by David Richardson, Senior Research Fellow

The history lesson

In the mid-1980s the Hawke/Keating Government committed itself to what it termed a ‘Trilogy’ of budget restraint. This pledged that Commonwealth revenue would not increase as a percentage of gross domestic product (GDP) with similar commitments for spending and the deficit. At that time the latest figures available were for 1984–85 when the budget balance was a deficit of 2.6 per cent of GDP and the tax to GDP ratio was 22.5 per cent while total revenue to GDP was 25.0 per cent. In an effort to appear fiscally ‘responsible’ the trilogy commitment used whatever the then current figures happened to be and, as such, were entirely arbitrary. However, the trilogy seemed to suggest fiscal conservatism when the then government thought fiscal conservatism meant good politics during an election campaign.

1 // Taxation

The budget papers have for a while mentioned a target tax to GDP ratio of 23.9 per cent which has recently become a ceiling or a ‘speed limit’. When Treasurer Scott Morrison said ‘We have imposed a speed limit on taxes in our budgets, that requires that taxes do not grow beyond 23.9 per cent of our economy’. This was repeated on budget night in the Treasurer’s speech and in the fiscal strategy which says ‘the Government has formalised its tax-to-GDP cap of 23.9 per cent as part of its fiscal strategy to support stronger economic growth’.

2 // Spending

The Treasurer’s budget speech also included some observations on spending:

“Real expenditure growth remains below two per cent, the most restrained of any Government in more than 50 years…This will see Government spending fall to 24.7 per cent of GDP, below the 30 year average at 24.8 per cent over the forward estimates.”

In the budget papers themselves there are references to spending restraint ‘bringing it [the spending to GDP ratio] below the 30 year historical average of 24.8 per cent’ and ‘bringing it below the 30 year average of 24.8 per cent’ .

It must be pointed out that the 30 year average is entirely arbitrary and over the 30 years the government has added new functions. On the latter point, the article on the NDIS funding points out that the NDIS spending appears on the federal government books but it is jointly funded by the states and territories. That adds around 0.5 per cent of GDP by including the states’ half in federal spending.

3 // Budget Balance — the Surplus

On the projected surplus the Treasurer said ‘Over the medium term the projected Budget surplus rises to over one percent of GDP, without breaching our tax cap, consistent with our fiscal strategy’.

The surplus objective (on average) is curious when we think about it. While it seems to have been accepted rather uncritically, you might get a different response if the Treasurer had said ‘We intend to tax you more than we need to fund government spending’.In the following passage the one per cent surplus becomes a target when the budget papers say ‘The budget repair strategy is designed to deliver sustainable budget surpluses building to at least 1 per cent of GDP as soon as possible, consistent with the medium-term fiscal strategy’ (3–7).

Putting it all together

Putting all this together we have a new Trilogy of commitments, a tax ceiling of 23.9 per cent of GDP, a spending ceiling of 24.8, and a surplus of one per cent of GDP. Those figures are consistent when we add in non-tax revenues that vary in the range of 1.6 to 1.9 per cent of GDP over the forward estimates.

However in combination the present trilogy implies a very severe constraint on public sector activity in Australia. This is very serious in the context of an Australian economy that has serious gaps in its delivery of fairness in the income distribution, as well as the provision of services in health, housing, education and many other areas. Artificial constraint in these areas will involve serious social and economic costs.

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