What has the Coalition Government been up to in its Budgets in the last three years? Reading them again it is clear that the single most important issue has been to balance the budget; the rationale has been to improve the nation's savings. The nation's key economic weakness continues to be an ability to spend and borrow, and an inability to earn and save. The real economy, the one in which we trade with the rest of the world, is no longer our oyster. No one owes us a living. We have a high structural deficit on current account, which consists of an intermittent trade shortfall and a large debt-servicing component. If the deficit climbs too high it may affect our ability to continue to borrow; it may affect our ability to trade. Australia needs amongst other things to save more.
What has the Government been doing about this?
The government sector has a part to play in the national savings and spending/ investment debate. By and large, although not slavishly, a government should live within its means, if only because it is a proxy for the taxpayers, who should live within their means. In this regard the Government moved swiftly in its first Budget in bringing its own into balance. The Budget deficit for 1995-96 was reportedly $10billion, at a time when the economy had been growing for five years. The political rhetoric at the time was appropriately severe for an incoming government, scolding the former government and righteous in its determination to repair the damage. The Budget was balanced within 18 months. It is now well in surplus. In other words the repair was effected very quickly, which leads one to suspect it was not the stuff of crisis, more a reasonable return to the surplus that the previous government had produced from time to time.
Therein lies the problem, the temporary nature of government financial management. The present surplus may well be dissipated in a time similarly short as its creation. Are there any remedies? One measure is the Charter of Budget honesty, which requires the Heads of Treasury and Finance to sign a document outlining the Commonwealth's Budget position prior to an election. This is a useful tool for scrutiny of government financial management. It increases the chance that government will not spend taxpayers' money to buy votes. Such a regime may improve the chance that governments' are rewarded for good management, not bribery.
The Commonwealth had also accumulated a great deal of debt by running deficits more often than surpluses. Those debts have been reduced considerably by the sale of government assets, most notably the part sale of Telstra. Had any of the moneys raised by the sale of Telstra been used to fund current spending, either in the hands of the government or in the hands of the taxpayer, as tax cuts the effect would be wholly unacceptable. Instead some was devoted to the establishment of the Natural Heritage Trust, and the remainder used to retire debt. The next time governments need to retire debt there will of course be no access to asset sales. There won't be any left to sell. The tools for managing public debt have therefore diminished. The one that remains, running a balanced budget (on average) will have to be constantly monitored.
The other side of the savings debate is the savings, which taxpayers make. In this the government's performance has been less satisfactory. The Government opted for a 15% tax rebate on savings, subsequently scrapped in favour of tax cuts. These moneys were essentially those that Labor proposed to be paid as an employee co-contribution to the compulsory Superannuation Guarantee levy. The savings gained from the tax pool are now to be returned to the taxpayer by means of a tax cut. Labor tried the same ploy for the1993 election. Returned to government, it had the good conscience to direct the moneys to a compulsory savings vehicle.
The Government assumes that a lower level of government spending and taxing will improve the nation's savings. It's boast, that spending is to reach 24% of GDP by 2001, down from 27% in 1995, has little to do with the savings issue. Less money passing through the hands of government increases the choice for taxpayer spending or saving, it does not create savings. Short of a prolonged recession or defeat in a war the savings ethos is long gone. In a world of easy access to credit, regardless of price, the ethos is not likely to return.
One area where the government may place a permanent mark on the future prosperity of the nation, in addition to its Charter of Budget honesty and its balanced Budget and debt retirement via asset sales, is an enhanced and renewed effort at lifting private savings. In the unlikely return to the frugality of earlier times, a bit of compulsion like Labor's Super Guarantee would be a good thing. The government's preference for a wider array of savings vehicle, like Retirement Savings Accounts, and its lifting of the preservation age to 60 by 2025 are reasonable measures to improve the possibility of higher savings but they do not guarantee it. It would be better to take the savings debate out of the temporary file that governments like to play with for appearance sake and shift it into the permanent and untouchable one.
The Coalition's fourth Budget, assuming it is not knocked for six by a Senate refusal to pass the GST should lay down a permanent marker in the savings debate. It will be rewarded at the polls for so doing.
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