Budget rules have gone the way of skinny jeans, no matter who wears the pants

Political leaders used to offer brave words about budget reform to convince Australians they could find a way out of endless deficits. Not too long ago, when the country was emerging from the global financial crisis, Labor assured voters it would make the hard decisions needed to rebuild the nation’s finances – and even set out the framework to do so.

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The answer, it said, was to draft a set of fiscal rules to make sure spending did not run ahead of tax revenue. The treasurer at the time, Wayne Swan, wrote the rules into the budget papers. The prime minister, Kevin Rudd, cited them as proof of his conservative economic credentials.

Those rules are now about as fashionable as skinny jeans. In a world of looser fashion, the budgets are looser as well. But the rules are worth revisiting now that this week’s budget has confirmed the sorry state of the budget – with deficits for years to come and $1.2 trillion in debt only a few years away.

The first Labor rule was to cap the real growth in spending to 2 per cent each year once the economy was growing above trend. The second was to make sure all new spending was funded by savings. The third was to make sure taxation stayed under the average of the previous government – mostly interpreted as 23.9 per cent of GDP.

Political leaders have thrown the rules overboard at the first sign of blowback from voters. Labor softened the rules within a few years of drafting them. The Coalition never imposed the same kind of discipline once it took power, especially after the ferocious response to the cuts in the 2014 budget.

With an election ahead, Anthony Albanese and Jim Chalmers will not admit the need for hard decisions about the budget. The prime minister and treasurer talk as if they have already made the tough calls. Opposition Leader Peter Dutton and shadow treasurer Angus Taylor have no coherent plan – so far, at least – to fix the finances.

Prime Minister Anthony Albanese listening as Treasurer Jim Chalmers delivers the budget speech.Credit: Alex Ellinghausen

Even so, it is now clear that Australia would have a pathway to a surplus if its political leaders were able to hold their nerve on budget policy – and voters could accept some tough savings to pay for the occasional tax cut.

This is not an argument for or against the $17.1 billion personal tax cut in Chalmers’ budget this week, nor the $6 billion cut in fuel excise in Dutton’s budget reply. It is an argument against the spin that pretends the budget is in good health. It is an argument in favour of decisions to fix the budget and pay for those tax cuts.

Labor has been lucky with tax revenue in this term. AMP chief economist Shane Oliver calculates the government has spent 96 per cent of all the revenue upgrades in this budget. This helps households with energy bill subsidies and tax cuts. Oliver says it also leaves the country exposed to a reversal in those windfall gains.

“The budget is in poor health,” he says. “We’re not living up to the letter of, nor the spirit of, those fiscal rules. We’re looking at chronic structural deficits for at least the next decade, and each budget seems to push out the return to surplus.”

Another economist, Chris Richardson, highlights how the tax upgrades have been spent. The budget reconciliation tables show the total effect of every revenue gain and every new payment. (Broadly, the things that are outside the government’s control are called parameter variations, such as Chinese demand for Australian exports. The things that are within the government’s direct control are the policy decisions, such as a tax cut or an increase in pensions.)

The numbers reveal Labor’s good fortune. The tax revenue parameter variations have added $396 billion to the coffers since the last election. There have been factors outside the government’s control on spending, as well, and these have subtracted $117 billion. The net effect is an increase of $279 billion – none of it from cabinet decisions.

Labor policy decisions have spent many of the gains. First, they added $144 billion to outlays. Second, they generated $32 billion in higher tax revenue – including tax increases on superannuation and similar measures, offset by this week’s tax cut. All up, the net result took $92 billion off the budget bottom line.

(As an aside, those numbers exclude the stage 3 income tax cuts because they were a Coalition policy before Labor took power. Albanese and Chalmers revamped those tax cuts, and put the Labor brand on them, without changing the bottom line.)

The upshot? Labor has been blessed with more tax revenue, while spending a lot of it and still being unable to forecast a surplus. One giveaway: there was no saving this week to pay for the $17.1 billion tax cut – a breach of the rule Swan drafted when Chalmers worked in his office.

Chalmers is the most skilled communicator in Australian politics, so he can slip past any question. Asking him about the dire budget numbers can be like climbing a mountain made of polished marble – you scramble to get a firm hold on the answer.

So it is worth noting that the questions to Chalmers on Wednesday, after his lunchtime address to the National Press Club, were overwhelmingly sceptical about the Labor claims to fiscal discipline. Memories can be short in politics, but there is still enough corporate memory in the Parliament House press gallery to recall the times when new spending was offset by savings.

Dutton and Taylor slip past questions with a different approach: they simply vacate the space. There was no mention of a saving to fund their $6 billion fuel excise cut – they merely reheated an idea from Scott Morrison at the last election. Taylor says spending should only rise in line with the economy, hinting at fiscal discipline. At the same time, he and others in the Coalition keep relying on a single idea – a cut to public servants – as if it can magically pay for all their spending.

Australia has a structural weakness at the heart of the budget: payments will be 27 per cent of GDP next year, while receipts will be 25.5 per cent. The gap between those two numbers will continue for years, ensuring more deficits. Political leaders will promise to restrain the spending, but history tells us they always miss their forecasts.

This is the unpalatable truth behind the election contest on tax cuts and spending boosts. The politicians assume voters will not worry about where the money is coming from. But they should. The complacency today will bequeath a weaker budget to the young Australians who are only just starting to cast their votes.

David Crowe is chief political correspondent for The Sydney Morning Herald and The Age.

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