“This year our debt will be $30 billion. This year what we see is that government expenditure has grown by $30 billion… The entire volume of our deficit for this financial year is explained by government increases in expenditure.” – Opposition climate spokesman, Greg Hunt, ABC Q&A, 5 August (watch the segment on the debt, deficit and the surplus here).
Whether Australia’s debt and deficit is in “crisis”, as the opposition would have it, or reasonable given the international volatility as Labor claims, is one of the key contested areas in the early stages of this election campaign. The coalition says what we have is a spending problem. The government says our debt and deficit is low by world standards, and it won’t cut spending harshly for the sake of the economy and to save jobs.
Hunt’s assertion is in this context - that it’s a neat sum. The government’s spending is rising this year by $30 billion, which is just about precisely the same as our deficit. The unspoken assumption is that if the government just curbed its profligate spending, we wouldn’t have a deficit or a deficit of this size.
It’s clear that Hunt when he spoke of this year’s “$30 billion debt”, he meant this year’s budget deficit, which is the difference between the government’s expenditure and its revenue. (The government’s total debt, or what it owes, is much higher, more than $300 billion this year when you include government-issued bonds and securities and interest we are paying on borrowings.)
When contacted, a spokeswoman from Hunt’s office said the $30 billion figure is “correct as the one year deficit, referred to two sentences later is an identity of the one year deficit. This is also clear from the later use of the cumulative gross debt figure of $400 billion by 2017 used elsewhere in the interview.”
Leaving aside the current debate around the reliability of Treasury’s estimates, according to the Economic Statement released last Friday, the budget deficit will be $30.14 billion (near enough to Hunt’s $30 billion) this financial year.
Basically, the size of the deficit depends on how fast government spending is growing relative to the growth of its revenue. According to the Economic Statement, revenue was expected to rise by $18.6 billion and expenditure to rise by $29.2 billion.
Hunt is clearly right on the raw figures. The budget deficit increases when government expenditure rises more than government revenue. But can the statement “the entire volume of our deficit for this financial year is explained by government increases in expenditure” be supported?
Economically, there is little correlation between the two. Government expenditure is almost always growing in a country with expanding population and increased demand for public services such as education and health. In addition, with population ageing and increased unemployment, welfare spending rises.
This rise in expenditure occurs even without any new government initiatives (such as the NDIS or Gonski) and expenditure as a percentage of Gross Domestic Product, or the value of our goods and services, may stay the same.
The $30 billion deficit would only “explained”, as Hunt puts it, by an increase in government spending if there had been no growth in revenue, which is not so - it has grown, but by less than in previous quarters. The deficit is as much to do with revenue growth as it has to do with expenditure growth.
Government revenue generally increases over time as there are more people in employment, incomes rise and people spend more, hence raising tax revenue.
However, in the current case, the government announced a four-year $33.3 billion revenue writedown, mostly blamed on the downturn of revenues since the May budget due to what Treasurer Chris Bowen said was a slowing of the China-led mining boom.
Spending is also up, although Bowen insists that “our spending as a percentage of GDP is falling in each of the next four years”. According to the Economic Statement from 25.3% of GDP in 2013/14 to 24.4% in 2016/17.
What needs to be separated out is the extent to which the deficit is due to “natural” increases in expenditure (due to factors such as population growth) over and above the revenue-raising capacity of the tax system. This is not easy without the sort of modelling Treasury has available since all sorts of variables such as population growth, the age structure of the population, unemployment, disability rates etc must be factored in.
This “natural” increase needs to be distinguished from “new” spending due to government initiatives such as those already mentioned such as Disability Care and Paid Parental Leave.
In any case, the deficit can be reduced by not just reducing spending but also increasing revenue by say, taxation reform.
If the government has a budget deficit, this has to be financed by borrowing, which contributes to the government debt. The Commonwealth net debt is estimated to reach $178 billion (May Budget Papers) or $184 billion (August Economic Statement) or even more according to some economic commentators. The gross debt is the actual amount borrowed without financial asset offsets, and this is well over $300 billion.
$30 billion is the best estimate of the deficit. Government expenditure is also estimated to rise by about $30 billion - but this is coincidental. The debt, on the other hand is the accumulation of deficits over time and is much greater than $30 billion.
But this is not solely due to excessive spending, it can also be explained by growth in spending exceeding growth in revenue. Reducing the former or increasing the latter are both options for reducing the deficit.