Here’s my piece from today’s Fin, on the expenditure side of the budget

More to life than tax cuts

Most discussion of Tuesday’s budget has focused, not surprisingly, on the announcement of new tax cuts. The Budget speech, however, indicates a different set of priorities. In introducing the tax cuts, Peter Costello said “After we balance our budget, reduce Labor’s debt, and fund our services we should reduce taxes as far as is prudent.� Rhetorically, at least, cutting taxes is at the bottom of the government’s priority list.

Costello’s presentation is consistent with the position taken by John Howard during the election campaign, when he observed ‘There is a desire on the part of the community for an investment in infrastructure and human resources and I think there has been a shift in attitude in the community on this, even among the most ardent economic rationalists.’

The forward estimates suggest that this is not merely rhetoric. Although there are some slight variations from year to year, general government expenditure is forecast to remain stable at around 22.5 per cent of GDP. Past experience suggests such projections are more likely to be underestimates than overestimates, as unexpected requirements for new spending emerge over time.

The idea that the share of GDP allocated to public expenditure should be constrained or reduced has been a standard assumption in Australian politics for decades, dating back at least as far as the Hawke government’s 1984 ‘Trilogy’ commitments, to reduce taxes, expenditure and the deficit relative to GDP.

An analysis based on structural change suggests the opposite conclusion. The sectors of the economy that are, or should be, growing in relative terms as we move from an economy based on physical goods to one based on services and information, include health, education and various forms of risk management, including retirement income and social insurance. These are the areas that dominate the expenditure side of the government’s budget.

One of the major positives in Costello’s speech was the recognition that expenditure on health is going to keep on growing, and that this will mean more public as well as more private spending. The speech also marked a shift away from the simplistic idea that this trend is due to the aging of the population.

Demographic change will play some role in increasing health expenditure. In particular, as was recognised in the budget, people with dementia are surviving longer than in the past, and caring for them is expensive. But the major source of growth in health care expenditure is the development of new treatments. We could ‘control’ health expenditure by forgoing new treatments, but why would we want to?

In many ways, the pre-Budget scuffle over funding limits for IVF symbolised the problem. The demand for IVF treatment is strong, even when the chances of success are small. Given the high cost to the budget it is not surprising that the government has tried to limit access to subsidised treatment, but it’s also not surprising that it has had little success so far.

Admittedly, this is an issue where the government created a rod for its own back. Having played what seemed like clever ‘wedge politics’ with IVF treatment for single women a few years ago, it has ensured that the issue has the kind of high political profile that precludes rational policy debate.

While health got a good run in the budget, education got very little beyond the ad hoc initiatives announced during the election campaign. There was nothing new for universities and only modest measures for technical education. Sooner or later, we will need to face the fact that, in a modern economy, we need to aim for universal completion of secondary school, and progression to post-secondary education, whether this is academic, technical or vocational. This will not come cheap, and it is unlikely that much more of the cost can be shifted on to students.

The sustained economic growth of the past fifteen years has made life relatively easy for the government. It has been possible to respond to demands for improved health and education services, while still handing out substantial tax cuts. As long as the predicted growth in export demand is sustained, it should be possible to continue this balancing act into the future.

What is clear, though, is that the demand for services will be there, whether the economy is strong or weak. As the Budget speech indicates, tax cuts are a luxury govenrments cna deliver when times are good. The converse is that, if the rosy predictions for the next few years are not fulfilled, it may be a long time before we can afford another round.