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Looming fiscal debacle needs immediate fix

Australia must take heed of the current sovereign debt crisis in Europe to avoid heading down the same perilous path, according to a report released today by The Centre for Independent Studies.

The report shows the economic crisis in Europe was in part triggered by very high levels of government spending, at times over 50% of gross domestic product (GDP). Australia’s current rate of spending and public debt are far lower than in most European countries, but growth in government spending is propelling us towards Future Fiscal Shock.

‘We are on track for a government sector well above 40% of GDP in the long term,’ says Robert Carling, Senior Fellow at CIS and the report’s author. ‘Even if budgets return to balance or surplus in the short-term, a deficit will reappear in the long-term.’

The Commonwealth’s own 2010 Intergenerational Report shows there is a window of opportunity now to adjust policies to the long-term fiscal gap.
 
‘So far governments and oppositions have paid little notice to this warning. Instead, they are piling up new spending commitments at an alarming rate, many with deferred starting dates, meaning their impact will only become apparent many years from now.’

‘The $22 billion a year for the National Disability Insurance Scheme, an additional $6.5 billion a year for schools funding, several billion a year for dental care and paid parental schemes – all these schemes and more could add up to $28 billion a year by the end of the decade – costs that the 2010 Intergenerational Report shows we can ill afford in the long-term.’

‘With increased spending comes pressure for higher taxation or borrowing. If governments proceed with these costs, I implore them to use fiscal discipline,’ says Carling. ‘Offset the costs by finding equivalent savings in existing programs.’

‘Unlike in the previous decade to 2010, governments should not count on another revenue boom,’ Carling warns. ‘Only a radical rethink of public financial management will steer us clear of long-term threats to financial sustainability’.

‘Politicians must curb spending commitments now. The less preferable option will be to increase revenue through higher tax rates, broader bases, and cuts to concessions.’

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Robert Carling is a Senior Fellow at The Centre for Independent Studies. He is available for comment.
 
The report, Future Fiscal Shock, is available from the CIS website.

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