It is to be feared that the forthcoming budget will be a mixture of spending bribes and unsustainable tax cuts. This is not what is needed to restore economic stability and the provision of essential government services.

With the next election only three months away, the Budget to be brought down on March 29 is more than usually important. This Budget may be the last chance for the Government to turn the tide of public opinion in its favour.

The Government will therefore be tempted to announce give-aways in this Budget in an attempt to restore its political future. However, the Governments economic management credentials will also be a key part of its sales pitch, and the Government will be judged according to how it proposes to handle the imminent return to full employment without risking excessive inflation.

Financial markets are expecting as many as four interest rate hikes this year, and even the Reserve Bank has shifted its position. It now says that a shift to higher interest rates this year is plausible, rather than waiting until 2024.

Fiscal policy will therefore also need to move to restraint, and that means getting the budget back into balance by 2023-24. If the Government fails to meet this test, it risks its reputation as competent economic managers.

The latest budget projections published by the Government last December (the MYEFO), however, show an underlying cash deficit of $84.5 bn, or 3.6% of GDP, in 2023-24. While last years Intergenerational Report projects excessive budget deficits forever, indicating that the Government cannot rely on economic growth to restore its fiscal position.

So, policy changes will need to be made in the forthcoming budget to reduce the prospective deficit. After all, the Government cannot claim the credit for getting the economy back to full employment, without recognising that a necessary consequence is that fiscal policy then needs to be tightened. Indeed, any delay makes the eventual budget restoration task more difficult and risks higher inflation and/or higher interest rates.

Accordingly, a reasonable target for the forthcoming budget would be to reduce the prospective deficit of 4.4% of GDP for next year, 2022-23, by around 2 percentage points to say 2.4% of GDP. Furthermore, it should be noted that this discretionary fiscal tightening of around a net $45 bn would still leave as much or more to be done in the following budget, if budget balance is to be restored by 2023-24.

Restoring the budget balance

Of course, given that economic growth will not be sufficient to restore budget balance, there are only two ways that a balanced budget can be achieved: increased taxation or reduced public expenditure.

As the Government has repeatedly stated, it is opposed to higher taxation.

Nevertheless, the present budget figuring assumes that the low and middle-income tax offset will not be extended, and unless this policy is reversed almost 90% of taxpayers will pay an extra $1080 in tax next year. On the other hand, extending this tax offset for another year in an attempt to save the election, would blow out the starting point for the budget deficit by a further $7bn.

Apart from this immediate taxation conundrum, the longer-term difficulty is that the Government has a self-imposed revenue ceiling whereby total tax receipts cannot exceed 23.9 per cent of GDP. Although the budget is not presently expected to hit this arbitrary revenue ceiling in the next three years, neither does it offer sufficient room to restore budget balance. Thus, some permanent cutting of expenditures or increasing taxation beyond the revenue ceiling will be required.

The Government, of course, will want to focus on cutting expenditures, but there is little, or no room left for this, other than scrapping some of its give-aways, such as sports rorts and various infrastructure projects, that are intended as election winners.

The MYEFO does project a decline in government payments in 2022-23 because of the winding back of various forms of temporary assistance provided during the pandemic. But as already noted, this still leaves an unacceptably high budget deficit.

Furthermore, the forward estimates show government payments stagnating well after the expected end of the pandemic, with these payments only increasing by 0.6% in 2023-24 and even falling by 0.3% in 2024-25.

The critical problem in balancing the budget is that too many ongoing government services have been under-funded for too long, and according to the Morrison Governments own forward estimates, this problem is only going to get worse.

For example, it has become clearly apparent that aged care is under-funded and therefore under-staffed. The obvious (market) solution would be to offer more pay, but Morrison says the Government cannot afford to pay aged care workers the salary necessary to attract them.

Similarly, the Morrison Government has stopped paying JobKeeper or any other form of assistance to businesses which are suffering from both forced and voluntary lockdowns, again because the Government considers that it can no longer afford this assistance. As the NSW Coalition Government has argued, however, the case for this assistance is just as strong as ever.

And most recently, a few days ago the AMA drew attention to the logjam that has developed in Australias health services because of under-funding. According to the AMA, the present funding formula doesnt adequately account for the fact that Australias population is growing, ageing, and developing complex health needs. Nor does it provide enough funding to keep people out of hospital through preventative and community care.

The AMA has therefore called on the Australian Government to invest another 1% of GDP in health care annually over the next four years.

And there are a host of other inadequately funded services, such as childcare, universities (both teaching and research), unemployment assistance, social housing, and foreign diplomacy and aid (see my article in P&I, September 22, 2021).

Morrison claims that his government guarantees essential services, but clearly he is failing to meet that commitment. Saying that they cannot be afforded, as he did with aged care, is not good enough. What is the purpose of any government if it is not to ensure the supply of services on which the community depends?

A new approach to budgeting is needed

Before the pandemic the Coalition Government sought to control and limit public expenditure by setting a revenue ceiling and a deficit target consistent with getting the budget back into the black.

This may have had the advantage of forcing a top-down review of priorities for government spending, but given our present starting position of inadequate services it is questionable whether that process of determining spending best meets present needs.

Instead, we need to consider a new more bottom-up approach where equal weight is given to a consideration of what services should the government provide if it is to meet legitimate community expectations, and their expected cost. That assessment of expenditure needs would then provide the basis for a consideration of how much revenue is needed and how it might best be raised.

On the information already available, it is clear that Australia needs to raise additional revenue if it is to adequately provide essential services. But even if taxation revenue was augmented by as much as 4% of GDP over the next few years, Australias ratio of taxation revenue to GDP would be no higher than in other comparable OECD countries and less than in most if they too balanced their budgets.

It is unlikely that the forthcoming election campaign will include detailed proposals for taxation reform. However, it is to be hoped that the incoming government will commit to a full-scale review of the taxation system after the election with the aim of meeting future revenue demands most efficiently and equitably. Without such a review it is difficult to see how Australia will enjoy adequate provision of government services nor meet the requirements of a responsible fiscal policy.