Ideas@TheCentre
The elusive budget surplus
The Commonwealth budget should already be in balance, if not in surplus, and would have been if the government had not been so slow in recent years to reverse the upsurge in spending that continued until 2009-10 or so ready to base its plans on optimistic revenue estimates.
Now we are told to expect a balanced budget by 2015-16, followed by increasing surpluses. This would be a reasonable second-best outcome if it was true, but it deserves to be greeted with healthy scepticism. A projection looking two years ahead depends not only on the accuracy of revenue estimates – which as we have recently seen leaves much to be desired – but also on the willingness of governments to keep a lid on spending.
The key assumption underlying these forward estimates is that there will be no new spending initiatives, but can governments be trusted to restrain their urge to spend for that long?
The question mark hanging over the projections becomes larger the further ahead one peers. The budget reveals that the full cost of major new initiatives in DisabilityCare and school education is heavily back-loaded so that it does not occur until after the four-year horizon of the forward estimates. Thus, spending on these two initiatives is put at just $3 billion in 2016-17, but then ramps up rapidly to $14 billion a year by 2020-21.
Despite this increased spending, the medium-term projections in the budget show the surplus rising to $27 billion by 2018-19, on the assumption that real spending growth will be capped at 2% a year and tax revenue will keep rising as a proportion of GDP.
The budget arithmetic suggests that more work will be needed to repair the nation’s public finances after the next election. One of the first acts of the newly elected government should be to commission both an audit of existing spending and a new and detailed review of the long-term fiscal outlook – essentially what has been done in past Intergenerational Reports (IGRs).
Much water has flowed under the bridge since the last IGR in early 2010. A revised IGR that includes a realistic assessment of the cost of DisabilityCare, among other things, should inform the government’s fiscal decisions over the year ahead. This time, the IGR should be broadened to include the states as well as the Commonwealth.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
