What's driving growing budget spending?

According to Treasurer Wayne Swan, the key point about the 2011-12 budget was a ‘return to surplus.’  In fact, this claim is highly misleading. Swan is budgeting for a deficit of $23 billion in 2011-12; a surplus will only be achieved a year later. Even then it will be a wafer-thin $3 billion – not much in comparison to the cumulative deficits totalling more than $150 billion which Swan will have delivered in the four preceding years.

Swan has tried, with some success, to direct attention away from the real story of this budget: under the Rudd-Gillard governments spending has surged.  In 2006-07 total spending was $253 billion; in 2010-11, only four years down the track, spending has rocketed to $350 billion. That is a 38 per cent increase in just four years.

The really interesting question is this: where is all this extra spending going?  If you were looking at the budget from a business perspective, you would want to understand what is driving all this growth. Amongst other things, by understanding the ‘cost drivers’, you can assess whether spending growth is likely to slow in the future as the government claims.

A table on page 6-10 of Budget Paper Number 1 casts considerable light on this question. The top twenty programs make up $216 billion, or nearly two thirds, of 2010-11 total spending of $351 billion. The biggest program is revenue assistance to the states and territories, at $47 billion; the next biggest items (in each case rounded to the nearest billion) are income support for seniors ($32 billion); family tax benefit ($18 billion); medicare services ($16 billion); disability support pension ($13 billion); assistance to the states for healthcare services ($12 billion); and pharmaceuticals ($9 billion.)

Another way to look at this is to see how the spending pie is divided up into major categories.  According to Statement 6 on page 6-1, one third of Commonwealth spending goes to social security and welfare; one fifth to “other purposes” (which includes revenue assistance to the states and territories); 16% goes to health; 8% to education; 6% to general public services; 6% to Defence; and 11% to everything else. 

There is an obvious conclusion from these numbers: the core areas driving growth in spending are health, education and welfare. All but one of the top seven programs listed earlier fall within these areas; the seventh (and largest) is assistance to the states.  In turn, health and education are the dominant items in state government spending. 

Bringing these growth trends under control involves political challenges. Presumably that is why the Gillard Government has made no attempt to do so, with its recent budget revealing the fourth monster deficit in a row: the 2011-12 deficit of $23 billion comes on top of deficits in the three previous years of $27 billion, $55 billion and $49 billion. 

But continuing to spend without restraint is a very bad plan. This lazy government says it will get back into surplus in two years’ time – but it will do so by relying on once in a lifetime revenue growth thanks to the resources boom.  Revenues are assumed to soar from $304 billion this year to $379 billion just two years later.  Over the same period spending will keep rising steadily.

If anything goes wrong, if the boom falters, this government has left itself no margin of comfort.  Surely it would make more sense to use the good times to look, calmly and systematically, for reform opportunities.  By contrast, this government is following the same approach as countries like Greece, Portugal and Spain followed for many years: keep spending and hope it will all be okay.  As those countries and others in Europe have found out, that ultimately leaves you having to make some very hard decisions indeed.

Thankfully, unlike many countries in Europe, Australia has at least one political party with a proven track record of managing our public finances.  Let us just hope that irrecoverable damage has not been done by the time the Liberal Party gets back to power.