Prime Minister Morrison says that he will make sure that government services are reliable and responsive to the needs of those “quiet Australians” whose legitimate expectations are consistent with past practice and social conventions. What that means for the growing number of other Australians, who are less able to have a go and look after themselves, is apparently of no great concern.
I want to question whether Morrison’s small government agenda, with revenue capped at a fixed share of GDP, will be capable of even meeting the expectations of his quiet Australians in the years to come.
Since the Coalition Government won office in 2013 it has run very tight expenditure control and despite an expectation of rising living standards, real government outlays per capita have not increased. Furthermore, in its most recent 2019 Budget the Morrison Government estimated that total spending on its existing policies would continue to be tightly constrained, with total real outlays only increasing over the next three years, between 2019-20 and 2022-23, at an average annual rate of 1¾ per cent – again about the same as the rate of population growth.
This tight expenditure control will be necessary if the Government wants to cut taxes while returning the Budget to surplus. But does it represent what the “quiet Australians” expect from their Government, and does it represent the best way to maximise economic growth?
As the Parliamentary Budget Office put it in its presentation of its Medium Term Fiscal Projections:
The spending restraint seen over the last few years may be difficult to maintain over the coming years given the length of time over which restraint has been applied, the pressures emerging in some spending areas, and the potential need for fiscal stimulus, noting that the budget balance is mildly contractionary.
In this article I will take this argument further, and discuss some of the legitimate demands by “quiet Australians” for government services that are not being met, including:
a. aged care
b. disability services
d. education from early education to tertiary education
Last week the interim report of the Royal Commission into aged care described what it called “A shocking state of neglect”. It found that aged care services are “fragmented, unsupported, and underfunded”. As many people are waiting to receive in-home care as are receiving it, and some people are even dying before they can get off the queue and become eligible. While many people in residential accommodation are mistreated largely because the inadequate numbers of hard-pressed staff cannot cope.
Seniors advocacy groups have been reported as saying at least another $2 billion a year funding increase is needed for aged care. That would represent an increase of a bit over a 10 per cent, but given the scale of the defects I think it will require far more than that to properly fund aged care.
The National Disability Insurance Scheme (NDIS) was introduced by the previous Labor Government and expenditure has ramped up since then. Last year NDIS payments amounted to $13 billion, increasing to $17.5 billion in the current financial year, and $22.3 billion next year, after which the cost of the NDIS will grow much more slowly.
However, in response to concerns about the quality of care for disabled people, a Royal Commission has been established, and it would be most surprising if its recommendations did not add significantly to budget outlays in future.
The principal reason why people elect to be privately insured for their health care is because they are concerned about the delays in the public system. However, the cost of this insurance has been increasing at more than twice the rate of increase in wages and private health insurance is being dropped by more and more healthy people. Consequently the future viability of private health funds is emerging as an issue.
There are essentially two solutions, but each will cost the budget. One would be to wind up private health insurance and move to a totally public health insurance system. However, that would most probably require a significant increase in present funding if it were to be viable. The second solution would be to increase the government subsidies to private health care, but again at a cost to the budget and with doubtful equity effects.
Universities have had their recurrent funding frozen for the last two years and research funding has been cut. As a result, universities have become more and more reliant on the funds raised from overseas students, but now this source of funding seems likely to stall.
Vocational education and training has been even more hard hit by the Coalition’s funding cuts. Most importantly, VET is critical to Australia’s capacity to adopt and adapt to technological change, on which our future living standards depend, and increased funding is a priority if we want to maintain employment and productivity.
Another major concern is that educational outcomes are heavily influenced by the socio-economic status of families and their location, and spatial inequality has increased enormously in Australia in recent decades. Early childhood education is increasingly important in that context, as it can help overcome the potential disadvantages of those children who are growing up in suburbs with a lower socio-economic status.
In sum, unless active steps are taken to redress these various areas of under-funding and increasing inequalities of educational opportunity, Australia’s future economic prospects and well-being are likely to suffer. However, this will require substantially more education funding than is currently being provided for.
The Government’s own forward budget projections show defence spending rising faster than GDP over the next few years. This is mainly because capital expenditures will be increasing rapidly, especially on the Future Submarine Project, which represents the biggest acquisition in Australia’s history.
Nevertheless, Australia is facing a looming gap in its maritime defence capability, as the first of the new submarines is not scheduled to be operational until 2035. At the same time the international situation is much more uncertain than it was when the previous Defence White Paper was issued only three years ago. In these circumstances, there needs to be a new review of defence strategy and the associated force structure, and that would very likely lead to new demands involving major expenditures on new capital assets that will add to the Defence budget.
An annual increase in additional budget outlays equivalent to half a percent of GDP in each of the next three years would be sufficient to eliminate the Government’s projected budget surplus. As I have shown above, however, the additional government spending necessary to meet the legitimate expectations by ordinary “quiet Australians” for government services would easily amount to another half a percent of GDP in each of the next three years, and thus wipe out this projected surplus.
In addition, that projected budget surplus is also based on a quick recovery in economic growth in the current fiscal year, and nominal GDP increasing at an average annual rate of 5½ per cent over the next five years. That rate of increase is a whole 1½ percentage points faster than the average rate of increase in nominal GDP of only 4.0 per cent over the six years of this Government. But again, even if nominal GDP growth is only half a percent lower each year, that would also be sufficient to wipe out the Government’s projected budget surplus.
Furthermore, without some of this additional expenditure, especially on education and training, and also to support household incomes, it is even less likely that economic growth will recover in the medium term as much as the Government is projecting.
In sum, the Government’s promises to ordinary “quiet Australians” just don’t add up. It is simply not possible to meet most Australians’ legitimate expectations for government services and return the budget to surplus, within the present revenue cap. Instead, we need to accept that additional revenue will need to be raised in the years ahead, and the political conversation should be about how best to do that.
The sad thing is that Labor in the last election recognised the need to spend and tax more, if Australia is to prevent the drift to increasing inequality and return to sustained economic growth. However, unfortunately, Labor failed to develop the necessary narrative to gain the support of many of the households that would have most benefited.
Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.