Australia's budget problem, in four powerful words

Scott Morrison. Photo: Scott Morrison MP/ Facebook.

Temporary boom, permanent promises.

That’s the devastatingly simple explanation from Deloitte Access Economics for the structural challenges gnawing into Australia’s budgetary position.

Deloitte is forecasting even more revenue write-downs – more than $4 billion this year and $16 billion over the forward estimates – since the last budget update in December from the new treasurer, Scott Morrison.

While there has been wrangling over whether problems with spending or revenue are to blame for the federal government’s fiscal dysfunction, Deloitte says both are a factor and it is becoming painfully apparent as the damage continues to mount in budget outcomes as China’s economy slows.

That says we have a revenue problem as well as an even bigger spending problem, and that revenue problem is becoming more apparent. As usual, our comments above come back to our favourite four word summary of what happened to the Budget: temporary boom, permanent promises. The last decade saw a temporary revenue boom – notably in profit taxes – that subsequently tanked. But whereas the impact of China and the resources boom on the Budget came and went, the impact of politicians’ promises has lingered.

The reality is that the “permanent promises” in terms of welfare commitments – and the National Disability Insurance Scheme – were conceived at a time when the budget was the beneficiary of cyclical tailwinds. Deloitte’s Chris Richardson explains:

… the biggest policy question of the last decade was just how wrongfooted the Budget was during the resources boom. We knew money poured in during the good years and then poured out again more recently. But what we didn’t know was how much of the extra money during the years of fat would prove sticky – the permanent improvement in the Budget as a result of the rise of China. And although you can argue the decimal point, to the nearest round number it is more and more clear the ongoing Budget benefit was … nuthin’. Zip, zero, zilch.

Yet that temporary boom was accompanied by permanent promises. Some of those (such as the full cost of the NDIS) will mount very rapidly. That doesn’t say we shouldn’t pursue worthy goals such as the NDIS: we should. But our social compact remains quite badly broken. And the otherwise healthy change of focus in the debate onto tax reform (or the lack of it) shouldn’t let public sector budget repair slip off the national ‘to do’ list.

The puts some focus onto the Coalition’s claim that economic growth is the solution to pulling the budget out of its hole. The spending commitments into the future are simply too great.

We can expect the government to try to highlight how the budget is at the mercy of external factors over the coming week. David Uren reports in The Australian this morning:

The Treasurer told The Australian last night that the government was focused on stimulating economic growth in a difficult global environment.

Mr Morrison said the budget would reveal the changes in the economic forecasts since the mid-year update released before Christmas. “These are estimates beyond the government’s control,” he said. “In preparing the budget, you seek to better understand what you can’t control, such as global economic conditions and market movements, to better focus controlling on what you can — namely what you spend and how you manage tax.”

While it is high time that politicians started being more up front with people about the extent to which the government can control many of the forces that determine budget outcomes, with an election coming, this strategy does raise questions about how the Coalition can confidently claim to be best-placed to repair the budget when it is also claiming that blow-outs are not of its making.

In this environment, finding savings and making long-term, visionary spending programs sustainable – designing them so that they can withstand the cyclical realities of the economy – becomes everything.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.