1. Greg Smith ACU Canberra 10 June 2014
The Budget
Greg Smith
ACU Canberra
10 June 2014

2. “...upper income groups should pay the lion’s share of taxes for the same reason that Willie Sutton robbed banks. That’s where the money is”
Bill Clinton
Source: Peterson Foundation Fiscal Summit May 2014

3. 'If you agree that you have to engage in fiscal consolidation and your concern is that its outlays that have grown ahead of everything else, then, inevitably, ... those groups in the community that get most of the expenditure are likely to bear the most significant part of the burden.’ Martin Parkinson (Senate Estimates, reported in Canberra Times 5 June 2014)

4. Budget cuts: where the spending is...
Commonwealth Function
budget
Social Security and Welfare
$146 billion
Health
$67 billion
Education
$30 billion
Defence
$24 billion
Everything else (excl $54b GST)
$94 billion
TOTAL (excl state GST)
$361 billion

5. Ideology, values or science?
Is this just about ideology and values?
Both sides agree on seeking budget balance
The budget and social/economic policy are also based on theories of human behaviour
What government does is not just a response, it may also be a causal influence
whether or not to work or seek work
whether or not to save, insure, invest, learn
whether to self-manage health, ageing, other risks

6. EMERGENCY!!! Cash deficit in 2014-15
$29.8 billion (1.8% of GDP)
Total policy decisions for
Net spending reduction $1.0 billion
Net tax increases $0.7 billion
TOTAL Fiscal Changes $1.7 billion

7. Try again – future emergency!!!
Total budget improvement since 2013 MYEFO (including policy and parameter changes)
Source M Parkinson Post Budget Address

8. Journey to the Budget: since GST 2000
% of GDP
Howard average
Budget forecast
projection
Revenues
25.4%
23.5%
24.7%
Spending
24.4%
25.3%
24.8%
Balance
Surplus 1%
Deficit
1.8%
0.2%
Source Budget : revenue excludes future fund earnings

9. What is the economic context?
Ideology aside, budget balance issues are real
Quite possibly a long prospective deficit
Medium term corrections underway
Mining investment, terms of trade, exchange rate
Leading to weak income and employment growth
Longer term
Intergenerational challenge (health and ageing)
Some revenue revival through bracket creep
BUT note “revenue cap” (ignores NDIS levy)

10. Continued 4 year spending growth
Schools funding
Increase from $14.7 to $18.3 billion (24%)
Public hospitals
Increase from $16.7 to $20.6 billion (23%)
Disability services (mainly NDIS)
Increase from $2.6 to $8.1 billion (310%)
NOTE: Total HEW increases $42B to $277B (18%) compare projected nominal GDP growth of 19%

11. New spending priorities (over 4 years)
Infrastructure funding + $8.60 billion
Defence force pensions + $1.35 billion
Emissions reduction fund + $1.15 billion
Paid Parental leave ??
unspecified provisions in the “contingency reserve” as unannounced policy

12. The “public service” Total ASL 2007-08 (actual) 2013-14 2014-15
Non-military
175,531
177,258
169,922
Military (inc reserves)
72,686
76,595
79,339
Total
248,217
253,853
249,261

13. Social redistribution
Income base
late 2000s (OECD)
GINI coefficient
Market Income (pre tax)
0.46
After taxes and transfers
0.32
After government program spending
0.23
2010
ABS
Bottom quintile
Middle quintile
Top quintile
Private income 3%
16%
48%
All govt programs
39%
10%
Tax paid 6%
14%
49%
Final income
13%
17%
35%

14. Making government bigger than it seems
Government is a bank/investment fund
Loans to students ($25 billion, to double in 4 yrs – not counted as part of government spending)
“Future funds” ($90 b +) also not “spending”
Government borrowing has to cover the lending and the spending e.g. borrowing of $45 billion in while deficit is only $30 billion
Government is also an insurer
Indemnities, guarantees (eg bank deposits, NBN, Telstra, Reserve Bank, State borrowings)
Income and medical expense safety nets

15. Bigger government(continued)
Shadow (privatised) budget
‘Compulsory’ superannuation: $60b+ per year
‘Compulsory’ private health insurance: $10b+r
Tax expenditures also significant
Commonwealth co-funding for States
Nearly a quarter of C/W spending ($101 billion)
Four year growth matches GDP growth, but cuts in several areas to fund the committed growth areas (schools, hospitals, infrastructure)

16. Will the Budget pass? The “Budget” an economic policy statement
Legislation (Appropriations Bills) will pass:
provide for annual spending commitments
About one quarter of all government spending
Taxes and most spending (state programs, transfer entitlements) are separately legislated
The Senate may amend or reject the changes proposed for some of these