This year’s budget provides an opportunity to return Australia to a path of fiscal responsibility. Rather than promising everyone some candy, the government needs to win back its credibility by demonstrating a clear plan to return the budget to surplus and pay down its debt. Credibility was lost when the Government went to the last election promising no cuts, only to propose cuts in the 2014 budget, and by promising responsible budgeting while presiding over a worsening budget deficit.
With Australia’s taxes already internationally uncompetitive, the plan must be based on spending cuts. However, the only way to make cuts politically palatable is to share the load. The government must convince the community that if everyone takes a small haircut now, larger and more painful cuts will not be required in future.
Such a plan would set the agenda for the election, leaving Labor with the task of proving it is not irresponsible. An economic narrative based on curing the deficit disease before it becomes life threatening would be compelling. And unlike with the 2014 budget, obstructionist crossbench Senators would be irrelevant — the key vote would be at the ballot box, not in the Senate.
The government will never win the vote of those who care nothing for responsible budgeting, demand ever more government spending, and subscribe to tax-the-rich rhetoric. But if it can gain the support of the remainder, there are more than enough votes to win the election.
The responsible thing to do
In his budget speech, Treasurer Morrison should commit to paying off the Government’s credit card, starting with a balanced budget in 2016-17. Our economy is growing at a healthy 3 per cent and unemployment at 5.7 per cent is as low as can be expected given our labour laws. And while commodity prices are lower than what we enjoyed over the last decade, they are higher than they were at any time between 1983 – when the Australian dollar was floated – and 2006.
An increasing debt burden does a disservice to the next generation. And a rising debt to GDP ratio, if not reversed, is a recipe for eventual Greek-style default and disaster.
A big job
Commonwealth Government revenue per person this year is around $16,500, while its spending per person is $17,900. Hence, we have a significant budget deficit.
Spending has been increasing relentlessly for decades and there has also been no let up in taxation. We now tax smokers, drinkers, high income individuals, corporations, capital gains and retirement savings more than most other countries in the developed world. As a result our overall tax burden is high by international standards, even ignoring the tax-like nature of Australia’s compulsory superannuation contributions.
If we do nothing, bracket creep will boost revenue per person over the next three years to around $17,400, while spending will remain at around $17,900. Thus we would still have a sizeable budget deficit, spending would remain bloated, and our tax burden would be even heavier. This cannot continue. We need wholesale change, beginning with balancing the budget in 2016-17.
Spending cuts will be noticed
To balance the budget in 2016-17, the Commonwealth Government needs to cut spending by $1,400 per person. This amount could not be taken from you without you noticing. Everyone needs to take a haircut.
However, the cuts required should be put in context; real spending per person only needs to return to the levels of 2007-08, which represented the height of the big spending Howard era. 2007 was hardly a year when Australians starved in the streets. All it requires is unwinding Kevin Rudd’s spending splurge in response to the Global Financial Crisis.
Haircuts for welfare recipients
As welfare is more than a third of Commonwealth government spending, it cannot be immune from cuts. Government spending on welfare should be cut by $300 per Australian per year, noting that this would still leave $6,000 per Australian. A third of this should come by freezing welfare payments and child care subsidies. The aged, families, unemployed and sick would all take a small haircut. Single age pensioners would miss out on a $20 boost to their fortnightly pension.
More than half of the cut should come by including the family home in the means test for the age pension. This would ensure that young people who can’t afford a house don’t pay taxes to fund older Australians with multi-million dollar houses.
The final contribution should come from consistently applying the income test for Family Tax Benefit Part A payments once a family earns more than $50,000. The impact of this would fall largely on families with incomes in excess of $90,000.
Haircuts for healthcare users
Government spending of $110 per person should be cut from the health budget.
A $5 Medicare co-payment for non-concessional patients should be reintroduced. This would represent a fraction of the cost of consultations. The Government’s proposed $5 increase in co payments for pharmaceuticals for non-concessional patients should proceed as well.
Commonwealth Government subsidies for the training of future health workers – which represent a completely unnecessary intervention in state activity – should be stopped.
And programs to promote healthy lifestyles should be abolished, as how we live is none of the government’s business. However, immunisation programs should be retained as these provide benefits beyond the individuals who receive the vaccine.
Haircuts for students
A budget boost of $150 should come from the education budget. Half of this boost could come by requiring graduates to repay their concessional student loans from their first pay check. Currently they don’t start repaying their debt until their income exceeds $53,000, and the Government is planning to lower this threshold only slightly.
The other half of this budget boost could come by reducing Commonwealth funding for students in non-government schools, towards the level of Commonwealth funding for students in government schools. The only reason they are different is to counteract State discrimination against non-government schools. Ideally, only one level of government should fund schools using student-linked vouchers, making it irrelevant who owns the school.
Haircuts for public servants and the military
Government spending of $10 per person should be cut by implementing the Commission of Audit recommendation to remove excessive senior staff at Defence Headquarters, comprising the top brass of the Defence Force and senior executives from the Defence Department.
More broadly, public service wages have risen faster than private sector wages since the end of the Howard era. To restore relative wage rates, the wages of all Commonwealth Government employees should be cut by up to 2 per cent, which would reduce government spending by $15 per person.
Haircuts to industry interference
Tourism, mining, energy, manufacturing, construction and agricultural industries should all receive a haircut by shaving 20 per cent off their industry assistance, cutting government spending by $25 per person. A similar haircut for university academics and other government researchers would cut government spending by around $20 per person. Philanthropic and business support is likely to increase in response, which would help fill the gap.
A 20 per cent haircut for the ABC, SBS, arts and sports funding, heritage and national parks would cut government spending by around $25 per person. Taxpayers should not be expected to fund ‘the Weekly with Charlie Pickering’, the opera, or sporting events.
Suspending unnecessary spending
To round out the spending cuts, spending of $40 per person should be cut from the Commonwealth Government’s environmental initiatives. The Abbott-era Direct Action Plan should be suspended until international commitments to reduce emissions become binding, and Abbott’s Green Army should be abandoned as a Commonwealth frolic into State government affairs.
Government spending of $25 per person should be cut by abolishing regional development spending, which is code for pork barrelling.
Spending of $130 per person could be cut by suspending foreign aid (except for short-term responses to natural disasters overseas, which often involve our military). Governments do not need to be involved in foreign aid so long as individuals are able to make charitable contributions to overseas causes they consider worthy. Government-funded foreign aid typically involves the poor in rich countries funding the rich in poor countries, or rich countries imposing first-world priorities on third-world countries.
Haircuts for the States
Government spending of $140 per person should be cut by discontinuing Commonwealth spending on affordable housing, which is a state responsibility. Similarly, government spending of $410 per person should be cut by discontinuing Commonwealth involvement in the provision of roads and railways. Road making is an important function of government, but it is a state and local responsibility. Commonwealth involvement is motivated by vote-buying. The State Governments have healthier budgets and balance sheets than the Commonwealth and can afford to fund roads.
Annual spending cut per person
180 Include the home in the age pension means tests
10 Apply the income test for Family Tax Benefit consistently
110 Freeze welfare payments
45 Introduce a means-tested Medicare co-payment
55 Stop subsidies for training health workers
10 Stop healthy lifestyle promotions
75 Lower the income threshold at which graduates start repaying debt
75 Reduce the gap between Commonwealth private and public school funding
Public servants and the military
10 Cut senior staffing at Defence headquarters
15 Cut Commonwealth Government employee wages by up to 2 per cent
25 Cut industry and agriculture assistance
20 Cut research funding
25 Cut funding for the ABC, SBS, sports, arts, heritage, national parks
End the Direct Action Plan and Abbott’s Green Army $40
Stop Commonwealth spending on regional pork barrelling $25
Cut foreign aid $130
Return responsibilities to the States
410 Cut Commonwealth spending on roads, railways
140 Cut Commonwealth funding for housing
Cutting government spending by $1,400 per person is not dramatic. In fact, it would be hard to distinguish the proposed spending levels from the status quo (see chart). After making these cuts there would still be massive government spending.
If we were in Government, these spending cuts are a fraction of what the Liberal Democrats would pursue. Our policies include major reform to the big ticket items of welfare, health, education, and defence, and the abolition of all grants to the States, forcing them to manage their own finances.
The spending cuts the Liberal Democrats propose would not only balance the budget and repay debt, but would facilitate abolition of taxes on alcohol, fuel, tobacco and imports, allow the tax free threshold to be lifted to $40,000, and allow personal income tax and company tax rates to be reduced to a flat 20 per cent.
By comparison, the proposal outlined in this alternative budget – which achieves a balance simply by shaving spending – is very modest. There is no reason it could not be implemented.
A budget to set the election agenda
A balanced budget would set the agenda for months to come. We would continue to discuss the footy, traffic jams and the Batman v Superman movie, but injected into these conversations would be comments about what the government is doing.
Over the weeks between the budget and the election, begrudging acceptance that balancing the budget is the responsible thing to do would develop. A café manager may overhear a customer sticking up for the budget, saying: “Why shouldn’t the budget be balanced?” A publican may hear drinkers debate the budget across the bar, saying: “What would you do instead?” And amid all the phone watching and thumb twiddling on the bus or train, one may even hear comments like: “But we all have to pay off our credit card.”
The imperative to balance the budget is undeniable, and as my proposals demonstrate, it would not be hard to achieve. All it requires is some gumption from Turnbull and Morrison. Let’s hope they have it.
David Leyonhjelm is a Senator for the Liberal Democrats