Hey, big spender, everything’s not so hunky-dory

Challenges lie ahead, but policy actions are required now. The main challenges lie in the medium and longer term, but to address them, further policy actions should not be delayed. Ageing will exacerbate the underlying rise in public health costs and to a lesser extent in public pensions, putting pressure on public finances. More fundamentally, although Australia has moved up the “league table” in terms of per capita incomes during the past decade, it has returned only to the relative position it already held in the early 1970s and remains well below the leading countries in terms of labour participation and labour productivity.

Against this background of ageing and required early policy changes, the Budget falls short. Despite the additional welfare-to-work programs designed to encourage welfare recipients to move into the workforce, and costing $3.6 billion over four years, the Budget forecasts suggest no increase in the workforce participation rate over the next four years and the spending estimates show no reduction in the relative (to GDP) size of welfare spending. Indeed, as the estimates of assistance to the unemployed provide for an increase of nearly 30 per cent between 2005-06 and 2008-09, it appears many of those no longer eligible for the disability pension and parenting payments will go on to the dole, with little or no net change in the total number on welfare. The weak explanation being provided by ministers is that it will probably take about eight years for the programs to have a major impact.

Regrettably, this slow adjustment to changed circumstances is par for the course. Under the Howard Government no substantive progress has been made in reducing the size of government spending, either in practice or philosophically. Indeed it has gone backwards. My report to the Australian Chamber of Commerce and Industry shows that since 1995-96 Commonwealth spending, excluding interest, has actually increased as a per cent of GDP - and remains higher than in Whitlam’s final year. Moreover, with the now extensive so-called “tax expenditures” - basically tax concessions - Commonwealth spending is really about a sixth higher than the published figures.

In short, the 2005-06 Budget indicates that the government has failed to adapt to the new improved economic environment in which budgetary policy now operates - but in which structural changes should be implemented to a much greater extent.