Shut Your Budget Hole

Everyone is foaming at the mouth about the Liberal party’s spin campaign of a budget ‘crisis’. But while some of it is rubbish, much of it is quite legit. Caring for an aging population is going to put incredible amounts of pressure on Australia’s fiscal system over the next three decades (and thereafter), and we need to start taking measures now if we want to maintain our social welfare system into the future.

So there is indeed a budget problem, though perhaps not a crisis. Certainly this is not a Labor party legacy as the Liberal party spin machine would have us believe. The NDIS had broad-based support. Gonski did too, and improvements to educational outcomes in Australia are likely to result in a net benefit in the long run because the returns to education are so high (note that the current Liberal administration is also big on education reform and funding). The Carbon Tax corrected an externality in the most efficient manner possible. To suggest that it hurt our economy is to misunderstand economics. Climate and clean air is an endowment just like clean water or petrol stocks. If you are not charging people to access that endowment then they will use it inefficiently. Certainly some business practices are now more expensive. But this is the true price of these activities. The pre-tax price was not factoring in the full costs of production.

This budget problem is the result of demographic trends and a decline in China’s demand for Australian coal and iron. Neither party engineered these trends.Some people have said this is not a budget emergency because America, the United Kingdom and, hilariously, Japan all have higher debt levels. This is not a counterpoint. These countries are all staring at budget abysses as well. Japan’s debt levels as a proportion of GDP are the highest in the world. It has only managed to sustain these debt levels because its citizens are uniquely inclined to hold low-yield government bonds. At some point they will want a higher interest rate, and then everything is going to unravel very fast. One of Japan top economists, Takatoshi Ito, speculated at a conference last year that Japan would default around 2020, potentially triggering another serious bout of global financial disorder.

Japan is so desperate to improve its economic situation that the current Abe administration’s first act was to embark on one of history’s most ambitious programmes of economic reform, with fiscal, monetary and structural elements. The first two elements worked out, the third has stalled. The consequences are likely to be disastrous. Japan is not in a favourable position. To say that we are okay because we don’t look like Japan is to say that a man with a gunshot wound is fine because he isn’t on life support.

Managing the aging population is going to be the first world’s biggest but perhaps most mundane challenge over the coming decades. It’s not sexy, but it’s damn important, and our current discourse on the issue is woefully inadequate. The Liberal party needs to show some leadership on this matter. Targeting pathetically small gains on the margins of unemployment benefits, Tasmanian forestry and GP co-payments, among other things, is not going to cut the mustard. The Liberal party needs to be frank with the electorate about the source of the challenge and provide a plan for how they are going to tackle it. Labor needs to take the fight to them in a mature manner so we get an intelligent, sophisticated discourse grounded in reality not spin.

Some aspects of a plan to manage the budgetary pressure should be obvious. There are presently several implicit subsidies of the well to do in Australia. First, thousands of people destined for high incomes have their university educations subsidised in Australia. The higher education funding structure needs to be reformed so that those people earning degrees that will net them huge returns in their lifetime (e.g. commerce, engineering and economics) pay a suitable amount for those degrees. Public funding of universities should continue because of the positive externality benefits, but it should be directed at the teaching and research staff and infrastructure, not at student contributions.

Subsidised fees do not enhance equity! In the presence of income-contingent loans (the FEE/HECS-HELP system), empirical research shows that higher fees do not discourage low socio-economic individuals from tertiary study, nor do they make tertiary study less affordable for those people. You only pay if you earn enough to pay! Subsidised fees are a subsidy for the rich to get rich—it is one of the purest examples of rent seeking currently at work in Australia. Bizarrely, student associations note that the vast majority of uni-students are from well-to-do backgrounds, but then continue to advocate for an unconditional subsidy. Whaaaa?

Second, the wealthiest 10 per cent of superannuation contributors reap over 36 per cent of the benefits. Reform needed. Now of course superannuation is an integral part of our management of the aged care issue. But that doesn’t mean we can’t improve on our existing system.

Third, the mining industry is one of our most profitable. Why does it get a subsidy? In particular, why does it get a fuel subsidy? Madness; reform needed.

Then there are harder questions. Lifting the retirement age seems a no-brainer when there is pressure from pensions, but manual labourers are going to struggle to work for that long. Even some older-aged cerebrally-employed people will be totally burnt out, notably from stress, by 65. How can we index such a policy? Perhaps a Scandinavian-style cultural shift towards 25 hour working weeks until we are 80 is in order—but how will this jibe with our Protestant work ethic?

Huge sums of health care funding are spent on people who will die within six weeks anyway. How do we feel about euthanasia? How do we feel about letting people die?

A lot of these reforms are going to be hard for the left to get their head around because they challenge the very existence of a welfare state. Australia is defined by its egalitarianism and strong welfare system. It is a big part of why we have some of the world’s highest rates of social mobility, lowest levels of inequality, highest levels of development and standard of living, and highest levels of life satisfaction. It should and ought to be maintained. But if we want to uphold our welfarist ideals we are going to need to answer some hard questions in the coming years. Pretending there isn’t a problem is just going to mean deeper cuts and more pain in the long run.

The author blogs at markfabian.blogspot.com