Greg Smith ACU Canberra 10 June 2014 The 2014-15 Budget Greg Smith ACU Canberra 10 June 2014

“...upper income groups should pay the lion’s share of taxes for the same reason that Willie Sutton robbed banks. That’s where the money is” Bill Clinton Source: Peterson Foundation Fiscal Summit May 2014

'If you agree that you have to engage in fiscal consolidation and your concern is that its outlays that have grown ahead of everything else, then, inevitably, ... those groups in the community that get most of the expenditure are likely to bear the most significant part of the burden.’ Martin Parkinson (Senate Estimates, reported in Canberra Times 5 June 2014)

Budget cuts: where the spending is... Commonwealth Function 2014-15 budget Social Security and Welfare $146 billion Health $67 billion Education $30 billion Defence $24 billion Everything else (excl $54b GST) $94 billion TOTAL (excl state GST) $361 billion

Ideology, values or science? Is this just about ideology and values? Both sides agree on seeking budget balance The budget and social/economic policy are also based on theories of human behaviour What government does is not just a response, it may also be a causal influence whether or not to work or seek work whether or not to save, insure, invest, learn whether to self-manage health, ageing, other risks

EMERGENCY!!! Cash deficit in 2014-15 $29.8 billion (1.8% of GDP) Total policy decisions for 2014-15 Net spending reduction $1.0 billion Net tax increases $0.7 billion TOTAL Fiscal Changes $1.7 billion

Try again – future emergency!!! Total budget improvement since 2013 MYEFO (including policy and parameter changes) Source M Parkinson Post Budget Address

Journey to the Budget: since GST 2000 % of GDP 2000-2007 Howard average 2014-15 Budget forecast 2017-18 projection Revenues 25.4% 23.5% 24.7% Spending 24.4% 25.3% 24.8% Balance Surplus 1% Deficit 1.8% 0.2% Source Budget 2014-15: revenue excludes future fund earnings

What is the economic context? Ideology aside, budget balance issues are real Quite possibly a long prospective deficit Medium term corrections underway Mining investment, terms of trade, exchange rate Leading to weak income and employment growth Longer term Intergenerational challenge (health and ageing) Some revenue revival through bracket creep BUT note “revenue cap” (ignores NDIS levy)

Continued 4 year spending growth Schools funding Increase from $14.7 to $18.3 billion (24%) Public hospitals Increase from $16.7 to $20.6 billion (23%) Disability services (mainly NDIS) Increase from $2.6 to $8.1 billion (310%) NOTE: Total HEW increases $42B to $277B (18%) compare projected nominal GDP growth of 19%

New spending priorities (over 4 years) Infrastructure funding + $8.60 billion Defence force pensions + $1.35 billion Emissions reduction fund + $1.15 billion Paid Parental leave ?? unspecified provisions in the “contingency reserve” as unannounced policy

The “public service” Total ASL 2007-08 (actual) 2013-14 2014-15 Non-military 175,531 177,258 169,922 Military (inc reserves) 72,686 76,595 79,339 Total 248,217 253,853 249,261

Social redistribution Income base late 2000s (OECD) GINI coefficient Market Income (pre tax) 0.46 After taxes and transfers 0.32 After government program spending 0.23 2010 ABS Bottom quintile Middle quintile Top quintile Private income 3% 16% 48% All govt programs 39% 10% Tax paid 6% 14% 49% Final income 13% 17% 35%

Making government bigger than it seems Government is a bank/investment fund Loans to students ($25 billion, to double in 4 yrs – not counted as part of government spending) “Future funds” ($90 b +) also not “spending” Government borrowing has to cover the lending and the spending e.g. borrowing of $45 billion in 2014-15 while deficit is only $30 billion Government is also an insurer Indemnities, guarantees (eg bank deposits, NBN, Telstra, Reserve Bank, State borrowings) Income and medical expense safety nets

Bigger government(continued) Shadow (privatised) budget ‘Compulsory’ superannuation: $60b+ per year ‘Compulsory’ private health insurance: $10b+r Tax expenditures also significant Commonwealth co-funding for States Nearly a quarter of C/W spending ($101 billion) Four year growth matches GDP growth, but cuts in several areas to fund the committed growth areas (schools, hospitals, infrastructure)

Will the Budget pass? The “Budget” an economic policy statement Legislation (Appropriations Bills) will pass: provide for annual spending commitments About one quarter of all government spending Taxes and most spending (state programs, transfer entitlements) are separately legislated The Senate may amend or reject the changes proposed for some of these