It’s the time of the year when the sky is littered with kites and missiles, figuratively speaking. It’s the lead-up to the Budget when various ideas are floated and others are shot down. Come Budget night, the broad parameters and key decisions are already clear, although the precise details are contained in the Budget Papers. This year is no exception.
Let’s be clear here: there has been a remarkable improvement to the budget bottom line this financial year. In October last year, it was estimated that the underlying cash balance would come in at $37 billion. It will be a lot less than that because commodity prices have stayed high, leading to a surge in company tax receipts, and close to full employment.
This latter factor has meant reduced welfare payments as well as higher income tax receipts, including the impact of bracket creep. If Treasurer Jim Chalmers had really tried, he could have engineered things to record a budget surplus this financial year. (There is always some scope for shunting spending and revenue between adjacent years.)
My guess is that he won’t do that because he would be setting himself up for disappointment when the Budget records significant deficits in the out-years, in part because of the ambitious spending plans of the Labor government.
(By contrast, the Coalition should feel real regret about not delivering a budget surplus in 2018-19, a year in which the deficit was a trivial $690 million. Very little effort would have been required to push the budget into the black and the symbolic political value of this outcome would have been considerable.) Chalmers has announced a few key budgetary decisions already. He has effectively ruled out the recommendation that the rate of JobSeeker be significantly increased, citing that the fiscal costs are not sustainable at this point. The broader issue is his (appropriate) unwillingness to add to inflationary pressures through fast growing budget spending.
He has also flagged the theme of promoting clean, cheap energy as a central component of the budget, notwithstanding the fact that clean energy has thus far proven to be anything but cheap. This potentially paves the way for even more subsidies for renewable energy and related activities.
Lobbyists in Canberra have been banging the drum that Australia will miss out on becoming an “energy superpower” if government action is not taken, particularly in response to the massive green subsidies available in the US under the (misnamed) Inflation Reduction Act. In particular, large sums of moneys are being sought to subsidise the processing of lithium in Western Australia.
This is unlikely to be sound policy. For one thing, we can take advantage of the actions of the US – it’s their taxpayers not ours – given that global emissions are the name of the game and the US is a relatively big emitter. Moreover, any relevant technology advances that occur there can be taken up here without the need for our investment. In any case, the US senior government officials are actually speaking through both sides of their mouths on green issues by actively promoting the natural gas industry, which is expanding rapidly in that country. There is a lesson here for Australia which is putting more and more roadblocks in the way of gas developments.
Returning to the fiscal challenges facing Chalmers, we know from the October budget that the two fastest growing spending items are: net interest payments and the National Disability Insurance Scheme. There is a significant jump in net interest payments in 2025-26 when some of the cheaper debt has to be rolled over. The take-out message for the Treasurer is that every effort should be made to prevent any further increases to government debt because of the rising cost of servicing. This necessarily involves tight controls on spending into the future.
(You may be wondering where the Labor government’s new funds fit into the budget framework – Rewiring the Nation, Housing Australia Future Fund and National Reconstruction Fund. All up these funds will add over $40bn to government debt but will be held off-budget. They will show up in the headline budget balance but not the underlying budget balance. But the cost of the debt associated with these funds will still have to be serviced.)
As far as the NDIS is concerned, it’s not clear that the steps proposed by Bill Shorten, minister for the NDIS, will actually make much difference to the growth of spending, which is currently running at 14 per cent per annum in real terms. At this rate, the NDIS will cost around $90bn by the early 2030s; it already exceeds spending on aged care and Medicare, respectively.
It’s hard to know where to start with any analysis of the problems of the NDIS. It wasn’t helped by the faulty report of the Productivity Commission which predicted that the scheme would cover only some 400,000 – the current numbers are close to 600,000 and rising by 200 per day – and would cost (only) $22bn when fully operational.
Notwithstanding that the legislation contains a looser definition of people with disability than the PC had recommended, some of the core assumptions that underpinned the PC report were wildly inaccurate. For instance, there was an expectation that the cost of provision would decline by 20 per cent – it has soared – and that young people would exit after the early interventions had done their work. In fact, the exit rate from the scheme hovers around only 1 per cent per year. It was never an insurance scheme and it should not have been given that name.
An egregious governance error – and recognised by Labor parliamentarian, Andrew Charlton – was made by the Gillard Labor government when it negotiated the key agreement with the states and territories. Under this agreement, the costs to the states and territories, which had been fully responsible for disability services, were capped and any upsides would be met by the federal government. The effect has been for the federal government to shoulder a rapidly rising proportion of the overall costs of the scheme – now above 60 per cent and heading towards 70 per cent.
In the meantime, the states and territories have used the NDIS to cost-shift many related activities, such as dealing with development delays in the education system and obesity in the health system. This was also inevitable given the difficulty of controlling this type of actions in a meaningful way. The people and families receiving the assistance are unlikely to care which level of government pays for it.
Shorten’s claim that he can do a better deal with the states and territories, all of them with their own fiscal pressures, looks like wishful thinking. He has stated that he doesn’t intend to make any changes to eligibility, which is one of the main drivers of spending.
The only (weak) light on the hill is that the Coalition has offered bipartisan support for any reasonable measures that the government proposes to rein in the NDIS. Unless spending on the NDIS can be better controlled, Chalmers can kiss goodbye to any future budget surpluses and any claim to being a sound fiscal manager, certainly without significantly jacking up taxes.
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