Opinion & Commentary
Fiscal gamble cheats reality
ADVOCATES of more government spending assert Australia has "small" government in comparison with other developed countries. Why anyone should be swayed by such international benchmarking is a mystery.
It overlooks the contribution of government spending - running at more than 40 per cent of GDP in most developed countries and more than 50 per cent in some of them - to their economic malaise. But, under the current approach to public expenditure management, those who hanker for bigger government will get their way. If Australia is to keep its public sector at about 35 per cent of GDP - let alone shrink it and make room for a lower tax burden - governments will need to tighten up.
The recent flurry of new spending commitments by the Gillard government seems to have overlooked an inconvenient truth revealed by the commonwealth's own Intergenerational Report in February 2010, which confirmed the budget was heading for a long-term excess of expenditure over revenue owing to population ageing and other long-term trends. Those trends alone were set to lift commonwealth spending as a share of GDP by almost five percentage points by 2050.
In fact, the IGR understates likely future spending growth, as it used the standard "existing policies" assumption. It did not include the National Disability Insurance Scheme, Denticare, Gonski funding proposals, paid parental leave, carbon tax compensation, and so on. All these programs have emerged since the end of 2009 and add to the IGR expenditure baseline.
They will increase government spending relative to GDP and further widen the long-term fiscal gap. It is easy to foresee government spending rising to more than 40 per cent of GDP in the long term, without even taking into account any growth of state government spending.
For these reasons, new disciplines and checks on fiscal sustainability are needed. Any government serious about fiscal discipline would impose the self-discipline of confining new spending commitments to the annual budget, wherein all proposals can compete for funding at the same time.
There was no need, other than a political one, for this week's announcement on education funding outside the annual budget context. Strong self-discipline requires any new spending initiatives to be fully offset by expenditure savings (not revenue increases) in programs to be identified at the same time.
Since governments have perfected the art of gaming the four-year forward estimates, those estimates have passed the limits of their usefulness as a framework for fiscal transparency and sustainability. New spending is announced with start dates well into the future and with full implementation delayed beyond the horizon of the forward estimates. For example, full spending on Gonski's recommendations has been deferred to 2020. This is not prudent long-term planning, but gambling on economic and fiscal conditions eight years from now.
Fiscal decisions need a longer-term anchor of sustainability. The IGRs provide the foundations, but they should be changed in two ways. First, fiscal sustainability is an issue for the states as well as the commonwealth. Instead of separate IGRs by the commonwealth and the states that choose to commission them, there should be a single IGR for the whole government sector prepared jointly by commonwealth and state treasuries and finance departments using consistent assumptions and methodologies.
Second, in addition to a full IGR every few years to reset the baseline, annual fiscal sustainability reports should be commissioned to quantify the impact of the preceding year's policy initiatives on the long-term fiscal gap. Ultimately rules, frameworks and transparency won't stop governments from overspending, but they can help.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
