CEDA makes the case for balancing the budget

The Federal Government needs to focus on balancing the budget rather than getting bogged down in the mud of cutting or raising taxes and expenditure, the Committee for Economic Development of Australia (CEDA) argues in a new report.

The report “Deficit to Balance: budget repair options,” says action is needed now more than ever because each annual budget deficit adds to the public debt, requiring more taxes to meet interest payments and less revenue available for future expenditure. It comes at a time when each week brings a new suite of proposals and counter-proposals.

Paul McClintock, the CEDA chairman, said at the National Press Club yesterday that the CEDA Board felt that there was an urgent need for Australia to face up to the continuing problem of the budget deficit, and that CEDA could add some structure to the chaotic public conversation about the issue.

To achieve this, CEDA put together a Balanced Budget Commission which included three former heads of the Prime Minister’s Department, former senior State bureaucrats, business figures and leading economists to come up with a considered view.

The Commission’s proposal was that:

• The Federal budget should be balanced by 2018-19

• All budgets should be assessed against the well-established convention that expenditure be held at 25.5% of GDP, and taxation revenues at 23.9% of GDP

• These targets would be met in 2018-19 by increasing revenue by $15 billion and by reducing expenditure by $2 billion relative to current policy settings

• There is a range of alternative policies available to governments to reach these targets in that year (without CEDA endorsing any particular policies)

• From 2018-19 additional steps would need to be taken to deal with the expected growth in expenditure.

The case for balancing the budget quickly rested mainly on the agreed imperative to maintain balance over the business cycle, and the fact that Australia is in the positive phase of the business cycle so this is when we should be running surpluses not deficits. CEDA also noted that money borrowed today to support current expenditure will have to be paid back by the next generation and so amounts to an unfair penalty on the future.

The budget can be balanced at any level of revenue and expenditure. The CEDA report points out however that Australian governments of both complexions over the last two decades have focused on a target for tax revenue of 23.9% of GDP (yielding a total revenue of 25.5%), and expenditures of 25.5%. So CEDA suggests focusing on these levels given their revealed and established support.

Fixing these target levels, and using the mid-year economic forecasts, then allows CEDA to calculate how much additional revenue will be needed to meet the target and by how much expenditure will need to be cut. This leads to the view that revenue needs to be boosted by $15 billion and expenditure reduced by $2 billion in 2018-19.

CEDA does warn however that beyond the forecast period expenditure seems likely to grow faster than GDP, particularly because of health and age-related expenditures. So while Australia has more of a short-run revenue deficiency, the longer-term problem is how to keep expenditure in check. This is expected to be the subject of a subsequent piece of CEDA research.

Rather than set out any particular steps to meet its revenue and expenditure targets, CEDA sets out a number of different alternatives which would do so. Without any increase in company tax or the GST, and with bracket creep meaning income tax is already playing a role, the scope for revenue increases is quite narrow.

Superannuation taxes, capital gains tax, and “sin” taxes CEDA suggests can be increased and reductions in a range of tax concessions would also lead to higher government revenues. Inevitably such boosts to tax revenues come at the expense of different groups of individuals, and the choices are political, and CEDA simply emphasises the need for balance and fairness.

One important caveat CEDA makes concerns the States. The conventions discussed about revenue and expenditure shares, relative to GDP, are built upon the current allocation of responsibilities between the Commonwealth and the States. If there were some rebalancing of responsibilities, the conventions would have to be adapted.