MYEFO’s missing medium-term fiscal framework

EY chief economist Cherelle Murphy’s graph showing the sharp spike in all levels of public expenditure as a proportion of GDP in the past decade suggests that post-pandemic Australia is becoming a permanently higher taxing country with a structurally higher level of government spending. No wonder productivity is actually falling.

Jim Chalmers’ Mid-Year Economic and Fiscal Outlook points to federal government tax and other revenue consuming a record 26 per cent of national income in a decade. Even by then, the tax grab will fall short of rising public spending. Since the political failure of the Abbott government’s 2014 budget that aborted then-treasurer Joe Hockey’s mission to end the “age of entitlement”, there has been a bipartisan failure to discipline the community’s expectations of what governments can deliver even for worthy causes. Those expectations were further unmoored during the pandemic as governments borrowed massive sums of what was then ultra-cheap money to provide social protection all around.

This helped spur Labor’s “care economy” election spending promises in aged care and childcare. Labor now has promised to cap growth in the cost of the out-of-control National Disability Insurance Scheme monster at 8 per cent. But this has had to be “bought” by committing billions of dollars to new support services for childhood conditions, to “no worse off” GST top-up payments and more public hospital funding. And there is now a renewed push for even more spending on schools after the billions of dollars of Gonksi “education revolution” funding failed to reverse declining student performance, as the productivity of the school system actually fell.

Governments once were politically rewarded for keeping a tight lid on the size of government, the taxes needed to fund it and the shortfall needed to be financed by borrowing. In the 1980s, the Hawke-Keating Labor government set clear budget rules for all three. In 1996, the Howard government established the Charter of Budget Honesty which formalised a medium-term framework of balanced budgets over the economic cycle. This framework, which helped anchor budget expectations and insulate the public finances of this commodity-exporting nation against global volatility, was jettisoned by the Morrison government at the start of the pandemic. It was replaced by the very modest goal of shrinking the debt as a share of GDP over time, and has not been restored by the Albanese government.