The full story...

Daley tips tax hike to deal with deficit

Eleanor Hall reported this story on Wednesday, December 18, 2013 12:14:00

ELEANOR HALL: One close budget watcher who has extensive experience in business and the public sector says the Federal Government will need to break at least one of its election promises if it's to solve the budget problem.

The CEO of the Grattan Institute, John Daley, also says that very few governments have addressed structural deficits like the one Australia is facing with spending cuts alone. He predicts that the Treasurer will need to increase taxes.

John Daley spoke to me in Melbourne this morning.

John Daley, is the Government overplaying the depth of the budget problem, or is this a realistic check on the previous overly optimistic forecasts?

JOHN DALEY: This is, I think, a realistic check indeed. If anything it probably understates the extent of a long run issue. The good things are we are seeing a government being very honest about the fact that the short run debt to be quite substantial, being very honest about the pressures that health will put on the budget in the long term, sounding warning sign signals about the cost growth, the statement yesterday at least flags that a control cost so that they only grow about 2 per cent a year will be a very, very big ask.

ELEANOR HALL: So how tough a budget do you think we are likely to see in May?

JOHN DALEY: You don't solve a budget deficit of $30 billion a year with a couple of hundred million here and a couple of hundred million there. You actually need to do some big things. The Government has certainly promised that they're not going to be reducing education spending or health spending or defence spending or changing superannuation rules or increasing taxes. So that doesn't leave them a lot of options.

ELEANOR HALL: You've written that almost no government has balanced its budget without resorting to both spending cuts and tax increases. Do you expect that despite its election promises, this government will increase taxes?

JOHN DALEY: I don't know. But if they're serious about fixing the budget they are going to need to. The catch of course is that if you don't take very serious measures in your budget in your first year, it's very difficult to get political momentum to fix it thereafter.

ELEANOR HALL: If the goal is to address the structural deficit, what options, broadly, does the Government have?

JOHN DALEY: What we're seeing at a most broad level they can either increase taxes or they can reduce expenditure. The work that we did a little earlier this year called balancing budget identified the things that were big enough to make a real difference and which weren't horrible in terms of either dragging on economic growth or really hitting the bottom 20 per cent or very bad social outcomes.

And the kind of things we identified were things like lifting the age at which you can access the aged pension, broadening the GST, looking at superannuation tax concessions, particularly there's a number of concessions that essentially go to old rich people. And that's in fact where most of the tax concessions for superannuation go.

Now of course, all of those things are as one person described them, political hemlock. On the other hand, those are the things that are relatively attractive and large enough to really make a difference.

ELEANOR HALL: You advise that the pain of balancing the budget should be spread across population sectors for political reasons. Do you think that the cuts the Government has flagged so far achieve the right balance?

JOHN DALEY: Look, they're spread across a range of different groups. I think that the real issue is that because they're rats and mice, by and large they've hit small and individual sectors and they haven't been felt across the community.

If you look at the history of successful budget repair in the past, generally governments are very deliberate about ensuring that changes are felt across the population and the reason for that is that when you're hitting just individual groups, it's very easy for that individual group to stand up and say well this is completely outrageous and unfair. And of course that's an argument that's much more difficult to run if everybody across the community is bearing some pain.

ELEANOR HALL: And yet if this government rules out changes to things like superannuation, does that then pose a danger, politically, for it?

JOHN DALEY: Look I think the enormous danger here is that they're going to have to break at least one promise. They've promised no changes to defence, health, education and superannuation and no increase in tax in the next three years. But they've also promised to fix the budget. And I just don't see how they can keep all of those promises. They're going to have to break at least one of them.

ELEANOR HALL: You say that the Government will need to cut costs in ways not seen for a decade. But is there a danger that the Government may overplay how bad things are and that that itself could knock consumer and business confidence and damage the economy?

JOHN DALEY: Look there's are a danger, although I think most people who follow the budget closely have been acutely aware that there's been a structural deficit for quite some time. In terms of the significant tasks, the first thing you'd have to do is communicate to the community that there is a problem. And I think that's exactly what the Government is doing.

There's also a timing issue here. If your economy is a little bit slow, then you're always reluctant to see government spending cut at that point in the cycle, but the problem that we've got is that there's no guarantee that economic growth for the next five or six years is going to be a lot faster than it is at the moment.

ELEANOR HALL: Well the Prime Minister does say that he wants to grow the economy in order to improve the budget. Do you think that the changes the Treasurer has flagged in yesterday's review are likely to help or hinder in that goal?

JOHN DALEY: I think the short answer is most of the things the Treasurer flagged are just not that big. The kinds of things that make a difference around innovation and so on are what happens in the rest of the world, were precise kinds of things that an Australian government doesn't control very much. That's the first point.

Then the second point of course is that it will be very difficult to solve the budget crisis simply by seeing the budget, if the economy grows faster.

ELEANOR HALL: You say that governments don't control innovation, but what about the cuts that have been flagged to education and research? Is this the right place to cut if you're trying to build an economy beyond the mining boom and with manufacturing sectors like the auto industry in decline?

JOHN DALEY: It depends on exactly where you're cutting. I don't think it's right to say that every dollar spent in education or every dollar spent on research is a dollar well spent in terms of increasing rates of innovation or increasing rates of economic growth.

And you'd need to look at the detail of the precise things that are being changed as to whether or not they're going to have a material impact on economic growth.

If you look at what the Prime Minister said two days ago, he said that the best way for budget repair was to grow the economy. As I've said, I don't think that that will work. Having the economy growing certainly helps but it's not going to do the hard work. And it remains to be seen whether they have got the political will to do the tough things that are big enough to make a difference and that will ultimately move Australia's budget to a more sustainable position.

ELEANOR HALL: John Daley, thanks so much for joining us.

JOHN DALEY: It's been a pleasure, thank you.

ELEANOR HALL: That's John Daley, CEO of the Grattan Institute.


From the Archives


The beginnings of civil war: Sri Lanka in 1983

» More
Recent Programs
Follow us...
Follow us on Facebook
Follow us on Twitter
Other News Websites