The release of the Parliamentary Budget Office’s report on government spending this week was a timely pointer to the reasons the federal government finds itself in a budgetary pickle.
According to the PBO report, over the last decade, government spending grew 27 per cent faster in real terms than the annual rate of growth of GDP. For the last five years it was 47 per cent. These are easy and dramatic numbers to understand. All governments are culpable.
More seriously, spending has run ahead of tax receipts and borrowing was the only available option. Sadly, this led to the abolition of the maligned debt ceiling, which at least had the virtue of showing the public how rapidly borrowing was increasing.
It’s as though we are using a new credit card to pay the debt on one that has reached its limit.
How will the day of reckoning ever arrive? Will recovery from the spending addiction be an orderly process? Or do we have to go cold turkey? If the Treasurer and Finance Minister don’t close the door now, it may well be the latter.
Maybe I’m a little obsessed with the problem of government spending, but it’s time to be. Despite knowing the likely extent of the problem, the new government has added to the fiscal extravaganza in just its short time in office. Election promises perhaps, but it wouldn’t have hurt to have waited until the picture was clearer. The public would have gone along with the pause.
For instance, from the PBO report we learn that the trajectory of health spending is unsustainable.
A couple of examples. On average, people are using Medicare-funded services around 40 per cent more each year than they did a decade ago. And these services are more expensive.
The cost to the federal government, and thus the taxpayer, of subsidised pharmaceuticals has risen by 50 per cent for every person over the past decade. The growth in health spending has outstripped annual GDP growth significantly.
This can’t continue. A small co-payment for Medicare services, as recommended by the CIS, would help reduce the demand for some medical services while contributing to the budget bottom line.
There are other suggestions to bring the budgetary house to order. Cutting or ending a program here and there are only short-term solutions; what we really need is to establish institutional mechanisms to bring some discipline to the budget process and change the national and political culture about government and its fiscal responsibilities.
Historian Niall Ferguson and former Israeli finance minister Yuval Steinitz’s suggestion in an article to introduce multi-year budgets to deal with the US financial crisis could be applied in Australia. Israel’s experiment with biennial budgets is credited to some degree for the nation’s rapid recovery from the financial crisis. There are arguments for and against this approach, but giving governments a longer time frame to consider a sounder fiscal policy is a sensible idea.
Engendering certainty more generally throughout the economy will spur investment and growth.
Other measures have been discussed in Australia to strengthen our fiscal position. In “Strengthening Australia’s Fiscal Institutions”, released this week, CIS Research fellow Dr Stephen Kirchner examines the deteriorating budget situation and blames it on the failure to adhere to a rules-based framework. Governments over the past 30 years have enacted various kinds of fiscal policy rules, but given the current situation, there are some clear shortcomings that need to be fixed.
Kirchner recommends establishing an independent statutory Fiscal Commission tasked with formulating the fiscal and economic parameters that frame the government’s tax and expenditure decisions. Serious structural reform of the expenditure side of the budget is required to balance the budget over the long term and, more importantly, without resorting to further tax increases as they would be self-defeating.
Mind you, one recommendation in his report will certainly appeal to us all: “The remuneration of all members of federal Parliament should be reduced by 1 per cent for every percentage point breach of the fiscal rules for the duration of the breach.”
The case for serious measures to deal with the deficit and debt situation is overwhelming.
The time to start is now and the word for the responsible ministers to utter until the situation is remedied is “no”.
Greg Lindsay is executive director of The Centre for Independent Studies.
Home > Commentary > Opinion > Fixing our runaway spending must be more profound than cuts
Fixing our runaway spending must be more profound than cuts
The release of the Parliamentary Budget Office’s report on government spending this week was a timely pointer to the reasons the federal government finds itself in a budgetary pickle.
According to the PBO report, over the last decade, government spending grew 27 per cent faster in real terms than the annual rate of growth of GDP. For the last five years it was 47 per cent. These are easy and dramatic numbers to understand. All governments are culpable.
More seriously, spending has run ahead of tax receipts and borrowing was the only available option. Sadly, this led to the abolition of the maligned debt ceiling, which at least had the virtue of showing the public how rapidly borrowing was increasing.
It’s as though we are using a new credit card to pay the debt on one that has reached its limit.
How will the day of reckoning ever arrive? Will recovery from the spending addiction be an orderly process? Or do we have to go cold turkey? If the Treasurer and Finance Minister don’t close the door now, it may well be the latter.
Maybe I’m a little obsessed with the problem of government spending, but it’s time to be. Despite knowing the likely extent of the problem, the new government has added to the fiscal extravaganza in just its short time in office. Election promises perhaps, but it wouldn’t have hurt to have waited until the picture was clearer. The public would have gone along with the pause.
For instance, from the PBO report we learn that the trajectory of health spending is unsustainable.
A couple of examples. On average, people are using Medicare-funded services around 40 per cent more each year than they did a decade ago. And these services are more expensive.
The cost to the federal government, and thus the taxpayer, of subsidised pharmaceuticals has risen by 50 per cent for every person over the past decade. The growth in health spending has outstripped annual GDP growth significantly.
This can’t continue. A small co-payment for Medicare services, as recommended by the CIS, would help reduce the demand for some medical services while contributing to the budget bottom line.
There are other suggestions to bring the budgetary house to order. Cutting or ending a program here and there are only short-term solutions; what we really need is to establish institutional mechanisms to bring some discipline to the budget process and change the national and political culture about government and its fiscal responsibilities.
Historian Niall Ferguson and former Israeli finance minister Yuval Steinitz’s suggestion in an article to introduce multi-year budgets to deal with the US financial crisis could be applied in Australia. Israel’s experiment with biennial budgets is credited to some degree for the nation’s rapid recovery from the financial crisis. There are arguments for and against this approach, but giving governments a longer time frame to consider a sounder fiscal policy is a sensible idea.
Engendering certainty more generally throughout the economy will spur investment and growth.
Other measures have been discussed in Australia to strengthen our fiscal position. In “Strengthening Australia’s Fiscal Institutions”, released this week, CIS Research fellow Dr Stephen Kirchner examines the deteriorating budget situation and blames it on the failure to adhere to a rules-based framework. Governments over the past 30 years have enacted various kinds of fiscal policy rules, but given the current situation, there are some clear shortcomings that need to be fixed.
Kirchner recommends establishing an independent statutory Fiscal Commission tasked with formulating the fiscal and economic parameters that frame the government’s tax and expenditure decisions. Serious structural reform of the expenditure side of the budget is required to balance the budget over the long term and, more importantly, without resorting to further tax increases as they would be self-defeating.
Mind you, one recommendation in his report will certainly appeal to us all: “The remuneration of all members of federal Parliament should be reduced by 1 per cent for every percentage point breach of the fiscal rules for the duration of the breach.”
The case for serious measures to deal with the deficit and debt situation is overwhelming.
The time to start is now and the word for the responsible ministers to utter until the situation is remedied is “no”.
Greg Lindsay is executive director of The Centre for Independent Studies.
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