Five Eye-Catching Points From The Grattan Institute's Budget Research Paper

The Grattan Institute’s research report, Budget pressures on Australian governments, released today, has led to some fairly horrible headlines about the nation’s fiscal quandary.

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A combination of hard cuts and likely tax increases are required to get Treasury’s books in order, the think-tank finds — specifically, 4 per cent of GDP in savings and tax increases to balance their books by 2023.

The report covers a swathe of economic territory in examining factors putting pressure on the budget bottom line. Here are some of the key points – with charts, where relevant – in the report.

1. The ageing population might not be the looming problem we think it is…

Take a bow, boomers. Increasing participation in the workforce by older workers will, the report says, be a boon to the nation’s books if the current trends continue. There will be increased healthcare costs associated with caring for an ageing population, but the Institute says the impact on budgets is likely to be “relatively small” if participation continues to increase in line with trends over the last decade.

2. … but there’s a problem from another quarter on health spending

The cost of delivering public healthcare continues to drag on the national finances. But health spending increases, the Institute says, are “primarily driven not by an ageing population, but by people of all ages seeing doctors more often, having more tests and operations, and taking more prescription drugs, often employing new — and effective treatments.”

It’s one of the by-products of medical breakthroughs – better testing, better drugs, and wider availability of treatments can balloon costs to the taxpayer when governments agree to fund delivery of these treatments.

3. Australians’ better saving is hurting the budget bottom line

Reining in of household budgets after the GFC is shrinking certain government revenue lines. The Institute lays it out in a couple of great charts that show the big gear shift in the consumer behaviour after the GFC when we all started cancelling driving holidays and putting a bit more cash away for a rainy day.

This chart shows that while corporate and income taxes recovered after the GFC, indirect taxes such as fuel excise and GST didn’t follow.

And this shows why – after the party years of the mid-2000s, national savings rocketed, climbing from 3 per cent to 6 per cent between 2008 and 2009.

3. Committed spending plans are is higher under Labor, but potentially just as high under the Coalition

Two graphs compare the projected cost of known spending commitments by the major parties to 2020. Without cuts or new taxes, the ALP’s commitments have a bottom-line impact of around $17 billion while the Coalition’s amount to around $10 billion. But adding in (admittedly with some liberty) the cost of other key measures which the Institute says are “much speculated about, but by no means adopted” – both the Coalition and the ALP emerge with around the same impact on the budget bottom line.

Here’s the ALP chart:

And here’s the Coalition projection, with the commitments being smaller but roughly equal when taking in the speculative implementation of the Disability Insurance Scheme, and increases in Newstart and Defence spending:

4. This might be as good as it gets

In warning there’s no easy route to returning to balanced public finances, the Institute underlines that there may be no “rebound” from some of the factors that caused unexpected revenue shortfalls in recent years, including the passing of the mining boom peak and falling commodity prices. Looking at economic growth projections as Australia passes the peak of mining boom, the Institute says that these might be the most favourable economic conditions we are likely to see for some time. From the report:

the current economic conditions may be about ‘as good as it gets’. This implies that Australian budgets should not expect a significant improvement from the economy ‘returning to normal’.

(Treasurer Wayne Swan is arguing that revenues will pick up over the coming years.)

The Reserve Bank and economists generally are watching closely for signs of pickup in the non-mining sector as an indicator that growth will maintain trend as the resources sector starts to ease. Like many economists though, the Institute is not hopeful about the non-mining sector picking up this slack, saying: “economic growth is normally slower after the peak of a mining boom than before. The history of previous mining booms around the world suggests that manufacturing industries typically rebound strongly after the boom. But these rebounding industries typically add less to economic growth than is subtracted by the slowing resources sector.”

5. There’s no counting on the carbon and mining taxes

Something to watch for in the forthcoming Budget: the revenue projections for the Minerals Resources Rent Tax, and the carbon tax. Counting on these to return to surplus could be something of a fool’s errand, the Institute warns. Excerpt:

In the last two years, the Commonwealth legislated two substantial new revenue sources: the carbon price and the Mining Resource Rent Tax (MRRT). Both appear likely to generate substantially less revenue than current forecasts.

Carbon price revenues are likely to collect around $5.3 billion per year (0.3 per cent of GDP) less than current forecasts from 2015-16 onwards. These forecasts assume a traded price of $29/tonne from 2015-16. But current European prices (to which the Australian scheme is now linked) are around $6/tonne. If carbon prices stay around this level, then revenue for 2015-16 will be approximately $1.4bn rather than the $6.7bn in current forecasts.

Current forecasts assume the MRRT will raise around $5 billion in 2013-14, and similar amounts in future. In fact, it may well collect almost no revenue. Reported revenues in the first six months of operation are close to zero. Collections will depend on minerals prices, and many expect that future minerals prices will be at or below the levels of the last six months…

The detailed report is available for download here (PDF). Author John Daley has a piece in today’s Australian here.

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