The $129 billion budget black hole

AUSTRALIA has splashed $129 billion on this in recent years, and it’s blown a huge hole in the Budget. We can’t afford it.

SUCCESSIVE federal governments since 2008 have squandered $129 billion in borrowed cash on welfare handouts and other ongoing spending, doing serious damage to Australia’s growth prospects, a new report argues.

Between 2008-09 and 2013-14, the federal government borrowed $266 billion, only $137.3 billion of which was spent on infrastructure projects, according to the analysis by free-market think tank the Institute of Public Affairs.

The rest was directed to current consumption and transfers, including interest payments on borrowing. Those interest payments are increasingly crowding out more efficient public spending, and already represent the seventh largest expense item in the budget.

In 2015-16, the government will spend $15.561 billion on interest payments — 14 times the annual budget of the ABC.

The report, “Canberra’s debt problem: Where’s the money gone?”, argues Australia has already lost control of its ballooning public debt burden, and that the public debt load is unsustainable — not in the future, but right now.

Whether public debt is unsustainable is determined by comparing the actual budget balance achieved by government versus the level of budget balance needed to stabilise the debt-to-GDP ratio.

In 2014-15, Australia needed a budget surplus equivalent to 0.5 per cent of GDP, and recorded a deficit equivalent to 1.7 per cent of GDP. For the following year, the deficit is equivalent to 1.2 per cent of GDP.

That means despite its talk, the Abbott government did not achieve the budget surplus necessary to stabilise Australia’s public debt trajectory in the long run.

“We have found empirically that Australian federal government debt is unsustainable,” IPA senior research fellow Dr Mikayla Novak said. “It’s unsustainable now, not in 10, 15 or 20 years time, because our economy isn’t growing fast enough.”

The $129 billion splashed out on ongoing expenditure and transfers was a “story of missed opportunity”, she said. “Federal public debt is in part being used to fund ongoing payments and transfers by the government.

“That flouts a basic rule of public finance: if you go into debt, you need to spend the borrowing proceeds on capital works and infrastructure.”

Former Bank of America Merrill Lynch chief economist Saul Eslake said while he agreed that successive governments had failed to bring the budget under control, he didn’t agree the current level of debt was unsustainable.

“There’s a difference between unsustainable and undesirable,” he said. “It would be desirable if public debt were lower.”

Mr Eslake agreed governments of both parties had baulked at significant cuts in areas they regarded as politically sensitive to them. “I think it’s fair to say that insufficient attention has been given to reining in recurrent spending,” he said.

“And as the IMF pointed out last week and [Reserve Bank governor] Glenn Stevens two weeks before, it might have been more conducive to better economic performance if successive governments had been willing to do more infrastructure spending, either themselves or via the states.”

Finance Minister Mathias Cormann said since coming into government, the Coalition had been able to reduce spending growth and get the budget “on a believable track to surplus”.

“Labor in government spent too much, locked Australia into an unsustainable, unaffordable spending growth trajectory and wasted way too much taxpayers’ money,” Senator Cormann said.

“As well as reducing spending growth overall, we have redirected a significant proportion of recurrent expenditure into investments in productivity enhancing economic infrastructure.”

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