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2013 budget reply speech

June 5, 2013

I don’t normally get the opportunity to give a budget reply speech, but this year the ALSF invited the Australian Taxpayers Alliance to address their annual budget seminar, so I was given the chance to rant to some eager young politicians of the future. This is what I prepared for the talk…


The choice

In the coming decades, policy makers will need to make a choice between embracing the green-left policy of higher taxes, allow our country to slowly go bankrupt, or undertake difficult reforms to health and pensions that are politically unpopular. Those are the only choices. Few people on the centre-right will admit it now, but the truth is that most politicians (including the “good” ones) are probably going to choose a mix of higher taxes and eventual bankruptcy.

For political wannabes, this is a killer question. It goes straight to the issue of why you want to be involved in politics.

The reason for this uncomfortable choice is that government spending is going to continue trending upward — both because of the aging population, and also because our culture now demands ever more government handouts, even as people become richer.

Aging population

The budget problems caused by an aging population are now fairly well known in among policy boffins. A century ago life expectancy was under 60 years, fifty years ago it was 70, and today people can expect to live over 80 years. As our society ages, there are fewer people working (and paying tax) and more people living on the pension and regularly using government health services. In the next few decades, the number of >65 year olds will more than double, and will make up about 1/4 of the total population. The number of people aged >85 will quadruple. We currently have five workers to support each retiree, but by 2050 there will only be 2.7 workers for each retiree… and the trend is just going to continue.

This change is a good thing if you like being alive, but it’s not affordable if you want to keep our current health and pension policies.

The International Report (IGR) is published by the Treasury every five years (sometimes more often) and it explains every time that health and pension spending is going to increase by about 5 percentage points of GDP over the coming decades. To put that into perspective, that would require the doubling of all income tax rates or the tripling of the GST… just so that we can pay for a continuation of current policy for our aging population.

The problem doubled

But the problem is actually much worse than that. The IGR does not factor in the cost pressures on state governments, which are also facing growing health cost pressures. In NSW alone it is estimated that under the current hospital system, health costs will consume the entire state budget in less than 20 years. And the problem is worse still, since the IGR assumes that the government will never come up with a new spending scheme. That is unlikely. Even under the “austere” Howard government, federal health spending increased by 6% per year, and welfare spending increased by 25% in real terms, in part due to a range of new spending initiatives.

Compounding the problem of an aging population is that we are developing a culture of dependence, with an growing proportion of the population addicted to government support. When Australia became a nation the government (local, state, federal) took up about 15% of the economy. Today, the government has grown to about 35% of the economy (mostly health & welfare) and even those on the free-market edge of pragmatic policies only want to bring it back to 30%. John Maynard Keynes famously said that the government should not increase beyond 25% of the economy, so we are now in the absurd position where Keynes would be considered on the radical free-market fringe of Australian politics, more libertarian than the Centre for Independent Studies or any Liberal politician. If a fabian socialist had gone to sleep 100 years ago and woke up today, they would celebrate their victory.

One reason for the victory of the fabians is that welfare leads to more welfare. It is well known in economics that if you want more of something you subsidise it and if you want less of something you tax it. That is why the government (rightly or wrongly) subsidises education and tax cigarettes. By far the largest subsidy in Australia is a subsidy on not working and by far the largest tax is a tax on working. The consequence is sadly predictable.

In 1965 only 3% of the working-age population relied on government welfare; today that number is over 20%. Before Medicare was introduced, nearly ¾ of families had their own private health insurance. Forty years later ¾ of health is run through the government. This is despite the fact that people are now more than twice as wealthy in real terms (ie after adjusting for inflation). In a sane world, as our society became richer, then we should have fewer people relying on government… but welfare addiction prevents sanity.

We are now a nation addicted to government, with bipartisan support. Which brings us back to the problem at hand — a choice between ever-higher taxes; a slow trend towards bankruptcy; or politically difficult reform that includes spending cuts.

Macroeconomic laziness

The current bipartisan policy is to sleepwalk towards bankruptcy. It is true that Australia currently has low levels of debt and a fairly strong economy, so we aren’t in fear of facing a Greek-style bankruptcy in the near future. That is probably still 30 years away. Some people use this as a rationale for complacency and justification for deficits. However, the Greeks were in a better situation and complacent a few decades ago and it was exactly that sort of attitude that led to eventual ruin. If we know we are walking down a road to ruin, then we should change direction.

There is no macroeconomic justification for a budget deficit at this stage of the business cycle. While the stimulus policy of 2008/09 were bad policy by any objective measure… it would have been acceptable for the government to have recorded some amount of deficit spending during our mini-recession. But that was five years ago. The budget reports stable economic growth of 3% per year, which means (even according to Keynesian theory) that we should have a budget near balance and perhaps with a small surplus.

If we cannot maintain a surplus now in times of stable growth, how are we going to maintain a balanced budget in the coming decades with the pressures of the aging population and an underclass increasingly addicted to perpetual welfare?

All of this is a long introduction to the idea that the 2013 federal budget needed to be in surplus, and more importantly it needed to be in surplus by reducing the spending pressures on health and pensions. Allowing a deficit is the easy answer, but it is not the responsible answer. Fixing the budget with a few tax increases and a few marginal spending cuts is more responsible, but it is not a long term solution to the ongoing structural problems. The government needs to pass more health and pension responsibility on to the shoulders of middle Australia so that people can once again be responsible for most of their own life.

Some budget details

If the above details haven’t scared you, then you probably haven’t understood the situation. You should be scared. And further, you should be pessimistic about the chances of Australia ever finding a politician smart and brave enough to address the problems. But putting aside the macro story for a moment, the 2013 budget had a few micro points worth noting.

* The government complained that they were not getting enough revenue. In fact, federal revenue increased from 23% of GDP in 2012/13 up to 23.5% of GDP in 2013/14 while government spending also increased from 24.2% in 2012/13 up to 24.5% in 2013/14. Another “tax & spend” budget.

* Back in 2007/08 the federal government spent 23.1% of GDP. If the government was able to keep spending down to that level, then they would have a surplus now.

* The budget papers talk about a “fall in company tax receipts” to justify the continuing deficit. A few pages later the budget clearly shows that company tax revenue has gone from $66 billion in 2012/13 all the way down to an expected $72 billion in 2013/14. By using the words “fall” the budget clearly gave the impression that there had been a fall… and that is not the truth. What they meant (and what they should have said) is that company tax receipts haven’t increased by as much as they hoped.

* The government made much of the fact that they made $43 billion worth of “savings” over the next four years to pay for new spending programs and cut the deficit. What they forgot to mention is that $26 billion come from higher taxes, thanks to over 50 new revenue measures. Suffice to say, taking money from productive people to pay for bigger government is not a “saving”. This sort of gross dishonesty is repeated every year by the government and gullible media, but it really needs to stop.

* In 2007/08 federal government tax and spending was under $300 billion per year. The budget estimates that by 2014/15, federal government tax and spending will be over $400 billion. This is not austerity.

* Wayne Swan has been repeating the line that Australia is now more than 13% richer than it was when the ALP came to power. That is true. But there are also more people in Australia now. When measuring GDP per person, Australia is less than 5% richer than we were in 2007. That’s still better than a slap in the face with a wet fish… but it’s not quite the story Wayne wants us to believe.

* The government has increased the mis-named “Medicare Levy”. For most people that will mean a 0.5% increase in their marginal income tax rate. But for people earning between $24,168 and $25,677 per year, their marginal tax rate will increase by 8.5%… from 20.5% up to 29%. You will not hear this anywhere else, because literally no economic journalist or political commentator understands how our tax system works.

* As I do every budget, it’s time to untangle the web of lies and report the actual marginal tax rates on income. And as I repeat every year, our tax system still has two places where the rates are regressive… at $24,167 the marginal rate drops from 29% to 20.5%… and at $66,666 the marginal rate drops from 35.5% to 34%.

2013/14 rates (before the increase in Medicare Levy)

up to $20,542 = 0%
$20,543-$24,167 = 29%
$24,168-$37,000 = 20.5%
$37,001-$66,666 = 35.5%
$66,667-$80,000 = 34%
$80,001-$180,000 = 38.5%
over $180,000 = 46.5%

2014/15 rates (after the increase in Medicare Levy)

up to $20,542 = 0%
$20,543-$25,667 = 29%
$25,668-$37,000 = 21%
$37,001-$66,666 = 36%
$66,667-$80,000 = 34.5%
$80,001-$180,000 = 39%
over $180,000 = 47%

  1. June 5, 2013 at 10:15 am

    My actual talk skipped a few of the above points, and instead we split the session into smaller groups that each prepared a mini-budget. This is what they did:

    * Team “G” had $31.2 billion in savings from university, FTB, schools, environment, and job seeker, had a $4b increase in defence, and a $9.2 billion surplus.

    * Team “C1” increased the retirement age to 70, cut spending on FTB, PBS, childcare, arts, universities and FTB. They also had a $4b increase in defence spending, and had a surplus of $25 billion.

    * Team “M” cut higher education, family payments, PBS, environment, recreation & culture and DSP, giving total savings of $59 billion. They used this to abolish excise taxes & the carbon tax and keep a $7.5 billion surplus. (my favourite)

    * Team “C2” cut foreign aid, defence (replaced with more liberal gun laws), ABC, car subsides, DSP, half of uni spending, and removed negative gearing, giving a surplus of $4.9 billion.

    * Team “J” cut ATSI spending, ABC, foreign aid, energy, agriculture, housing and childcare, giving a $12.7 billion surplus.

    All better than the actual budget, but it’s worth noting that most of the cuts didn’t directly tackle the problem of runaway health and pension spending.

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