The holidays are over, the Commission of Audit is about to report, and it is time for the Abbott government to go into battle with the budget deficit. While the task is daunting, it needs to be kept in perspective.
The best available measure of the budget deficit is Treasury's estimate revealed in the Mid-Year Economic and Fiscal Outlook (MYEFO) in December. The MYEFO tells us there is a structural deficit of 3 – 4% of GDP in 2013-14, which under current spending and tax policies will shrink to a little under 2% of GDP over the next three years, and then gradually to around 1% of GDP in the early 2020s.
The structural budget result is the deficit or surplus remaining after the temporary effects of economic booms and slumps are stripped out. Although the government talks about achieving a surplus, a structural surplus is neither necessary nor desirable; a structural balance between spending and revenue is the appropriate target, which means that the actual budget result will swing between deficit and surplus depending on cyclical conditions.
Clearly a fiscal adjustment (reduction in the structural deficit by reducing spending and/or raising revenue) is needed at this time. One of the key questions for fiscal policy is the time frame for achieving that adjustment. Reaching structural balance over three years would require an adjustment of a little less than 2% of GDP spread over that period; achieving it over seven years would require only 1% of GDP.
The attraction to politicians of a longer-term target is obvious, but there are too many uncertainties and political risks over a seven year horizon. An adjustment of 2% of GDP over three years seems about right. That represents around $30 billion a year in 2013-14 terms. Although this sounds huge, it is comparable to adjustments made in Australia in the mid-80s and mid-90s.
All of the adjustment could and should be achieved by reducing Commonwealth spending as a share of GDP, which has rarely been higher than it is now. Carving 2% of GDP out of Commonwealth spending over three years would be consistent with the CIS' TARGET30 campaign, which highlights the benefits of reducing government expenditure at all levels of government to no more than 30% of GDP over ten years. This would not just allow budgets to be balanced; it would also create room for sustainable tax reduction.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
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Balancing the budget
The best available measure of the budget deficit is Treasury's estimate revealed in the Mid-Year Economic and Fiscal Outlook (MYEFO) in December. The MYEFO tells us there is a structural deficit of 3 – 4% of GDP in 2013-14, which under current spending and tax policies will shrink to a little under 2% of GDP over the next three years, and then gradually to around 1% of GDP in the early 2020s.
The structural budget result is the deficit or surplus remaining after the temporary effects of economic booms and slumps are stripped out. Although the government talks about achieving a surplus, a structural surplus is neither necessary nor desirable; a structural balance between spending and revenue is the appropriate target, which means that the actual budget result will swing between deficit and surplus depending on cyclical conditions.
Clearly a fiscal adjustment (reduction in the structural deficit by reducing spending and/or raising revenue) is needed at this time. One of the key questions for fiscal policy is the time frame for achieving that adjustment. Reaching structural balance over three years would require an adjustment of a little less than 2% of GDP spread over that period; achieving it over seven years would require only 1% of GDP.
The attraction to politicians of a longer-term target is obvious, but there are too many uncertainties and political risks over a seven year horizon. An adjustment of 2% of GDP over three years seems about right. That represents around $30 billion a year in 2013-14 terms. Although this sounds huge, it is comparable to adjustments made in Australia in the mid-80s and mid-90s.
All of the adjustment could and should be achieved by reducing Commonwealth spending as a share of GDP, which has rarely been higher than it is now. Carving 2% of GDP out of Commonwealth spending over three years would be consistent with the CIS' TARGET30 campaign, which highlights the benefits of reducing government expenditure at all levels of government to no more than 30% of GDP over ten years. This would not just allow budgets to be balanced; it would also create room for sustainable tax reduction.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
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