Australia has a budget policy credibility deficit

The slowing economic cycle revealed in the national accounts also exposes Australia's structural Budget situation as poor.

There are several estimates from reputable sources that put Australia's structural Budget deficit at around 2% to 3% of GDP per annum ($30 to $45 billion). Some sources suggest this structural deficit will persist indefinitely, or, more likely, get worse, under current policy settings. With the Federal Election campaign auction now under way, we are getting big-ticket long term spending promises, adding to NDIS, Gonski, etc., that will substantially increase it.

We have a structural Budget policy credibility deficit. A credible path to eliminate both structural deficits is needed.

The Government claims the deterioration due to downside revenue surprises is structural when it's cyclical. There's 'kite flying' to test possible new structural revenue measures to plug the gap, rather than shaving spending to meet more realistic longer-term revenue prospects. This mis-diagnosis of the problem hampers appropriate policy responses.

Coming back to our declining incomes driven largely by falling terms of trade, the revenue 'mix' in the Budget makes things worse too. The Government has increased reliance on more volatile taxes, especially income/profits taxes, to over 73% of total tax revenue, despite declines in expected revenue from such taxes.

This makes the Budget bottom line more volatile, and revenue forecasting more difficult. Meanwhile, nominal consumption spending – the tax base for the GST – increased by about 5% in the year to the December quarter of 2012, over 2.6 times as much as nominal GDP. Revenue volatility would be reduced by broadening the GST tax base and increasing its rate to finance income tax cuts.

But this is off the agenda. Australia's 'twin deficits', fiscal policy credibility and Budget, seem set to remain for a while yet.

· Geoff Carmody is Director, Geoff Carmody & Associates, a co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury.