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My slightly altered letter published in today’s Australian has been accompanied by an editorial which concludes that “the mantle for prudent fiscal management is up for grabs”. But it seems to me that much more than that is involved.

The Gillard government has locked itself into a policy of achieving a surplus in 2012-13 and, taking Parkinson at his word, that will require a massive adjustment to existing spending and/or taxation policies in circumstances where the economy may struggle to achieve the forecast real GDP growth of 3.25% and where the starting point budget deficit in the current year may well exceed $37 billion. Further, such policy changes will have to be made in the May budget by a minority government.

The Australian also refers to a “structural” budget deficit. But if Parkinson is correct in predicting a lower level of tax receipts “for many years to come” that implies an ongoing deficit problem, not one that will recover naturally in a year or so (which it would do if the problem is structural).

The Government (and the Opposition) face more than “significant pressure” to present a coherent budgetary policy. They face a major political challenge involving the role of government in society.

Des Moore

Swanís huge challenge
letter by Des Moore published in The Australian,12 March 2012
[square bracketted sections omitted by editor]

Paul Kelly draws attention (Inquirer 10/11 March) to the major budgetary problem revealed by Treasury Secretary Martin Parkinson - in the latter’s acknowledgement[, for the first time,] that tax revenues are now running 4 percentage points of GDP below pre-global crisis levels and are “not expected to recover to its pre-crisis level for many years to come” (“No way around the tough choices”, 10-11/3). Parkinson implies that budget estimates of tax revenues in 2012-13, [as published in the November Mid Year Economic and Fiscal Outlook,] are now about $40 billion too high.

For the government to achieve its promised budget surplus in 2012-13, savings of about $40 billion will need to be obtained from expenditure reductions or tax increases.

These days $40 billion may not sound much. But estimated expenditures of $370 billion for 2012-13 already provide for a 3 per cent reduction in real terms and another $40 billion cut would mean a real reduction of around 14 per cent.

[Under the present minority government,] this looks unachievable, with the previous largest real reduction being 4 per cent under the Hawke-Keating government in 1988-89.

[Clearly a large part of the savings will have to come from increases in revenue – and measures that are not one-offs but will last “for many years to come”.] [Treasurer] Wayne Swan faces an enormous challenge.

Des Moore, South Yarra Vic

The structural budget deficit
Editorial, The Australian, 12 March 2012

THE discovery of a gaping hole in government revenues - caused by stalled company tax receipts, lower income tax revenue and softening economic growth - will add significant pressure on the government and the opposition to rein in spending to return the budget to surplus and repair the structural deficit.

The European debt crisis, the high dollar and weak consumer spending add to the challenge that Wayne Swan already faces in meeting the government's commitment to turn around a deficit of at least $37.1 billion this year into a promised surplus of $1.5bn in 2012-13.

In his latest economic note, the Treasurer is right to point out "one of the lingering effects of the GFC has been a massive write-down of tax receipts" -- falling by $140bn over the five years to 2012-13. As The Australian's David Uren noted, if the same fall in company tax revenue in the December quarter is reflected in the June half-yearly results, then the deficit will edge up to $50bn in 2011-12.

Accordingly, Mr Swan has set himself the target of finding "significant savings" in the budget. This newspaper has constantly pointed out waste and profligacy: overspending in the second stimulus package in early 2009; the exorbitant fees associated with the Building the Education Revolution program, the $36bn National Broadband Network, and the excessive costs associated with giving pensioners set-top boxes. These big-ticket items come in addition to systemic bureaucratic waste, not withstanding the 2.5 per cent efficiency dividend on top of the existing 1.5 per cent dividend.

This is why Tony Abbott's pledge to establish a commission of audit to review "top to bottom" government spending and identify areas of waste is a timely one. This is an opportunity for the Coalition to demonstrate its own fiscal constraint, given several large spending policy commitments and a previously vague commitment to delivering a surplus.

The bigger challenge is to repair the structural deficit. Last week, Treasury secretary Martin Parkinson exposed the weak budget position. He expects spending to exceed revenue for several years. Since the global financial crisis, tax revenue has fallen by $60bn a year. "Surpluses are likely to remain, at best, razor-thin without deliberate efforts to significantly increase revenue or reduce expenditure," he said. The mantle for prudent fiscal management is up for grabs.

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