Budget Management

Spending is forecast to be kept under control over next five years, but in the medium-term, the Intergenerational Report found that spending will grow faster than national income.1 This level of public spending growth is unsustainable.

Unless public spending is contained, the Australian economy will slowly suffocate under unsustainable increases in taxes and growing public debt.

Already, every day, the Federal Government spends $1.1 billion, but only raises $1 billion in taxes. The $100 million shortfall is money that Australia must borrow, and that must ultimately be repaid – with interest – by future generations.

In ten years, Australia has slipped from 15th to 48th in rankings of general government debt and from 22nd to 83rd on the general government budget balance.

Government spending should be restricted to below 25 per cent of GDP, which is consistent with the average level of federal spending by governments over the last 40 years.The alternative – to do nothing and or wait until the system breaks – means we risk the painful readjustments similar to those in several European economies.

Reducing spending does not have to mean shifting costs or placing the vulnerable at risk. There are several places to start.

The independent Harper Review of Competition Policy found that there could be substantial benefits for both government and consumers in introducing greater choice for services in the health, education and aged care sectors.3

The benefits of increased competition in these sectors are twofold: better services and greater choice; and, the capacity to ease pressure on government spending. Around four out of five retirees in Australia rely on the pension.4

A similar proportion owns their own home and the equity value of owner-occupied housing for Australians aged over 65 is approaching $1 trillion.

The government should consider transforming in whole or in part pension payments to owner-occupiers into a loan that is recoverable against their property when it is sold. The benefits pensioners receive would be unaffected, but it would allow the pension payments for all to be more sustainably funded in
the long term.

The Medicare Benefits Schedule review found that significant reform is needed to ensure the government is not funding procedures that are ineffective or unsafe, without removing access for procedures that are genuinely required.

An ‘actuarial approach’ to welfare could ensure that those likely to be long-term burdens receive intensive up front support to become self-reliant.5 There is also scope to tighten the means test on family tax benefits, including child support payments.

Recommendations:
6.1 Ensure government spending is sustainable by reducing it to less than 25 per cent of GDP.
 
6.2 Encourage innovation and value for money by facilitating greater competition in government-funded education, health and aged care services.
 
6.3 Consider transforming pension payments to owner-occupiers into a loan that is recoverable against their property.
 
6.4 Remove funding for ineffective and unsafe medical procedures. 
 
6.5 Apply an actuarial approach to welfare payments and tighten welfare means tests so that payments go to those most in need.

 

References:
1 See Commonwealth of Australia, (2015), Intergenerational Report, http://www.treasury.gov.au/~/media/Treasury/Publications%20and%20Media/Publications/2015/2015%20Intergenerational%20Report/Downloads/PDF/2015_IGR.ashx.
2 The long–term average payments–to–GDP ratio is 24.7 per cent of GDP, calculated over a 40 year period from 1974–75 to 2013–14, as used in the 2015 Intergenerational Report.
3 Harper, I. et al (2015), Competition Policy Review, http://competitionpolicyreview.gov.au/files/2015/03/Competition-policyreview-report_online.pdf#page=226
4 National Commission of Audit, (2015) http://www.ncoa.gov.au/report/appendix-vol-1/9-1-age-pension.html
5 See Department of Social Services, A New System for Better Employment and Social Outcomes – Final Report of the Reference Group on Welfare Reform to the Minister for Social Services, https://www.dss.gov.au/sites/default/files/documents/02_2015/dss001_14_final_report_access_2.pdf

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