Peter Costello wants cuts in services to reduce Australia's debt

THE charge against disability pensioner Hamdi Alqudsi spoke volumes to former treasurer Peter Costello about how to reduce the national debt.

On a disability pension ... Hamdi Alqudsi allegedly organised for young Muslims to go to war in Syria. . Photo by Simon Chillingworth

TO Peter Costello, the front-page story of Wednesday's edition of The Daily Telegraph - WELFARE WARFARE - spoke volumes about what's wrong with the Federal Budget.

The story said Sydney disability pensioner Hamdi Alqudsi allegedly organised for young Muslim Australians to go to Syria to fight alongside terror group Al-Qaeda and that he had planned to go there too.

"If you are well enough to fight in a war I don't think you should be classified as disabled," Costello tells News Corp Australia.

Alqudsi is one of 822,000 people receiving the Disability Support Pension (DSP). To put that in context, only 710,000 Australians are classified unemployed. DSP payments blew out $430 million last financial year to $15 billion, despite the number of people on DSPs falling by 5000.

News_Image_File: On disability pension ... Police allege Hamdi Alqudsi is the mastermind behind a network of young Muslim Australians sent to Syria to fight alongside terror group Al-Qaeda.

CENTRELINK ORDERED TO PAY DSP TO MAN WHILE HE LIVES IN INDIA

The annual cost of the scheme rose more than $5 billion - or 60 per cent - under the Rudd-Gillard-Rudd Labor government.

Cutting back on DSP payments is just one of many ways the Budget can be brought back to the black, according to Costello. Others include reducing spending on the National Disability Insurance Scheme (NDIS) and the Gonski school funding reforms, as well as reducing overlap between the Commonwealth and states in education, aged care and health.

If there's one thing Costello knows better than anyone else in the country, it's how to get the Budget back in the black.

Costello became Treasurer in March 1996, inheriting government debt of nearly $100 billion, or about 18 per cent of Gross Domestic Product. The budget was $11 billion in the red in 1995-96.

By the end of 2006-07, shortly before the Howard Government was booted from power, the budget bottom line was $17 billion to the good. Commonwealth net debt had been eliminated and there was $45 billion of accumulated savings.

Costello, 56, doesn't think he'll ever see net debt eliminated. He doubts any Australian will: "Are we ever going to be able to do that again?"

The most recent Treasury numbers - the Pre-Election Fiscal and Economic Outlook (PEFO) published in August - estimated the 2013-14 budget bottom line would be a $30 billion deficit. Net debt would be $184 billion, or 11.7 per cent of GDP, and headed to $219 billion in two years' time.

Within days Treasurer Joe Hockey will reveal a new set of numbers in the Mid-Year Economic and Fiscal Outlook.

"The midyear figures will be worse," says Costello, speaking from the Collins St, Melbourne offices of political advisory firm ECG, of which he is chairman.

The deficit this financial year could be $40 billion - about $10 billion worse than the PEFO, which in turn was $5 billion worse than Wayne Swan's final budget in May. Less than 12 months ago Swan was maintaining we'd be in surplus by now.

"What worries me," Costello says, "is this deterioration has been very fast."

It has us on a path to the problems other nations now face, he says. We'd be in strife already were it not for having had a much stronger starting position.

Without change, "we will be a high debt country like Japan and the US," he says.

"The public has to be let in on this story. We've got to explain to people … we can't keep going the way we've been going the last six years."

The most in-depth independent recent work on the Budget outlook is by Deloitte Access Economics, led by Chris Richardson. It's one of those saying the 2013-14 deficit is more likely to be $40 billion.

I find Richardson in the waiting room of a Canberra dentist. It proves an appropriately grim setting for our conversation. He's a sensible, measured individual, as you'd expect from an economist formerly of Treasury and the International Monetary Fund.

But when we speak he has to calm himself down more than once about what's looming - not the drills and fillings but Gonski and the NDIS.

"Just as we discovered we didn't have money to spend, we spent a lot more," says Richardson. "We promised away a decade of flexibility on DisabilityCare (NDIS) and Gonski."

The Coalition has committed $2.8 billion to Gonski over four years, of which $1.2 billion was promised only this week. Years five and six of Gonski come at an extra cost of about $7 billion. However, the Coalition has not said it will spend this money.

The NDIS is set to cost the Federal Government $14.3 billion through to 2018-19 and another $11.7 billion after that.

These are big, big numbers.

"We don't have a debt problem yet," Richardson says. "If we keep going the way we are we would have a problem.

"We do need to change our trajectory."

You might be surprised by Richardson's chief argument for doing so. It's not based on economics. He says that someone has to start paying back the money. If not us, it will be our children, or their children, which he doesn't think is reasonable because they didn't spend it. Our generation did.

"It's a fairness killer," he says.

The longer-term view is clearly concerning the head of the Parliamentary Budget Office, Phil Bowen, too. Last week he told a private function in Adelaide: "Major programs such as the age pension, the disability support pension, assistance to families with children and Medicare all experienced strong growth and are forecast to contribute significantly to growth in spending in the future," he said.

"Real growth in the main drivers of budget baseline expenditures can be expected to continue beyond the (four-year) forward estimates period. The mature National Disability Insurance Scheme, increased funding for schools, and increased funding to the States for public hospitals will add to these pressures."

So how do you reduce them?

Costello says you don't miss spending you have yet to outlay: "The best saving is not to buy the new fur coat, to not buy the new car."

The fifth and sixth years of the Gonski funding have not been committed to. That has to be wound back. He also believes the NDIS and Disability Support Pension should be reined in. Too many people with substance abuse receive the DSP, he says.

Removing GST exemption on imports worth less than $1000 is an "option" worth considering. The exemption means $650 million a year is forgone, according to Treasury.

"And there are huge savings to be made if you can stop the Commonwealth and states duplicating," Costello argues, starting with aged care, education and health.

Raising income taxes would be "totally counter-productive" and he's against increasing the rate of the GST: "Governments would just spend more and waste more."

A 12.5 per cent GST would generate an extra $12 billion a year, Richardson estimates. You can also raise that amount by applying a 10 per cent GST to food ($6 billion), education ($3 billion) and health ($3 billion), he says.

Richardson supports the inclusion of food in the consumption tax, as well as education. He says adding health would be inefficient because the public sector already picks up 70 per cent of the bill.

The first cut Richardson would make would be to what he calls "industry welfare".

"We don't have a record of using subsidies to pick winners," he says. "We spend a lot of money on giving support to industry, directly and indirectly, and it tends to have very little to do with good economics and everything to do with votes in marginal electorates."

While the likes of Richardson don't want to nominate specific targets, submarines and cars are two possibilities.

What he will say is the point at which "middle-class welfare" is withdrawn should be lowered from household income of $150,000 to $130,000 and that tax breaks to very high income earners on, say, superannuation, are too generous.

A high-powered Government-appointed commission of audit into its finances, led by Business Council of Australia president Tony Shepherd, will deliver its initial report next month.