States extract NDIS pound of flesh from Canberra

The economy’s weak 0.2 per cent expansion in the first quarter of the financial year confirms the impact of the sharpest monetary policy tightening in a generation. After the sharp but brief contraction at the start of the pandemic in 2020, household incomes were pumped up by debt-financed and inflationary government stimulus payments, such as JobKeeper, that ended up in a $300 billion household savings buffer. That buffer has held up living standards as inflation, a record high income tax bite and higher mortgage repayments have eaten into household spending power.

Economics correspondent Michael Read calculates that real disposable per capita household income has fallen back to 2015 levels. As the fiscal stimulus runs down, the economy’s record-high terms of trade will fall as commodity export prices come off their highs. That will turn the federal government’s temporary budget surplus, fired up by a resource company tax windfall, into ongoing deficits. The population catch-up from returning international students and migrants will peak and fall back just as immigration is being scapegoated for the housing crisis. Yet, despite the economic slowdown, the alarming fall in the economy’s overall productivity and stubbornly high services inflation mean that interest rates are likely to remain higher for longer.

As the borrowed money is spent, Canberra is struggling to pay the bills for its pre-pandemic fiscal excesses. The deal cobbled together by national cabinet to rein in the out-of-control National Disability Insurance Scheme and cut it back to its original planned size is just another temporary fiscal fix. The scope and cost explosion in the NDIS will be tackled by closing the scheme to new participants with mild childhood autism and early developmental problems who will instead receive services under a new jointly federal-state funded scheme. That proves the rule that once governments hand things out it is next to impossible to take them back.

Moreover, state governments have used their power of veto over any changes to the NDIS to extract an extra $25 billion from Canberra. In return for funding half of the supposedly capped 8 per cent annual NDIS cost growth, the states get a three-year extension of the GST top payments – the compensation for Scott Morrison’s GST deal with WA – and an agreement to increase the average federal share of public hospital funding from 40 per cent to 45 per cent over the decade to 2035. The insatiable appetite of the political class for higher taxing and spending is not matched by any serious policy intent to do anything to help lift Australia’s sluggish growth prospects.