This paper outlines the case for and key elements of a comprehensive budget reset after the Federal election and ahead of the 2023-24 Federal Budget. Governments must now focus all of their policy levers on lifting Australia’s capacity to grow into the future and deliver the services that will underpin Australians’ health and wellbeing.
Budget Reset Paper
The needs of the economy and community are changing, demanding a new approach to budget policy in the period ahead. By undertaking a major review of budget strategy immediately following the next Federal election, the Federal Government will ensure that the budget is better positioned to support growth, meet community expectations, and respond to future economic shocks.
The economic environment is changing
COVID-19 and the government’s response has fundamentally changed the economic environment. After $500 billion of stimulus, demand in the economy has taken off and full employment is in reach.
In the next 12 months the Federal Government will be unwinding unprecedented stimulus gradually to get as many people as possible into jobs to reach full employment, while confronting growing inflationary pressures and a pandemic that is not done just yet. Getting this right is critical – every 0.1 per cent drop in unemployment will see another 14,000 odd people in jobs. i At the same time, unwinding the spending too slowly could add further to inflationary pressures, leading to higher interest rates than otherwise would have been the case.
Beyond the immediate impetus to reach full employment, the challenges are now on the supply side of the economy. Stronger demand is showing up persistent long-term weaknesses in human capital, lacklustre productivity and slow adoption of new technologies. Addressing these issues will become increasingly important to future living standards, with economic growth expected to dip lower next year and as the headwinds of an ageing population gather pace. The economy and budget will also be increasingly exposed to the impacts of climate change, greater geopolitical instability and the transition to net zero.
i Assuming constant participation rate as at January 2022.
Budget policy must change too
In this environment, the quality of the budget and the efficiency with which taxpayers’ dollars are invested in building productive capacity in the economy and delivering effective human services will be more important than ever.
Current low interest rates have also changed the goalposts for budget sustainability. The Parliamentary Budget Office’s view after the 2021-22 budget is that the fiscal position remains sustainable even if the government continues to run modest deficits and interest rates rise from record lows. 1 Against the backdrop of increasing headwinds and competing demands for increased government spending, a stronger focus on frequent evaluation of programs and prioritisation based on long-term economic and social benefit would boost fiscal sustainability and resilience.
Past approaches are no longer fit for purpose
The arbitrary targets and narrow focus on budget surplus that have underpinned Australia’s recent budget approach do not guarantee budget sustainability and will carry significant economic costs in a supply-constrained economy. 2 Budget targets, while necessary to anchor the fiscal strategy, are often blunt tools that constrain choices, leading to an over-reliance by policymakers on temporary indexation, efficiency dividends, levies and other short-term savings that don’t improve value for money or budget sustainability over the long-term. Many Australians bore the brunt of a temporary deficit levy only to find that the measure never met its intended objective to repair the budget.
Budget caps and other attempts at expenditure restraint have also not been sufficient to address the underlying funding and demand challenges across programs growing at a quicker pace than the economy – health, aged care and the NDIS. These programs require a far more sophisticated approach to policy design, review and evaluation, and a willingness to present and discuss the trade-offs with the community transparently.
In 2019, CEDA noted in Sustainable Budgets: underwriting Australia’s social contract that extremely low expenditure growth in several areas of the budget was likely to prove unsustainable in the longer term. Any attempts to artificially constrain these expenditures in the short-term ultimately leads to a deferral of costs and unintended consequences. The community then bears the burden of arbitrary caps and artificial constraints through inadequate services in the longer term. This has been seen all too painfully in areas such as the aged care system , hospital funding and higher education, as evident in Box 1.
Box 1: Examples of unsustainable expenditure caps and restraint s
Aged care
- In the five years leading up to the Royal Commission, aged care expenditure for each person over the age of 65 was increasing by around one per cent a year in real terms. 3
- The aged care system was subject to 18 major reports and inquiries from 1997 until the Aged Care Royal Commission just over 20 years later. 4 Many of these reports highlighted inadequate care driven by funding and resource constraints and the need for a significant lift in spending per resident.
- This rate of spending growth has tripled since the Royal Commission.
Hospital funding
- The National Health Reform Agreement 2020-2025 between the Commonwealth and the States includes a 6.5 per cent annual growth cap in Commonwealth contributions to public hospital services.
- Backlogs of elective surgery and delayed medical care due to COVID-19 is now placing considerable pressure on state government run hospitals.
- Such unusual circumstances render the growth cap unworkable if State Governments are to sustainably meet demand. 5
Education & vocational education
- Between 2010 and 2020, combined Commonwealth Government expenditure on higher education and vocational and other education grew at an annual average of just 1.6 per cent in nominal terms. 6
- Projections point to Australians needing to spend a third more time on education and training in the next two decades to keep up with technological change in modern workplaces. 7
- This trend was reversed in 2020-21 with major investments in research and vocational education capacity.
Several targets in the current fiscal strategy have been there in one form or another since the early 2000s, despite being unmet, unsound, or inappropriate in the economic environment.
Targeting a budget balance on average over the economic cycle
Australia has now recorded 14 consecutive deficits and over the last 40 years, there are only six years in which Australia could claim to have been running a balanced budget on average over the preceding decade. This rule also has no mechanism to prevent net debt from blowing out and debt sustainability will be an increasing focus for policymakers in the period ahead. 8
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