Budget repair and the changing size of Australia s government Crawford Australian Leadership Forum John Daley, Grattan Institute June 2016
Commonwealth expenditure is high relative to history; revenue is typical of last 30 years Commonwealth expenditures and revenues per cent of nominal GDP 27% Expenditure Estimate 25% 23% 21% Revenue 19% 17% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Commonwealth Budget Papers, 2014-15 Financial year ended 2
Health has driven the increase in expenditure Change in Australian governments expenditure 2003-2014 $ bn relative to CPI 50 45 40 35 30 25 20 15 10 5 0 Real growth Growth at GDP Crim justice Health Education Infrastructure Industry Defence Welfare Other Social Debt mgt services Government Source: Grattan Institute, Budget Pressures 2014 3
as it has in all OECD countries as they got richer (except Iceland) Health spending and GDP, 2000 to 2012 Health spending as proportion of GDP, % 14 12 10 8 6 4 2 0 Source: OECD Hungary Chile Turkey Germany Iceland 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 GDP / capita, PPP $51k, 16.4% Australia Switzerland No GDP growth Norway Luxembourg Health growing faster than GDP $91k, 6.6% Health stable relative to GDP 4
Big jump in net transfer to older households also hurt budget balances Average net benefits per household (government payments, less tax) 2010$ $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 -$5,000 -$10,000 -$15,000 1988-89 1993-94 1998-99 2003-04 2009-10 Increase of ~$10k/household $20b/yr budget cost 15-24 25-34 35-44 45-54 55-64 65+ Age of head of household Notes: Net benefits are social assistance benefits in cash plus support in kind (such as health and education), minus income and sales taxes Source: Grattan Institute, The Wealth of Generations, p.22 5
Most of the planned structural repair relies on organic increases in tax collections Budget balance 2019-20 budget compared to 2015-16 outcome, $2015 20 0 Denotes improvement in budget balance 23 9-7 -19-6 -20-40 20-40 7 Budget deficit 2016-17 2016-17 Budget measures Personal income tax growth Other revenue growth above GDP Spending growth below GDP Initial deficit growth at nominal GDP Other Budget deficit 2019-20 6
The planned drift back to surplus isn t happening Actual and forecast Commonwealth underlying cash balance per cent of GDP Forecast made in May 1 2010 2011 2012 2013 0 2014-1 2015 2016-2 -3-4 Actual -5 2008 2010 2012 2014 2016 2018 2020 Financial year ended Grattan analysis of Commonwealth Budget Papers 7
Reality undershot as spending rose 2009-14, while revenue has disappointed since 2012 Change in budget outcome from original forecast % of GDP 4 2 0 Spending policy changes Revenue policy changes -2-4 -6 Net change in fiscal balance Spending parameter changes Revenue parameter changes -8 2009 2011 2013 2015 2017 2019 8
Belief about what is important drives priorities about taxes and spending What do you care about most? Budget balancing Small government Economic growth (short run) More services that government provides (health) Companies reluctant to invest while budgets don t balance Structural deficit won t be solved by economic growth. Politics requires budget repair through both revenue and expenses Smaller government increases economic growth and reduces budget deficit If government reduces taxes, it will be forced to cut expenditure. Increasing economic growth will solve the budget issue As income increases, can spend more on health and other services Government better at delivering many health services é Taxes ê Taxes ê Taxes é Taxes ê Expenditure ê Expenditure é Expenditure é Expenditure Source: Chris Richardson for the underlying insight 9
Australian gvt expenditure is not large (even including super) but others are shrinking General government expenditure, advanced economies, % of GDP, 2016 Finland France Belgium Denmark Austria Italy Greece Norway Sweden Portugal Netherlands Germany Slovenia Iceland Spain Israel Canada Estonia United Kingdom Average Japan Australia Latvia United States New Zealand Switzerland Ireland Korea Singapore Hong Kong 0 10 20 30 40 50 60 Note: Data for Greece is for 2015 Source: IMF Fiscal Monitor April 2016; Tax stats 2012-13; APRA superannuation bulletin 2011 Compulsory super contributions 10
Australian government revenue is not large, even including super General government income, advanced economies, % of GDP, 2016 Finland Norway France Belgium Denmark Austria Sweden Italy Iceland Greece Germany Portugal Netherlands Slovenia Estonia Canada Spain Israel Average United Kingdom Latvia New Zealand Australia Japan Switzerland United States Ireland Singapore Korea Hong Kong 0 10 20 30 40 50 60 Note: Data for Greece is for 2015 Source: IMF Fiscal Monitor April 2016; Tax stats 2012-13; APRA superannuation bulletin 2011 Compulsory super contributions 11
Australia s deficits are relatively manageable General government budget balance, advanced economies, % of GDP, 2016 Japan Greece Israel United States France Spain United Kingdom Portugal Average Belgium Denmark Finland Italy Slovenia Australia Canada Austria Netherlands Latvia Sweden Ireland Switzerland New Zealand Germany Korea Estonia Hong Kong Singapore Norway Iceland 5.4 14.3 Note: Data for Greece is for 2015 Source: IMF Fiscal Monitor April 2016-5 -4-3 -2-1 0 1 2 3 12
Australian government debt is relatively small but deteriorating faster General government, advanced economies, % of GDP Net debt, 2016 Change in net debt, 2011-2016 Spain Portugal France Australia Italy Netherlands Denmark United Kingdom Finland United States Korea Average Estonia Belgium Japan Latvia New Zealand Canada Israel Sweden Austria Switzerland Ireland Germany Iceland Norway -150-100 -50 0 50 Source: IMF Fiscal Monitor April 2016 286 123-30 -20-10 0 10 20 13
Australian governments spend relatively less on welfare, general government and debt Government expenditure, OECD countries, % of GDP, 2013 General public service Greece Slovenia Finland France Denmark Belgium Sweden Italy Austria Portugal Hungary Netherlands United Kingdom OECD UWA Germany Spain Norway Iceland Luxembourg Japan Czech Republic Poland OECD WA Israel Slovak Republic Australia (inc super) Ireland Estonia United States Australia Latvia Korea Defence Eco affairs Health 0 10 20 30 40 50 60 70 Notes: Other category includes Public order and safety ; Environmental protection ; Housing and community amenities ; and Recreation, culture Edu and religion. Welfare category is referred to in the source data as Social protection. Source: OECD http://dx.doi.org/10.1787/888933248323; Australian super contributions from APRA Welfare Other Compulsory super contributions 14
Australia has a particularly targeted welfare system Public payments to households as a proportion of population disposable income, mid-2000s Transfers to Transfers to poorest 20% remaining 80% Denmark Sweden Belgium Norway Australia Czech R. OECD-23 Neth. Ireland France Austria Slovak R. Germany Switz. Finland UK NZ Luxem. Italy Canada Poland Japan US Korea 0 5 10 15 20 25 30 35 40 Note: incomes are equivalised Source: Grattan analysis of Whiteford (2010) 15
Filling a budget hole of $40b without revenue increases is implausible Budgetary impact of budget choices worth at least $2b/yr 2013 $b per year 0 5 10 15 Age Pension assets test Negative gearing Pharmaceutical spend Pension and super access CGT discount Higher ed subsidies Defence spending Cost effective medicine Super contr concessions Super earn concessions Fuel tax indexation Transport infra costs Industry support School class sizes GST broaden Health rebate Mining royalty CGT owner occ Payroll threshold Fuel tax credit Bracket creep Source: Grattan Institute, Balancing Budgets Positive impacts Negative impacts Revenue Mixed Expenditure 16