It’s not a spending problem, it’s a GDP problem

Australia’s Treasurer wants to curb spending. Yet the elephant in the room is the sliding economic growth. Fix that, he boosts revenue and the deficit disappears.

Australia has a spending problem, apparently. Our new Treasurer is a man of action and he wants to fix the problem. He stopped the boats, now he wants to cut our spending. But didn’t Joe Hockey want to do that? Has anything really changed?

We’ll see what comes out of Turnbull’s mini economic summit this week, but if Morrison doesn’t mention negative gearing and capital gains discounts on investment properties we’ll know he is all talk and no action. Then we’re just a hop, skip and a jump from a media blackout on the reporting of on-budget matters.

It’s true, our spending is growing faster than the rate of inflation. It was even when the budget was balanced, so the blame can’t be put fairly and squarely on Labor. In truth, everyone’s had a go at cutting government spending but none have succeeded. But it isn’t the biggest issue the Treasurer faces.

Certainly relating spend to GDP – as Morrison has done – is a meaningless measure. If spend as a proportion of GDP falls, is it because spending has been cut, or because GDP has risen? And do the two need to be in sync? You could easily argue that when GDP growth is down to a trickle that’s the time government needs to step up to the plate. It all depends on how Keynesian you want to be.

First, though, you’ve got to make budget figures meaningful. We have a growing population. You wouldn’t expect the household budget to stay the same after you’ve welcomed a brood of young, hungry, PlayStation obsessed, brand driven kids into the world. Likewise, we shouldn’t expect government expenditure to remain constant in real terms when we are adding a few hundred thousand people to the country each year.

Hence, if you track government expenditure on a per capita basis, from the turn of the century, you’ll find some of the highest growth was in the Howard years – over 6 percent in 2005. Remember the baby bonus, when Treasurer Costello told us to have three babies – one for mum, one for dad and one for the country? We could afford it because revenue was similarly increasing, thanks to an economy that was going gangbusters.

It’s not doing so well now. Over the last year, GDP per capita grew by just 1 percent. That’s less than the rate of inflation. Sure, official figures have the economy growing at a more acceptable2.4 percent, but that ignores the 1 percent growth in the population. You can always grow the economy by throwing more people at it.

Since 2008, GDP per capita has grown by just 6 percent, over nine years! Not much, considering it was propped up by the mining boom. Meanwhile, budget spending and revenue grew by 22 percent. That’s possibly a few points higher than it should be, allowing for inflation, but nothing too catastrophic.

So, have we really got a spending problem? I’d suggest the Treasurer has a far bigger job trying to kick start and restructure the economy, rather than worrying about where to apply his scalpel. If he manages to get GDP growth back on track then employment rises, people pay more taxes and the budget deficit will fix itself. If you cut, you ignore the elephant in the room. Or is our slow economic growth something that we’re not allowed to talk about? Old habits die hard.

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