Paid parental leave weighs heavily in government spending forecast

A new report from the Parliamentary Budget Office could help Joe Hockey sell his budget. Nikki Short/AAP

Growth in government spending on big-ticket items including Medicare, public hospitals and the aged pension is expected to be less than real GDP growth over the next decade, according to the latest report from the independent Parliamentary Budget Office (PBO). The report shows the impact of planned savings measures in the federal budget, many of which are yet to be legislated.

It highlights real growth in Australian government spending over the past decade (annual average 3.6%) was significantly greater than real economic growth (annual average 3.0%) during the period, a fact the government has used to help make its case for budget cuts. The PBO forecasts total government spending to grow from A$385 billion to A$682 billion over the next decade, with 2024-25 savings of $19 billion from budget measures yet to be legislated.

The PBO report, its second since it was established by the Labor government in July 2012, warns if the projected reduction in spending growth is not achieved over the medium term, an even greater share of the burden of fiscal consolidation would need to fall on the revenue side of the budget, meaning taxation increases.

“The report exposes just how vulnerable the commonwealth budget position is,” said John Daley, chief executive officer with the Grattan Institute.

“It expressly assumes that a number of things fall the government’s way. Firstly, it assumes no substantial discretionary increases in spending. As the PBO points out, that would be very different from the last decade.

"Secondly it assumes that all of the disputed savings measures are enacted, which are collectively worth $19 billion or 0.7% of GDP. Third, it assumes the Commonwealth doesn’t provide additional funding to schools or hopsitals and that states pick up the tab – which just shifts who has to solve the problem.”

Finally, the report assumes growth in real GDP will be stronger than it has been over the last decade.

“There’s downside risks to both the revenue and spending projections and that reinforces the need for fiscal consolidation.”

The report shows spending on defence, GST transfers to states, the National Disability Insurance Scheme and the expanded paid parental leave scheme are expected to grow faster than the economy. However, in the case of the NDIS and parental leave scheme, the net effect is offset by levies and contributions from state and territory governments.

The government’s controversial paid parental leave scheme is forecast to show the largest growth rate of all major spending, at 12% per year, at a total cost of A$7.5 billion in 2024-25. If the scheme proceeds as planned it would account for 3% of the growth in total government spending over the medium term.

Meanwhile, the government’s planned Medicare co-payment scheme, currently opposed by Labor and the cross-benchers is only forecast to improve the budget bottom line by A$2.2 billion in 2024-25, due to less people going to the doctor.

“However, what happens if people who don’t go to the doctor end up costing us more (in health costs) in the long run?” Prof Daley said.

The PBO warns of the challenges of reducing the growth of spending on major programs, given community expectations.

“The sustained period of strong growth in Australian Government spending over the past decade can reasonably be expected to have lifted the Australian community’s expectations of continuing higher levels of government services and benefits over the medium term.

"Realising the projected slowing in the pace of growth of Australian Government spending implies successfully adjusting these expectations.”

The report also warns of risks to the economy of uncertainties in the international outlook and in the economic transition out of the mining boom.

“These risks reinforce the need for fiscal consolidation in order to establish a fiscal buffer against the possibility of adverse economic shocks.”