A former head of Treasury says the Abbott government will have to pursue economic “austerity” if it is to fix the budget’s serious structural imbalance.
Dr Ken Henry, who served as Treasury secretary from 2001 to 2011, says the credibility of Australia’s fiscal policy relies on fixing the budget imbalance.
“To get the budget back into balance there will have to be a period of austerity relative to where the budget has been in the past several years,” Dr Henry told Bloomberg TV on Wednesday.
“I certainly did not anticipate that today [Commonwealth government] revenue would be 3 percentage points of gross domestic product below where it was a little more than a decade ago.”
“I mean, that’s actually quite an incredible thing that revenue could be that low despite the fact that Australia has had such a strong resources boom.”
Dr Henry was replaced as head of Treasury by Martin Parkinson in early 2011.
He chaired the so-called Henry tax review, published in 2010, which developed a blueprint for reforms to the tax system over the next 10 to 20 years.
Dr Henry highlighted on Wednesday that Commonwealth government revenue had fallen from 26 per cent of GDP in 2001-01 to just 23 per cent of GDP last year.
Meanwhile, government expenditure as a proportion of GDP had fallen from 25 per cent to 24 per cent over the same period.
“Because revenue has fallen by 3 percentage points of GDP and spending has fallen by only 1 per cent, the budget [has] flipped around from a surplus of 1 per cent of GDP to a deficit of 1 per cent,” Dr Henry said.
And estimates for the present fiscal year are for an “even larger deficit,” he said.
“That 3 percentage point gap between estimated spending and estimated revenue is of course not something that can be sustained if a government wants to maintain a commitment to having a budget surplus on average over the [economic] cycle,” Dr Henry said.
“Australian governments have had that commitment since the mid-1990s and it’s rather important to the credibility of the fiscal policy of Australia that that commitment [be maintained].”
Dr Henry’s comments will be welcomed by the Abbott government, which is under fire from its own constituency for plans to introduce a temporary “deficit tax” to help to return the budget to surplus.
Some Coalition MPs are furious that Prime Minister Abbott is planning to introduce the tax, plans of which were reported on Tuesday, saying it goes against his promise not to introduce any new taxes.
Dr Henry’s comments will lend support to Mr Abbott’s broader argument that Australia needs to fix its structural budget imbalance.
However, the business community has criticised the Abbott government’s planned deficit tax, saying it will do little to fix the budget imbalance.
“Temporary tax increases are no substitute for the reforms that are needed to bring spending back under control and put the budget onto a more sustainable footing,” Business Council of Australia chief executive, Jennifer Westacott, said on Tuesday.
Dr Henry also acknowledged that he was caught by surprise by the sharp fall in government revenue in the aftermath of the global financial crisis.
“[Australia’s] medium-term fiscal strategy was interrupted somewhat by the global financial crisis,” Dr Henry said.
“Australia is not alone in having taken substantial fiscal action to address the negative impact on the economy of the global financial crisis.”
“[But] since then, revenue has not come back as strongly as many people, including myself, would have anticipated.”