Ensuring Australia’s economic sustainability
National goal: Enable economic growth by establishing overarching settings, such as taxation, regulation, property rights and infrastructure provision, to support productivity and encourage the required restructuring of the Australian economy.
Adopt a fiscal policy that supports these actions and smooths economic variables with a clear path to budget surplus. Ensure the Government only delivers the services required and those services are delivered in the most effective and low cost way.
Australian economic context
Historically, governments had been able to use the twin levers of monetary and fiscal policy to influence the economy. The Hawke/Keating reforms changed this paradigm. Responsibility for monetary policy moved to the independent Reserve Bank (as it has in other Western countries), leaving the government with fiscal, tax and regulatory policy levers.
Economic management issues
- Ongoing structural deficit
The more recent budgets have resulted in Australia being left with a large structural deficit, and this is expected to continue into the future. The long-term impact of these deficits is exacerbated by expenditure being directed to areas that have not improved productivity or increased future cashflows to the Government.
The business community is equally concerned about the difficulties of returning the budget to surplus in the medium to long-term, as the current forecast relies on achieving savings over the forward estimates period, along with an improved economy.
Continuing budget deficits, at both Federal and State levels for the foreseeable future, will also only serve to increase Australia’s debt levels, eroding our future capacity to invest in appropriate infrastructure projects.
Government debt should only be used to fund public investment that, through rigorous assessment, demonstrates it will increase community incomes (and taxation revenues) by more than the cost of the debt. Previous governments have frequently failed to recognise this, resulting in ‘bad non-productive’ debt.
“Far from delivering a budget surplus on average over the medium-term, we now have in prospect an outcome of seven consecutive years of fiscal deficits – four in the past and three to come.”
Jennifer Westacott, CEO, Business Council of Australia
- Deep budget cuts could further weaken the economy
However, the Federal Government needs to find a path to surplus that protects its fragile economy. Australia is burdened with a high dollar (despite recent reductions), waning GDP growth, declining mining investment and widespread private sector indebtedness.
With these weak economic fundamentals, and despite recent substantial deficits, now is not the time to quickly re-balance the budget. Embarking on a large savings program may do significant short-term damage to the economy, especially if those savings directly reduce household incomes and hinder business growth (as demonstrated by the recent IMF conclusions on the failure of the austerity measures in Europe). Rather, we need a measured response with a defensible pathway to surplus.
In a slowing economic climate, there is a case for governments to increase investment. However, this investment must satisfy rigorous cost-benefit analysis: its productivity benefits (or other worthwhile objectives, such as social or environmental outcomes) must outweigh the costs to taxpayers.
According to AIG1, given our relatively low level of Government debt compared to other western economies, the 2013-14 Budget should focus on helping to support jobs and growth and not risk excessively detracting from aggregate demand.
“The federal budget does little to take cost pressure off the private sector, especially small business, and fails to wind back government spending to rid the nation of deficits and allow future investment in the economy.”
Peter Anderson, CEO, Australian Chamber of Commerce and Industry
Economic management recommendations
The incoming Government should prioritise actions that carefully balance the need for fiscal prudence with the need to encourage economic activity, while also helping to build business community confidence. These include:
- Presenting a credible fiscal strategy, based on cost control, to chart a path back to surplus in the medium-term
The incoming Government should seek to balance the budget over the medium-term – within three to five years. Australia may remain one of the few western countries with low overall debt, but we still need to use debt correctly within fiscal policy.
This means using debt to fund long-term infrastructure – not short-term deficits. Governments don’t have to deliver surpluses in every single year, but they do need to have a credible strategy for returning to surplus.
To this end, the Government needs to develop a clear and convincing fiscal strategy for balancing the budget, based on controlling the size of government, rather than actions that dampen demand, such as tax increases and placing cost imposts on the business community.
When required, fiscal policy should be applied in concert with monetary policy, which should be used to manage consumption and saving over the medium-term, smoothing economic growth over the business cycle and reducing the risk of a bust. Government should also consider the application of total fiscal policy – the net effect at the Federal and State level.
Other levers, such as tax and regulatory reform, should be used alongside monetary and fiscal policy and assessed, individually and collectively, to ensure they are meeting clear and worthwhile objectives at the lowest possible cost.
- Funding the right infrastructure projects to boost economic growth and improve productivity
The incoming Government should fund, or facilitate, more investment in critical infrastructure to support GDP growth, provided these investments can be started quickly and satisfy cost-benefit analysis. Virtually all major industry groups see increasing infrastructure spend to drive productive capacity as a major priority.
- Helping the economy adjust to a higher Australian dollar
The incoming Government could seek to lower the Australian dollar, although recent independent Reserve Bank monetary policy shifts along with global changes have started to address this issue. Irrespective, exchange rates are likely to remain high, driving the need for the incoming Government to focus on helping the economy adjust to the higher dollar. This will require measures to aid economic re-structuring, such as training assistance and labour mobility.
- Reviewing State/Commonwealth relations and roles in service delivery
COAG’s current model has increased the already high fiscal imbalance. The current trend to centralisation, inherent in the COAG process, is driving inefficient and costly changes in service provision responsibilities. This can only be addressed through reviewing State/Commonwealth relations, including clarifying the distribution of roles and responsibilities and considering potential areas of duplication.
Economic management conclusion
The incoming Government needs a clear strategy to return the budget to surplus. The strategy needs to review services provided by the public service and how they are being delivered. The incoming Government also needs to only use debt funding for capital projects and they need to ensure they invest in projects that deliver value to the Australian people.
1Ai Group Survey: Business Priorities for the 2013-14 Federal Budget Measures to build business competitiveness favoured over balancing the budget, May 2013