, which provides benefits beyond the individuals who receive the vaccine.
I would cut industry assistance, including for exporters, agriculture, the sports industry, the arts industry, and that part of the broadcasting industry we call the ABC and SBS. This is just corporate welfare for the favoured few.
I would cut government spending on research. It crowds out philanthropic and business support, which would provide greater discipline to the direction of research.
And I would cut indigenous programs, because race should not determine access to government services.
Commonwealth grants for regions, infrastructure and schools that are in annual appropriations bills would be cut, because they are areas of State responsibility. I would cut spending on climate change programs because, among other things, I see the reality of global inaction. And I would cut other areas of symbolic spending such as the Human Rights Commission, family studies, and gender equality.
Employing fewer Canberra public servants and paying them less
My spending cuts would mean at least 15,000 public servants lost their jobs, mostly in Canberra. While those affected obviously wouldn’t appreciate such cuts, it is in everyone’s long term interest to get people out of the unproductive public service and into the private sector where they produce things that people want.
The Government has a mandate for significant public service job cuts, given its election commitment to cut 12,000 public service jobs (rather than the 2,000 cuts it decided to pursue after the election). And there would still be more than 200,000 Commonwealth public servants after these cuts took effect.
For the public servants that remain, I propose to cut their pay by 10 per cent. After a decade in which pay and employment grew faster in the public sector than the private sector, this is a reasonable option. And yes, politicians’ pay should be cut by the same amount.
Overall, my approach would deliver a surplus in the coming financial year, based on currently available numbers, without resorting to tax hikes.
No tax hikes
There is no justification for tax increases of any kind. Real (ie after inflation) Commonwealth tax per person has increased by more than 13 per cent since the introduction of the GST. As a result, our tax-to-GDP ratio is higher than in many countries with which we compete, like South Korea and the United States.
Tax hikes may not even succeed in sustainably raising revenue because they discourage Australians from working, saving and starting a business, encourage mobile Australians to leave the country, and discourage foreign investment and migration.
Julia Gillard and Wayne Swan acknowledged the growth detracting impact of tax hikes in 2010 when they proposed a cut in the company tax rate from 30 to 28 per cent. They cited independent modelling indicating that the tax cut would increase GDP by 0.4 per cent, with much of the benefit accruing to wage earners.
Treasury modelling in 2012 reiterated this, noting that a company tax cut would prompt new foreign investment and greater profit shifting to Australia, rather than to overseas. Modelling by the UK Treasury has since indicated that half of the revenue impact of a company tax cut would be offset by increased economic activity.
Of course, we should be cutting taxes anyway. The policy of the Liberal Democrats is to halve government spending, which would finance a $40,000 tax free threshold, a flat 20 per cent personal and company tax rate, and the abolition of special taxes on tobacco, alcohol, fuel and imports. But the Liberal Democrats do not control each House of Parliament (yet), so in the meantime we should achieve what spending cuts we can in annual appropriations bills, and avoid tax hikes. To paraphrase Kerry Packer, the Government is not spending our taxes so well that we should be paying extra.
The imperative for surpluses
While tax hikes are not justified, an immediate surplus most certainly is. When you’re up to your eyeballs in liabilities, you should spend less than your income. The Commonwealth Government’s liabilities currently exceed its assets by $229 billion, amounting to nearly $10,000 for every man, woman and child in Australia.
The wave of baby boomer retirements has already begun and will soon become a tsunami. It is farcical to think it is too difficult to achieve a surplus now, but that we will somehow achieve surpluses in the 2020s when literally millions of baby boomers start drawing an age pension.
It would be imprudent to sit back and hope for a jump in economic growth (or commodity prices) substantial enough to generate a budget surplus. Economic growth is currently at a respectable 2½ per cent, but hoping for more is unwarranted given neither the Coalition nor Labor are promoting pro growth policies.
Both see multinational companies and foreign investment as whipping boys to tax and restrict, they are doing nothing about penalty rates, unfair dismissal laws and the ban on low-paid work (euphemistically called the minimum wage), and both run a mile from the politically-sensitive recommendations of the Competition Policy Review to strip protections from favoured groups and political donors, like pharmacy owners. Moreover, they ignore the lesson from the United Kingdom that cutting government spending frees up resources for the private sector to thrive.
The time is now
If the Government jettisons grown-up budgeting in favour of vote buying, they will get no joy at the ballot box. Labor and the Greens have already tied up the votes of those who can be bribed. The only votes on offer are those from taxpayers who understand that debt needs to be repaid and budgets need to balance.
My alternative budget would deliver spending cuts through bills that Labor would never block. So a feral Senate provides no excuse for another budget deficit. It is within the Government’s power to deliver a budget surplus, and it is the Government’s responsibility to do so.
David Leyonhjelm is the Liberal Democrats Senator for NSW