An emerging theme from the Abbott Government and its second budget is just how much government spending is increasing on its watch.
Compared to the average level of spending in the last three full years of the previous Labor Government, the policies of the Abbott Government have spending around 1.4 percent of GDP higher. In today’s dollar terms that difference is more than $20 billion in extra spending every year. In other words, if the recent budget had simply returned the level of government spending as a share of GDP back to the level of the previous Labor Government, Treasurer Joe Hockey would have had to cut spending by a staggering $90 billion over the four years of the forward estimates. This spending explosion, and there is no other word for it, reflects the inability of the government to construct a policy framework which is able to restrain spending. The rhetoric of government ministers, including Prime Minister Abbott and Treasurer Hockey about ‘smaller government’, is inconsistent with the fact that government spending levels are so high even though the government has had the opportunity to trim spending given it has framed the last two budgets. The budget also showed that the embarrassing failure of the government to get anywhere near a budget surplus was not because of any tax and other revenue shortfall. By 2018-19, total government revenue is expected to rise to 25.2 percent of GDP, up from levels around 21.5 to 22.5 percent during the bulk of the term of the previous government. In simple terms, a lack of revenue is not the reason for the budget being in deficit for at least another half decade. Former Labor Treasurer Wayne Swan would have been delighted to have revenue at these elevated levels when he was in power. Indeed, a tax to GDP ratio of 25.2 percent under the spending policies of the Labor Government would have delivered budget surpluses in five of the six budgets Swan handed down. It delivers deficits in every year of the budget forward estimates out to 2018-19. The other element of the budget, which destroys the perception of the Liberal Party being the custodians of small government, fiscal rectitude and debt reduction, is the projection from Hockey that net government debt will escalate to 18 percent of GDP in 2016-17. The level of net government debt at the time of the election in 2013 was 10.1 percent of GDP. The debt blow out is a simple result of the Abbott Government’s surge in spending and occurs despite the expected sharp climb in tax and other revenue. Net government debt will have nearly doubled in just five years. If net debt does in fact reach 18 percent of GDP as forecast by Treasurer Hockey, it will be the second highest level of debt recorded in recent Australian history, and will be just 0.1 percent of GDP below the peak level of 18.1 percent recorded in 1995-96. Any sight error in the budget forecasts that results in more spending or less revenue could see net debt reach a fresh historical high within a few years. Rather than being a party of small government and individual responsibility, the Liberal Party in office (under the leadership team of Abbott and Hockey) are taking the size of government to levels not seen in a generation. Perhaps this is what voters want. The government is increasingly seen to be the provider of many services, especially in the area of aged care, disability, health and education. It seems easy for a government to increase spending in these areas but is difficult whenever there are efforts to trim outlays in these big ticket areas. If it is the case that voters are demanding a more intrusive role from government, it may be a new reality that both sides of politics will need to acknowledge and economists analysing fiscal policy will need to take into account. The escalation of the size of government under Abbott may be reflecting this new reality. Certainly its policy actions in the budget point to this trend. If this is the case, there remains the issue of whether the current tax system will provide the revenue needed to fund these policies. Tax reform will no doubt remain a vital political issue once the dust from the recent budget finally settles. Stephen Koukoulas is the Managing Director of Market Economics thekouk.com.au @TheKouk