Boom's $190bn windfall 'wasted' | The Australian

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THE AUSTRALIAN

Boom's $190bn windfall 'wasted'

DAVID UREN AND SID MAHER

Source: TheAustralian

AUSTRALIA has squandered nearly all of the $190 billion windfall from the resources boom over the past decade through a raft of unsustainable government spending programs and tax cuts. With cabinet today expected to discuss savings and tax measures for Chris Bowen's planned economic statement to combat a predicted $8bn slump in revenues, a report from the Melbourne-based Grattan Institute think tank warns of a significant, long-term budget deficit. Even if the economy was recording healthy growth, the budget would remain deep in deficit at normal commodity price levels, the study warns. "The benefit of record commodity prices was treated like recurrent income, and tax cut and spent away as if it would last forever," the study's author Jim Minifie said yesterday. Soaring commodity prices have brought a combined benefit to the commonwealth budget of $190bn over the past decade. Of this, $182bn has been either spent or devoted to tax cuts by the Howard, Rudd and Gillard governments. This does not include the combined $87bn of stimulus spending by Kevin Rudd and then-treasurer Wayne Swan following the financial crisis. While most of the reduction in revenue occurred during the Howard era because of personal income tax cuts and more generous superannuation concessions, most of the spending increase has occurred under Labor. Dr Minifie said that while Australia had not saved as much as it should have, "it is not too late for a burst of prudence". He said the Treasurer's willingness to push for pre-election spending cuts to preserve the budget strategy of returning to surplus was "no less than he should be doing". Last week, Mr Bowen moved to stare down internal concern about spending cuts on the eve of an

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election, re-stating his intention to post a budget surplus in 2016-17. The government's expenditure review committee has been briefed by Treasury on an $8bn slump in revenues since the last budget in May and a possible writedown over the forward estimates of close to $30bn. Tony Abbott said the government was "in panic" over the state of the budget and accused the Prime Minister of sacrificing hundreds of jobs through the changes to the fringe benefit tax regime for cars. "They just don't understand the importance of living within your means and that is why Mr Rudd is now running away from an election on the 31st of August. Even on the 31st of August, an election would be one week overdue," the Opposition Leader said. Mr Bowen said yesterday that at a meeting last weekend of G20 finance ministers, there was a growing consensus that harsh budget cuts were holding back global recovery. He said the ministers acknowledged that fiscal consolidation remained important but should be carefully managed in pace and composition to suit the economic conditions. "There is a growing consensus that the most effective fiscal management involves support for jobs and growth in the short term, while economies struggle to recover from the lingering effects of the GFC, and prudent management over the medium term, to ensure confidence in countries' longer-term financial stability," the Treasurer said. Mr Bowen said the Australian economy remained strong and inflation was contained. "The future is not certain, and undoubtedly the international situation presents significant challenges ahead. Nevertheless, I have every confidence that Australia is in a very strong position." The Grattan study says Australia is not at high risk of recession and the government still has scope for further savings without risking economic damage. It looked at commodity price booms over the past 40 years and found that the downturns that followed resulted in recessions in five of the 12 resource-rich countries. But there were other contributing factors, such as high debt, or high inflation, neither of which is an immediate problem. "There are grounds for cautious optimism that Australia will avoid a sharp slowdown, even if the terms of trade fall sharply," the report says. Excluding the influence of the downturn in business conditions, the study finds the commonwealth's revenue fell from 22 per cent of GDP to less than 19 per cent by 2011, although there had been a small recovery since then. At the same time, spending, excluding the stimulus outlays, rose from 20.5 per cent to 23.5 per cent of GDP. Dr Minifie said that if the increased spending had been devoted to capital investment, such as improved infrastructure, it could be justified as a form of saving. Similarly, it could be argued that increased spending on health and education would boost the future productive capacity of the economy. The study shows that the commonwealth spending in these areas did rise, but only by 0.4 per cent of GDP whereas five percentage points of GDP went on general government consumption and tax cuts. State governments increased their investment over the past decade; however, this was all funded by borrowing. "Governments spent the windfall and then borrowed in order to invest," Dr Minifie said. He said the profligate use of the resource boom proceeds was supported by the government's budget rules, which say that tax as a share of GDP should be kept to its 2007-08 level while achieving surpluses on average over the medium term. Those guidelines allowed spending to rise as soaring export commodity prices boosted the level of nominal GDP - the value of everything produced. "Moreover, the base year for tax share of GDP was a year of unusually strong revenues," he said. "Tax cuts from around that time have eroded the revenue base." He said the budget strategy should explicitly recognise the bottom line benefit of high commodity prices and commit to saving most of it, at least until a large enough buffer to insulate the economy from

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downturns had been established.

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Comments on this story

David Bishop of Adelaide This unfortunately is very true & we will eventually pay the price. When any individual company or government starts to rely on extra income that may not be sustainable it risks being addicted to that situation. If & when this resources boom really deteriorates many government programs will be unsustainable & we will have to go into massive debt as these things get changed. The real problem here is that many of these programs are run by very expensive bureaucratic government systems that suck the life out its real objectives. If we are going to survive when the resource boom runs out we must have a much more efficient system of government that can provide programs that are much cheaper. We must get rid of duplication thru the three tiers of government & every department must be run like a private business. This is where high standards are met but done on time & on budget with savings if possible. We cannot afford even now to have massive government departments who are not expected to achieve anything other than get the job done with no agendas that make them truly responsible for anything else Ozzoid of Munich "...$190 billion windfall from the resources boom ..." No Great Big New Tax, no Great Big New Tax, no Great Big New Tax, eh? Now where did all those golden eggs go? Wayne Sleep of Gold Coast Mr.Rudd. Please Zip-it.

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