CALF size of gvt.pptx - Grattan Institute

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Change in Australian governments' expenditure 2003-2014 ... services. Industry. Debt mgt. Defence. Source: Grattan Insti
Budget repair and the changing size of Australia’s government Crawford Australian Leadership Forum John Daley, Grattan Institute June 2016

Commonwealth expenditure is high relative to history; revenue is typical of last 30 years

27%

Expenditure

Estimate

Commonwealth expenditures and revenues per cent of nominal GDP

25% 23% 21%

Revenue

19% 17% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Financial year ended Source: Commonwealth Budget Papers, 2014-15 2

Health has driven the increase in expenditure … Change in Australian governments’ expenditure 2003-2014 $ bn relative to CPI 50

Real growth Growth at GDP

45 40 35 30 25 20 15 10 5 0

Health

Education Welfare

InfraIndustry Defence Governstructure ment Other Social Debt mgt Crim services justice

Source: Grattan Institute, Budget Pressures 2014

3

… as it has in all OECD countries as they got richer (except Iceland) Health spending as proportion of GDP, %

Health spending and GDP, 2000 to 2012 $51k, 16.4%

14 12 n Germa

y

erlan

Switz

d

10 Iceland alia Austr

8

Hung Chile

6

Turkey

4 2

Norway

a ry

Luxembourg

$91k, 6.6%

No GDP growth Health growing faster than GDP Health stable relative to GDP

0 0

Source: OECD

10,000 20,000 30,000 40,000 50,000 60,000 70,000 GDP / capita, PPP

4

Big jump in net transfer to older households also hurt budget balances Average net benefits per household (government payments, less tax) 2010$ $35,000 $30,000 $25,000 $20,000

Increase of ~$10k/household ≈ $20b/yr budget cost

1988-89 1993-94 1998-99 2003-04 2009-10

$15,000 $10,000 $5,000 $0 -$5,000 -$10,000 -$15,000 15-24

25-34

35-44 45-54 55-64 Age of head of household

65+

Notes: Net benefits are social assistance benefits in cash plus support in kind (such as health and education), minus income and sales taxes 5 Source: Grattan Institute, The Wealth of Generations, p.22

Most of the planned structural repair relies on organic increases in tax collections Budget balance 2019-20 budget compared to 2015-16 outcome, $2015 20 9 Denotes improvement in budget balance

-7

23

-19

0

-20

-40

-6

-40

20

7 2016-17 Personal Budget Budget income tax deficit growth 2016-17 measures

Other Spending Initial deficit revenue growth at growth growth below GDP nominal above GDP GDP

Other

Budget deficit 2019-20

6

The planned drift back to surplus isn’t happening Actual and forecast Commonwealth underlying cash balance per cent of GDP Forecast made in May 1 2012 2010 2011 2013 0 2014 -1

2015 2016

-2 -3 Actual -4 -5 2008

2010

2012

Grattan analysis of Commonwealth Budget Papers

2014

2016

2018 2020 Financial year ended 7

Reality undershot as spending rose 2009-14, while revenue has disappointed since 2012 Change in budget outcome from original forecast % of GDP 4 2

Spending policy changes Revenue policy changes

0 Revenue parameter changes

-2 -4

Spending parameter changes

-6

Net change in fiscal balance

-8 2009

2011

2013

2015

2017

2019 8

Belief about what is important drives priorities about taxes and spending What do you care about most? Budget balancing Companies reluctant to invest while budgets don’t balance Structural deficit won’t be solved by economic growth. Politics requires budget repair through both revenue and expenses

Small government Smaller government increases economic growth and reduces budget deficit

Economic growth (short run) Increasing economic growth will solve the budget issue

More services that government provides (health) As income increases, can spend more on health and other services Government better at delivering many health services

If government reduces taxes, it will be forced to cut expenditure.

é Taxes

ê Taxes

ê Taxes

é Taxes

ê Expenditure

ê Expenditure

é Expenditure

é Expenditure

Source: Chris Richardson for the underlying insight

9

Australian gvt expenditure is not large (even including super) but others are shrinking General government expenditure, advanced economies, % of GDP, 2016 Finland France Belgium Denmark Austria Italy Greece Norway Sweden Portugal Netherlands Germany Slovenia Iceland Spain Israel Canada Estonia United Kingdom Average Japan Australia Latvia United States New Zealand Switzerland Ireland Korea Singapore Hong Kong

0

2011

Compulsory super contributions

10

20

30

Note: Data for Greece is for 2015 Source: IMF Fiscal Monitor April 2016; Tax stats 2012-13; APRA superannuation bulletin

40

50

60 10

Australian government revenue is not large, even including super General government income, advanced economies, % of GDP, 2016 Finland Norway France Belgium Denmark Austria Sweden Italy Iceland Greece Germany Portugal Netherlands Slovenia Estonia Canada Spain Israel Average United Kingdom Latvia New Zealand Australia Japan Switzerland United States Ireland Singapore Korea Hong Kong

0

2011

Compulsory super contributions 10

20

30

Note: Data for Greece is for 2015 Source: IMF Fiscal Monitor April 2016; Tax stats 2012-13; APRA superannuation bulletin

40

50

60 11

Australia’s deficits are relatively manageable General government budget balance, advanced economies, % of GDP, 2016 Japan Greece Israel United States France Spain United Kingdom Portugal Average Belgium Denmark Finland Italy Slovenia Australia Canada Austria Netherlands Latvia Sweden Ireland Switzerland New Zealand Germany Korea Estonia Hong Kong Singapore Norway Iceland

-5

5.4 14.3

-4

Note: Data for Greece is for 2015 Source: IMF Fiscal Monitor April 2016

-3

-2

-1

0

1

2

3 12

Australian government debt is relatively small but deteriorating faster General government, advanced economies, % of GDP Net debt, 2016 Change in net debt, 2011-2016 Spain Portugal France Australia Italy Netherlands Denmark United Kingdom Finland United States Korea Average Estonia Belgium Japan Latvia New Zealand Canada Israel Sweden Austria Switzerland Ireland Germany Iceland Norway

-150

286

-100

Source: IMF Fiscal Monitor April 2016

-50

0

50

123

-30

-20

-10

0

10

20 13

Australian governments spend relatively less on welfare, general government and debt Government expenditure, OECD countries, % of GDP, 2013 General Defence public service Eco affairs

Health Edu

Welfare

Greece Slovenia Finland France Denmark Belgium Sweden Italy Austria Portugal Hungary Netherlands United Kingdom OECD UWA Germany Spain Norway Iceland Luxembourg Japan Czech Republic Poland OECD WA Israel Slovak Republic Australia (inc super) Ireland Estonia United States Australia Latvia Korea

Other

Compulsory super contributions

0

10

20

30

40

50

60

70

Notes: ‘Other’ category includes ‘Public order and safety’; ‘Environmental protection’; ‘Housing and community amenities’; and ‘Recreation, culture and religion’. ‘Welfare’ category is referred to in the source data as ‘Social protection’. 14 Source: OECD http://dx.doi.org/10.1787/888933248323; Australian super contributions from APRA

Australia has a particularly targeted welfare system Public payments to households as a proportion of population disposable income, mid-2000s Transfers to Transfers to poorest 20% remaining 80% Denmark Sweden Belgium Norway Australia Czech R. OECD-23 Neth. Ireland France Austria Slovak R. Germany Switz. Finland UK NZ Luxem. Italy Canada Poland Japan US Korea

0

5

Note: incomes are equivalised Source: Grattan analysis of Whiteford (2010)

10

15

20

25

30

35

40 15

Filling a budget hole of $40b without revenue increases is implausible Budgetary impact of budget choices worth at least $2b/yr 2013 $b per year 0 5 10 15 Age Pension assets test Negative gearing Pharmaceutical spend Pension and super access CGT discount Higher ed subsidies Defence spending Cost effective medicine Super contr concessions Super earn concessions Fuel tax indexation Transport infra costs Industry support School class sizes GST broaden Health rebate Mining royalty CGT owner occ Payroll threshold Fuel tax credit Bracket creep Source: Grattan Institute, Balancing Budgets

Positive impacts

Revenue Mixed Expenditure

Negative impacts 16