Let's stop kidding ourselves. Taxes will have to go up

Before the election, the business press was terribly concerned about the decade of budget deficits and ever-rising public debt the Albanese government had clocked up. Something must be done! After the election, however, when the government pressed on with a move to save up to $3 billion a year by making rich men pay more tax on their superannuation, it was appalled. The sky would fall.

What the two contradictory positions have in common was that both are criticisms of a government few of its business readers would have much sympathy for. But the episode also shows the way voters’ attitudes towards the budget abound in wishful thinking – something the pollies encourage. “You want more, but don’t want to pay for it? Sure, I can do that.”

In Treasury secretary Dr Steven Kennedy’s speech to the Australian Business Economists last week, he showed a graph of the budget’s “structural” deficit stretching all the way out to 2035-36. (The structural component of the budget balance is the bit that’s left after you’ve allowed for the effect on the balance of where we happen to be in the business cycle of boom and bust.)

The structural deficit for next financial year is estimated to be 1.5 per cent of gross domestic product. Kennedy noted that spending on the National Disability Insurance Scheme is expected to reach more than our spending on defence. But he reminded us that (thanks mainly to our good friend Mad King Donald) defence spending is likely to grow a lot in coming years.

And that’s just the feds. The combined state and territory budget deficits are likely to be 1.8 per cent of GDP in the financial year just ending – which is 1.5 percentage points higher than their pre-pandemic long-run average, Kennedy said.

So the states have been really going at it, with their combined debt at the end of this month expected to reach 18.9 per cent of GDP, its highest in the 30-plus years they’ve had control over their own finances.

And yet politicians, federal and state, persist in running election campaigns where they promise bigger and better spending on this, that and the other, without any mention of how it will have to be paid for.

Worse, no matter how much they’ve promised, the Liberals always claim that their taxes will be lower than Labor’s, without this having any effect on their spending on “essential services”. (Perhaps this boils down to a promise not to rely on bracket creep – the “secret tax of inflation” – quite as much as Labor does.)

What the pollies never tell us is that, if you want it, it will cost you. But one woman who is game to tell us what the politicians aren’t is Aruna Sathanapally, boss of the Grattan Institute. In a speech a year ago she told the unvarnished truth: our governments are “not raising enough revenue for what we spend”.

No one wants to pay more tax. And the richest of us protest more and fight hardest when asked to cough up a little more. I meet people who tell me we’re already overtaxed.

Nonsense. “We are a relatively low-tax country with high service expectations. Pre-COVID, Australia was eighth-lowest ranked country in the Organisation for Economic Co-operation and Development for tax collections relative to our country’s size, five percentage points lower than the OECD average,” Sathanapally says.

“Yet, Australians expect high-quality healthcare, aged care, and disability care, among many other things. Like other rich nations, government spending has grown as a share of the economy, particularly in recent decades.

“But our tax base is going in the opposite direction: narrowing as the population ages with the growing cost of tax concessions.

“This leaves a structural gap,” Sathanapally says. “You can tackle the structural problem by reducing spending, increasing revenue, and by growing the economy.

“Growing the economy is the easiest solution to sell, but it is the hardest to achieve in practice. Australia, like other advanced economies, is expecting slower economic growth over the next 40 years than we’ve had over the past 40 years. Even if productivity growth exceeds expectations, it is still unlikely to close the structural gap.

“As a relatively low-tax country, we can afford to raise more revenue, but of course there are better and worse ways to do this. Broadening the tax base and reducing tax concessions tend to be much less economically damaging than simply raising the headline rates of tax.

“Australia’s tax mix asks workers and companies to shoulder most of the burden, while offering substantial concessions for wealth. Wealth in housing and superannuation gets particularly generous treatment.”

“Take superannuation tax breaks for example. They cost the budget almost $45 billion a year and are projected to cost more than the age pension by 2036. These tax breaks predominantly benefit the top 20 per cent of income earners, so they do little to actually reduce age pension spending.

“Meanwhile the combination of capital gains tax breaks and negative gearing encourages speculation in the housing market in place of other more productive uses of funds,” she says.

We know how hard politically governments find it to fix these problems, “but frankly, we are sitting on a wretched generational bargain, and it has gone on for long enough.

“Young people today already face the prospect of weaker wage growth, higher hurdles to owning a home [or more likely, a lifetime of renting] and a future shaped increasingly by extreme weather and natural disasters.

“Yet, we ask our young people – our children and grandchildren – to contribute more towards supporting older generations than our older generations ever contributed when they were of working age,” she concluded.

Phew. It’s not often people in public life say things of so frank, so honest, so disinterested good sense that I want to quote them at such length.

Next, why doesn’t the business press write a desk-thumping editorial explaining how Sathanapally got it all so badly wrong.

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The best thing our pollies have done in decades is also the worst

With the coming departure from politics of Bill Shorten, it’s time to talk about his former bouncing baby, and now obese adult, the National Disability Insurance Scheme. To his credit, his final act has been to put it on a strict diet.

The NDIS is one huge contradiction. Its introduction, in 2013, is Julia Gillard’s short-lived government’s greatest achievement, and Labor’s biggest extension of our welfare state since the introduction of Medicare in 1984.

Before the scheme began, the physically and mentally disabled received some help from state governments, but not a lot. To a great extent, the day-to-day care of the disabled was left to their families.

Under the NDIS, however, the lives of hundreds of thousands of Australians living with a disability have been transformed. They’ve been given greater choice and control over the services and supports they receive. More of their needs are being met, with more of their care being provided by paid workers and less left to family members.

People with a disability are given a personalised “package” – a budget to cover the cost of specified goods and services they need. It sounds like a great improvement, and for many thousands of people it has been.

So, what’s the problem? It’s costing taxpayers far more than ever expected. It’s supporting more people than were expected to need help – more than 600,000 – and covering more forms of disability than intended.

The scheme’s cost is rising far faster than expected. It’s become the second-biggest item of spending in the federal budget, after the age pension. It’s expected to cost $49 billion this financial year, rising to $61 billion in three years’ time.

In 2014, the Medicare levy was increased from 1.5 per cent to 2 per cent of individuals’ taxable income to cover the cost of the scheme. This has proved wildly inadequate. The scheme’s cost has been rising by an astonishing 11 per cent a year.

This was clearly unsustainable. Since Labor returned to power in 2022, Shorten – the man who championed and initiated the scheme – has been struggling to control its ever-mounting cost, and thereby secure its future.

Last month, after reaching agreement with the states and gaining the support of the opposition, Shorten put through the Senate changes in the scheme’s rules intended to reduce the growth in its cost to a mere 8 per cent a year. The scheme will support fewer forms of disability and do more to limit overcharging by service providers. The states will be required to accept more responsibility.

As proof that costs are coming under control, Shorten has said the scheme ended last financial year about $600 million under budget.

But how has such a well-intentioned scheme been such a disaster financially? It’s been a victim of the misguided crusade for smaller government – also known as neoliberalism – and its ideology that the public sector is always inefficient, whereas the private sector is always efficient.

The great misstep of our age has been the privatisation of many government-owned businesses and the “outsourcing” of taxpayer-funded services to private providers.

The proposal for a disability scheme was given a big tick by the Productivity Commission because a market could be established where private businesses competed to provide the goods and services to individuals using government money. This was ideology-based delusion. Governments can’t wave around the cash and create out of thin air a “market” that has any of the self-controlling properties described in economics textbooks.

Many people with disabilities can act like an ordinary consumer, making sure they get the good or service they need at a fair price, but many can’t, or don’t. Even where they have the understanding, they don’t have the same motivation to spend taxpayers’ money with the care they spend their own.

Where people’s disability means they’re unable to pick and choose, the government can pay someone to help them make their choices. But that adds to the cost. And who can be sure that person’s own interests don’t get in the way of them doing the best by their customer?

Even when most of these helpers do the right thing, are they highly motivated to ensure no more taxpayers’ money is spent than necessary? And that’s before you get to the actual providers of goods and services to the disabled. Since their prices are being paid from the bottomless pit of the government’s coffers, what’s to stop them providing more services than are strictly required, or padding out their prices, or even charging the government for services they didn’t provide?

When the feds took over responsibility for the disabled, the states happily stopped providing those limited services they were providing. So where they had, for example, employed providers in regional centres, they ceased to. Did a market of self-employed providers spring up to fill the vacuum? No, it didn’t.

The other hard lesson we’ve learnt is that the bureaucrats administering the scheme aren’t much good at detecting and preventing overservicing, overcharging and outright fraud.

Let’s hope that changes.

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Debt and deficit fixed in just Labor's second budget. Really?

Small things amuse small minds. Too many people have allowed their excitement over an expected budget surplus of a tiny $4 billion this financial year to distract them from noticing a much bigger deal.

Remember that mountain of government debt we ticked up fighting the pandemic? Now Treasurer Jim Chalmers tells us it’s more like a big hill. Remember the frightening spectre of the “structural” budget deficit? Not to worry, it’ll have disappeared in a decade – if you can believe it.

Assuming it happens, achieving an infinitesimally small, and one-off, surplus of $4 billion may be significant politically, but from an economic perspective, it’s not worth popping the champagne cork. In a budget worth $630 billion a year, in an economy worth $2600 billion a year, it’s no more than a rounding error.

No, what’s genuinely significant is not that magic word “surplus”; it’s that this time last year we were expecting a deficit of $78 billion. It’s the absence of another big deficit that’s the big deal. It represents the passage of a year in which we didn’t add to the existing public debt. And, as a consequence, didn’t add to the size of our annual interest bill every year until we’re all dead.

What’s more, the absence of a deficit this year suggests the expected deficits for the next few years will also be smaller than we thought. So next year will see not just a smaller than expected annual interest bill, but a smaller than expected addition to the debt, and thus an even smaller than expected addition to the following year’s interest bill, and so on and on forever.

Well, in principle, anyway. What this news also shows is how hopeless Treasury (and all economists) are at predicting the future.

Next, note that this year’s expected deficit disappeared not thanks to Chalmer’s superior management, but thanks to Treasury’s failure to realise how strong the economy would be. More people are in jobs and paying tax (and not needing to be paid the dole).

Company profits are up, as is the tax they pay. Export commodity prices have stayed higher than Treasury was expecting, so mining companies’ taxes are well up. And remember this: inflation causes taxes to rise faster than government spending does.

But though nothing Chalmers did caused the big improvement, he’d like a round of applause for not spending much of the extra dosh.

And he’s got some very impressive news he’d love me to tell you about. Treasury hasn’t just produced revised forecasts for the financial year just ending and for the budget year 2023-34, it’s done “projections” for a further three years. It’s also made “medium-term” projections right out to 2033-34.

What they show is truly amazing. Unbelievable, even. The budget papers say the absence of the formerly expected $78 billion deficit this financial year, and consequent improvement in forecasts for the following few years, “will avoid $83 billion in interest payments over the 12 years to 2033-34. It also means [the government’s] gross [public] debt, as a share of gross domestic product, will be 7.1 percentage points lower in 2033-34.”

That bit you can believe. It’s just compound interest – which, of course, works in reverse for a borrower rather than a saver.

Now it gets hairy. The Albanese government’s various decisions to limit the growth in government spending mean real spending growth is now “expected to average 0.6 per cent a year over the five years [to] 2026-27”.

This compares with average real (inflation-adjusted) spending growth of about 4 per cent in the eight years before the global financial crisis of 2008, and 2.2 per cent a year over the eight years to 2018-19, before the pandemic.

Really? That’s a truly Herculean achievement. And with so little blood on the floor.

What used to be a mountain of debt is now just a big hill. Phew. And we thought it was only Scott Morrison who could call forth miracles.

Except, of course, that it hasn’t been achieved. It’s just “projected” to happen. All those other averages are “actuals” whereas, the unbelievable 0.6 per cent is simply a projection.

Projections are based on assumptions, which are then mechanically multiplied out, year after year. One assumption is that the economy, and the budget, will just move in a straight line over the next five years, with nothing unexpected – say, a pandemic or a recession – blowing us off course.

The five-year projection says the gross public debt is now expected to peak at 36.5 per cent of GDP in June 2026. Now, get this: this would be 10.4 percentage points lower, and five years earlier, than projected just seven months ago in Labor’s first budget.

And if you keep cranking the projection handle, the public debt “will” (their word) be down to 32.3 per cent of GDP by June 2034.

Next, remember all the economists wringing their hands over the “structural” budget deficit? This is the part of the budget balance that’s left when you take out the part that’s just the product of where the economy happens to be in the business cycle at the time.

The balance will look good when you’re at the top of the boom (as we are now) and bad when you’re at the bottom of a recession (as we may be in a year or two). The structural deficit or surplus is a calculation of what the balance would be if we were in the dead middle of the cycle, neither up nor down.

In Chalmers’ first budget, last October, Treasury took its projection of the budget balance out 10 years, and estimated the structural component to be steady at a deficit of about 2 per cent of GDP.

That’s $50 billion a year in today’s dollars. A medium-size economy with a big debt can’t live with that. We have to get it down, so we’re well placed to borrow heavily in the next recession or pandemic.

Well, has Chalmers got good news for those economist worrywarts. Seven months later, the projection (budget paper No. 1, page 131) shows the structural deficit steadily withering away until it reaches almost nothing in 2033-34.

So, how did Chalmers magic it away? Assumptions, dear boy, assumptions. For years, the biggest single program driving the growth in government spending has been the explosive growth in the National Disability Insurance Scheme.

But the government has decided to take steps to limit its growth to a mere 8 per cent a year. The projections are based on mechanically projecting “existing policy”, so the 8 per cent target – which may or may not be achieved – is baked in.

Take that monumentally optimistic assumption, add further optimism about restraint in other spending areas, allow them to magnify the believable bit (that a disappeared deficit right at the beginning of the projection significantly reduces our formerly expected interest payments over a decade) and you’ve eliminated the problem.

If only reality was as easy.

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