Costello and Swan share blame for deficit: economist

A leading economic forecaster says the Howard, Rudd and Gillard governments have all contributed to a budget black hole that will bite hard when the commodity boom fades completely.

estimates that Australia's true budget position would be a deficit of more than $40 billion if it were not for the still high prices of Australia's major exports of iron ore and coal.

The report's author, Stephen Anthony, who is the director of budget policy at consultancy Macroeconomics, says that is much higher than his projection for an actual deficit of $11.6 billion in the federal budget which will be handed down in just over a fortnight.

Mr Anthony says the difference between his figure for the "structural deficit" and the actual deficit is down to the positive effect historically high commodity prices are still having on the budget.

"What we try to do is adjust the Government's budget - we try to think about what it would be if the economy was running at its sort of long-run average and if commodity prices were closer to something that you would consider the long-term norm," he explained.

While the Commonwealth Treasurer Wayne Swan will be the one standing up to take ownership of the latest deficit, Mr Anthony says he is not the sole architect of the budget's key problems.

"The first meaningful structural budget deficit was from about 2006-2007.

Essentially the Howard government, which had been a really strong fiscal performer, in its last five budgets both handed back tax cuts and engaged in discretionary spending to such a degree that the previously strong record of fiscal rectitude was sort of undermined," he said.

"Essentially we entered into a period of structural budget deficits and then that situation wasn't addressed by the Rudd government, and hasn't been significantly improved on by the Gillard Government either." Middle class welfare targeted When asked what the main cause of these structural deficits has been, Mr Anthony responds with an answer popular among economists but perhaps not so much amongst the electorate.

"The major issue is what they call middle class welfare - the payment of welfare benefits to households that essentially are not what you would consider in hardship," he replied.

"Ideally what you want to do is you want to target your welfare system, whether it's household benefits or assistance to the aged, assistance to superannuants, or whether it's assistance to corporates." Mr Anthony says it will take significant, but not necessarily brutal, cuts to public spending to eliminate the structural deficit and prepare for a time when Australia's commodity exports are worth less than they are now.

"We need to achieve spending cuts in the federal budget of somewhere between $10-15 billion per annum that close the structural budget deficit," he said.

The report cites many areas where what it describes as "wasteful spending and tax concessions" can be eliminated.

Those include eliminating the First Home Owners Grant for a saving of $771 million, cutting staff numbers in the federal education and health departments for a saving of $249 million, reducing irrigation purchases and water buybacks which are costing billions, savings in defence procurement and staff cuts for the Defence Materiel Organisation, eliminating the School Kids Bonus for a saving of $1.2 billion, and reducing the income test threshold on Family Tax Benefit B to $120,000 for a saving of $811 million.

Mr Anthony says the Federal Government also needs to urgently review around $18 billion worth of subsidies given to certain Australian industries every year, with the amount of subsidies paid to each firm published to increase accountability.

Long term focus However, the main change called for in the report is a fundamental shift in the way governments measure their commitment to fiscal sustainability.

Rather than just looking at the headline budget position each year and aiming to balance that over each cycle of economic ups and downs, Mr Anthony says governments need to focus on the budget's structural position and whether revenues and spending are sustainable under average economic conditions.

"What Australia needed at the beginning of the boom was a fiscal strategy which quarantined the surplus that we were about to enjoy, and there were economists back then who saw the writing on the wall and started to talk about tightening the fiscal strategy so that we could capture the benefits of the high terms of trade," he responded when asked whether there should have been a federal mining tax back towards the start of the boom in the early to mid-2000s.

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