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Gittins: Big cuts in government spending

Between now and May we’ll get a report from the commission of audit, and there’ll be much speculation about possible budget measures, officially inspired and otherwise.

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If you had a problem that required an operation and the doctor offered a procedure with a 90 per cent success rate or one with a 10 per cent failure rate, which would you pick? Most people say they prefer the one with the high success rate but, of course, they're both of equal risk. Point is, we can react quite differently to the same information depending on how it has been ''framed'', as the psychologists say.

When politicians engage in ''spin'' they're framing a problem or a solution in a way they hope will maximise the public's sympathy, a way that highlights those aspects the pollies want to draw attention to and draws attention away from aspects they don't want us to think about.

As Tony Abbott and Joe Hockey soften us up for an especially tough budget in May, we'll be subjected to much spin. Already the idea of imposing a $6 patient co-payment on GP visits has been floated, to which the federal Health Minister, Peter Dutton, added the comment that the growth in the cost of Medicare was ''unsustainable''.

<i>Illustration: Simon Letch.</i>

Illustration: Simon Letch.

Spending on healthcare is highly germane to Treasury's projections that, if no changes are made to present policies, the federal budget is likely to stay in annual deficit for the next 10, even 40 years.

But let me frame the projected growth in spending on healthcare in a way you won't hear from the pollies. It's a safe prediction that the real incomes of workers and households will continue growing by a per cent or two each year over the coming 10 or 40 years, just as they have over the past 40.

So, as each year passes our incomes will grow a little faster than the prices we're paying for the things we buy, leaving us to decide how to spend that extra ''real'' income. Every income earner and family will make their own decisions, but our past behaviour gives us a fair idea of what we'll decide.

We won't be devoting our additional real income to spending more on food, clothing and other basics. Their share of our total spending is likely to continue falling. We will be spending a higher proportion of our incomes on housing - hopefully on better quality housing rather than just keeping up with rising prices - and on improvements in household electronics such as television, home computers and the like. We'll probably spend more on educating ourselves and our kids. And it's a safe bet we'll want to spend more on healthcare. It's hardly surprising that as we become more prosperous, we're prepared to devote a higher share of our income to staving off death and ensuring those extra years are as free from pain and disability as possible.

Can you think of a higher priority? And the good news is that medical science is forever coming up with better pills and prosthetics, as well as better and less invasive surgery. The bad news is that the new stuff is invariably a lot more expensive than the technology it replaces. And as surgeons get better at doing particular operations, they're able to perform them on a wider range of patients, particularly the elderly.

After I started suffering angina about the time of the Sydney Olympics, and ended up having open-heart surgery, my GP told me that until this operation was developed all the medicos could have done was give me pills that didn't work.

I would just have had to keep tottering about until a heart attack eventually carried me off. By now I'd be long dead.

If healthcare was something we bought in the marketplace like most things we buy, that would be the end of the story. We'd go on spending a growing proportion of our increasing real incomes on healthcare and there isn't an economist or politician in the country who'd see a problem.

In fact, however, most of the nation's spending on healthcare is done by governments, federal and state. Public hospitals are ''free'', visits to doctors are subsidised by the federal government and pharmaceuticals (and chemists) are subsidised by the feds.

We do it this way because, like people in most rich countries, we believe healthcare shouldn't be denied to those who can't afford it. That's fine. But doing it this way introduces additional problems: scope for greater inefficiency in the delivery of care, ideological responses from those who believe government spending is wasteful and excessive by definition, and cognitive dissonance by punters who want ever-more healthcare available to them, but don't want to pay more tax to cover the cost.

We know from successive Treasury studies that the ever-rising cost of healthcare - caused not so much by the ageing of the population as by the ever-rising cost of advances in medical technology - is by far the greatest reason for the projected increase in budget deficits. It's rarely made clear, however, that all these studies assume a limit on the growth in taxation.

Contrary to the politicians' framing of the issue, the growing cost of healthcare is sustainable for the simple reason the electorate's demands leave them with no choice but to sustain it. What's unsustainable is the politicians' pretence that taxes won't have to rise.

Ross Gittins is economics editor.