14/08/2013 - 06:58

Fiscal challenge crosses political divide

14/08/2013 - 06:58

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Events of the past week have shown that governments in Perth and Canberra face an enormous task getting their budgets under control, no matter which party is in power.

Events of the past week have shown that governments in Perth and Canberra face an enormous task getting their budgets under control, no matter which party is in power.

Which would you prefer?

Running a state treasury that will need to cope with an increase in debt to $28 billion in four years’ time, or a national treasury that will need to manage $219 billion in debt at around the same time.

That is the unpleasant task facing our political leaders, who are promising new spending programs to win political favour while staring at a growing debt mountain.

The national outlook was laid bare this week when the federal Treasury released its pre-election economic and fiscal outlook, or PEFO.

It shows the budget deficit will increase to $30 billion in the current financial year, dropping a little in 2014-15 before falling sharply and then emerging in surplus in 2016-17.

In dollar terms, net debt is expected to peak at $219 billion in 2015-16, but as a proportion of GDP it will actually peak one year earlier. It will reach 13 per cent of GDP in 2014-15.

Australia’s budget deficit and debt levels are low on a global scale but for a country coming off the back of strong resources-driven growth, they should be lower.

It’s debateable whether the Treasury projections in the PEFO document will come to pass.

Deutsche Bank believes that, based on current policy settings, the budget is unlikely to return to surplus in 2016-17.

Its economics team expects total budget revenues to fall between $5 billion and $6 billion short of Treasury’s forecasts in 2016-17.

Adding bite to its analysis, it argues that the ‘structural’ position of the federal budget is now worse than under either the Whitlam or Fraser governments.

Last week’s state budget showed Western Australia faces similar challenges.

Here, Treasury has estimated a small budget surplus in the current financial year but a deficit next year.

Treasurer Troy Buswell says that won’t happen, but has yet to find the policy answers to turn around the bottom line outcome.

More worrying is the projected growth in state debt, which is of a scale that nobody remotely anticipated before last week’s budget.

It primarily reflects the state government’s commitment to a very large capital works program, which will hit a record $7.5 billion in the current financial year.

This is not driven by high-profile transport projects such as the MAX light rail or the airport rail link, which attracted so much attention during the state election campaign.

Most of the spending on these projects will occur in 2017 and 2018, beyond Treasury’s forward estimates period.

Instead, the spending is on a wide range of projects across schools hospitals, energy, roads, and housing – the sort of routine services that are affected by the rapid population growth WA has been experiencing.

The challenge facing the Barnett government in WA and the next federal government in Canberra, whoever leads it, is to pursue structural reforms of a kind that will make lasting differences.

Chasing ‘efficiency dividends’ is not a solution – for the most part, that is just forcing public service agencies to operate with less staff.

Governments need to ask what their role is, and whether they should stop undertaking some of their other activities.

At a state level, there are some encouraging signs.

The government has previously acknowledged the not-for-profit sector is often better at delivering services than its own departments.

That logic could be extended more broadly to getting greater private sector involvement in service delivery right across the state economy.

 


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