Budget test: Turnbull must make the case for spending cuts

Budget test: Turnbull must make the case for spending cuts

Budget test: Turnbull must make the case for spending cuts

February 19, 2016

On the night he seized the prime ministership, Malcolm Turnbull, speaking about Australia’s economic problems, extolled the importance of “explaining what the problem is, making sure people understand it … presenting a path forward and then making a case for that path forward”.

He is failing his own test.

There is no bigger problem facing his government than the budget. But the Prime Minister and his government have neither presented nor made a case for bringing the budget under control.

Quite simply, we have a spending problem. The commonwealth government spent 18 per cent of gross domestic product in 1970 and spends 26 per cent of GDP now. And taxes are rising accordingly.

The government is spending $17,850 a person this year, up from $17,750 last year and $6350 in 1970 (all adjusted for inflation). This growth has occurred despite all cohorts of society becoming richer, so there is less need for welfare. And it has occurred despite us knowing from the collapse of socialism that centrally planned service provision is highly inefficient.

It gets worse when we include the other levels of government. Our national, state and local governments together spend 35.6 per cent of GDP.

In more prosperous places such as Hong Kong, Singapore and Switzerland, governments spend less (17.6 per cent, 18.2 per cent and 33.5 per cent of GDP respectively).

One reason the government dithers is because of stupid advice from public servants. They tell it not to touch spending because that would push the economy over a cliff. This is simpleton economics.

Our budget deficit is injecting 2 per cent of GDP into the economy, but this is funded through foreigners buying government debt. This boosts our exchange rate, which in turn hurts our trade-exposed industries such as tourism, education, agriculture, mining and manufacturing. The deficit simply helps some at the expense of others.

Even if a budget deficit could be justified, this would be best delivered by cutting spending in Canberra (to free up resources mired in unproductive activities) and concurrently cutting taxes (to free up business activity and employment in the real world outside Canberra).

Another reason the government dithers is it is not being urged to cut spending by the community. Many people find it inconceivable that the government would dare to cut anything.

More than half of all households receive government cash handouts. More than 80 per cent of the population pays less in tax than it receives from the government, including in-kind benefits such as public schools and hospitals. That means less than 20 per cent of the population pays for the collective goods we all benefit from, such as defence, police, footpaths and street lighting.

And only these Australians are providing the funds to pay interest of $1 billion a month on our public debt, more than what we spend on unemployment benefits, foreign aid and the ABC combined.

Many are urging the government to leave spending alone, in the belief the economy can continue to remain in deficit indefinitely or it can be remedied through yet more taxes imposed on the 20 per cent already carrying the load. They are wrong.

What we need is a new economic narrative from the Prime Minister, using his renowned charm and powers of persuasion. He must convince the public we have a spending problem, that it cannot continue and that the burden of fixing it must be shared. As to where expenditure can be cut, middle-class welfare and the duplication of state and commonwealth departments are good places to start. But unless the community can be convinced there is a problem, no solution will be acceptable.

From The Australian, 19 February 2016.