BUDGET SUSTAINABILITY INVOLVES A SIMPLE QUESTION: WHO SHOULD PAY FOR WHAT
The Budget provides a rare moment of pageantry in Australia’s democratic calendar. Budget groupies even exist, mostly located in Canberra, who watch avidly as the nation’s peak economic statement is delivered.
In the lead up to a Budget the Treasurer, sleeves rolled-up and smiling, seems to be everywhere. The message is simple – I am working hard in your interests but still have time for my family and the normal things in life. The media plays along building tension for the big day.
For others, the budget lead-up feels different. The Prime Minister retreats from being star to supporting player. This shift is easier for some PMs than others. But only an unwise Prime Minister seeks the spotlight at Budget time. For a clutch of public servants, budget time is very, very busy and often much less smiley.
Budget day itself involves an important tradition which brings needed transparency to government – the Budget lock-up. For several hours before its release, a mix of journalists and expert commentators are given access to the Budget documents locked in the main committee room of Parliament House.
The lock-up is a genial temporary prison. Public servants are on hand to provide factual advice. Ministerial office staff are there to explain political nuance. The Treasurer and Finance Minister make an appearance, still smiling. Pride of place, however, goes to the political cartoonists, pencils ready to catch their worth-a-thousand-words view.
Recent times has seen a shift of gear in the production of budgets. By the end of next May, Australia will have had four budgets in two years. Whether this rapid-fire delivery of economic statements is in Australia’s best interests is questionable. It is at least arguable that recent budgets have avoided more issues than they have dealt with.
The most recent national budget was a modest affair but did place one important issue - budget sustainability – more firmly on the agenda. It is an issue that demands serious attention.
Questions about the structural sustainability of Australia’s budget have been lurking in the shadows for some time. Australia has enjoyed a long period of benign economic conditions, which has allowed government to avert its gaze. Growth was consistent. Inflation and interest rates stayed low. House price growth created a wealth boost for a lucky many. Tax revenues rolled-in and Australia built an ostensibly enviable budget position.
Australia’s position involved a dose of good fortune (thanks China) but was not serendipitous. Particularly early on, economic reform and policy stewardship played important roles. There were bumps, of course. The Asian tech crash and global financial crisis (GFC) both threatened without causing real damage. Government was able to commission expensive new services and provide a protective layer of spending through the GFC and even the pandemic, without triggering serious questions about budget sustainability.
Economic conditions looking forward are far less benign. Inflation has re-emerged and interest rates are rising. Economic globalisation and productivity, key sources of growth, stutter. Global economic growth is fragile and uncertain. House price declines portend disruptive wealth losses for some, without creating hope for those seeking to enter the market.
Australia heads into this economic turbulence with a national budget which is very different to when the long era of growth began. The creation of the care economy and emergent human services state is one major change. Another has been heightened public expectations about government’s role in protecting citizens from disasters, natural and economic. A third involves a growing understanding and commitment to environmental sustainability. Security concerns, new and traditional, have also risen to prominence. All have added to the underlying cost structure of the budget.
Australia’s once strong budget position now looks vulnerable. The fiscal head room built through the growth period has been exhausted, and the cost of servicing debt (both household and government) is rising. Economic conditions demand fiscal prudency. Yet disability, aged care, defence and energy transition (to name a few) all demand large injections of funding. This is before long-overdue consideration is given to addressing relative falls in the value of rent assistance and unemployment benefits.
In response, a repositioning of the economic debate has begun. We can expect this to continue and evolve. Part of the debate involves how best to navigate current economic conditions. Another involves Australia’s long-term economic (social and environmental) priorities, including how to lift productivity. The long-term structure and sustainability of the budget is a third.
To date, discussion of budget sustainability has focussed on managing spending expectations. Recent debates about the NDIS provide a prime example. The undoubted merits of better support for people with disability has seen costs rise rapidly. These dynamics are echoed, if more faintly, throughout Australia’s expanded commitment to the provision of care and in many other areas.
Tax is also important. Structural shifts in budget spending over the last 30 or so years have not come with a commensurate restructuring of revenue. Tax changes, notably the GST, have been made. But increased structural spending has been met largely, if not wholly, from the dividends of cyclical (if long lasting) growth. At some point soon, this will need to change, and taxes will need to rise.
Limiting our debate to spending and taxing, critical though they are, would be a mistake. In thinking about the sustainability of Australia’s budget, a deeper question is also important – who should pay for what?
Creation of the care economy has resulted in government meeting costs once met by individuals. Childcare policy, to take one example, now provides financial support for families earning over $500 000 a year. The NDIS has created high levels of non-means tested of support for those eligible and not much else for those who are not. Aged care (and home support) provides substantial subsidies, including to those who leave significant wealth behind when they die.
Other areas of policy have moved in the opposite direction. Support for university students has become relatively less generous. Superannuation concessions have (understandably) tightened. Means testing for some government support payments, such as Newstart, remains fiercely tight.
Australia is a wealthy society and should invest in high-quality care. Each of the above policies was created, and makes sense, within its own bubble. But the consequence of atomised decision-making is a confused and inconsistent approach to ‘who pays for what’ across the policy landscape as a whole. It is a recipe for unfairness and inefficiency.
The next phase of budget making provides an opportune time for government to take a step back and recalibrate. A good starting point would be to commission an analysis of how the policy system comes together across the life course of its citizens, and what this means intergenerationally. Developing some practical touchstone principles for policymakers on when (and how much) citizens should pay directly for services would be a second good investment.
Doing this is neither quick nor easy. It is ill-suited to a world of rapid-fire budget production. But the emerging economic environment requires some innovative thinking. Focussing on ‘who should pay for what’ provides an important supplement to the more obvious spend-tax approach to budget sustainability. At the very least, it is a question that any sleeves-rolled-up and smiling Treasurer should be thinking about as they head towards a future budget lock-up.