Ideas@TheCentre
Government can’t keep to its own spending constraints
Curbing government spending is critical to closing the Commonwealth budget deficit, and dare we say it, setting the foundation for tax cuts. The federal government’s mid-year budget review does not provide any grounds for optimism. In fact, it is a case study of how incapable the government is of curbing its own spending.
Since the Whitlam era of the 1970s, 2008–09 saw the biggest increase in Commonwealth spending. While defending this splurge as an essential response to the global financial crisis (a proposition I would dispute, but not here), the Rudd government went on to reassure fiscal conservatives in February 2009 that once the Australian economy returned to trend, real growth of Commonwealth spending would be capped at 2% a year at least until the budget was restored to surplus. Coming after a particularly large increase, this cap was not very limiting, but at least it was something.
In fact the economy returned to trend more quickly than expected. But with the exception of 2010–11, when real spending fell slightly, Commonwealth spending has exceeded the 2% cap. Take the current financial year. According to the May budget, real spending was supposed to increase by 0.5% in 2011–12. By the mid-year review in November, the increase had been revised up to 3.7%. That’s an extra $8 billion in six months.
So the government decided to shift its own goalposts by redefining its 2% spending growth cap as a multi-year average. But now even this depends on a real contraction in spending in 2012–13 on a scale that has been seen only once in the last 40 years, during the Hawke-Keating crackdown on spending in the late 1980s. In fact, even nominal dollar spending (that is, before any adjustment for inflation) is supposed to fall slightly next year, according to the mid-year review, something that has never happened in the last 40 years.
I will let you be the judge of how likely this almost unprecedented single year squeeze on government spending in 2012–13 is to be achieved. But if it isn’t achieved, the government has little chance of delivering its much trumpeted return to surplus.
Robert Carling is a Senior Research Fellow at The Centre for Independent Studies.
