Government Spending

Recommendation Summary

  • Budget repair that doesn’t rely on cyclical economic fluctuations in government revenue
  • Cap government spending below 24.7% of GDP
  • Retain an efficiency dividend of 2%
  • Establish efficiency boards to find savings in the large, complex spending areas of defence, health, education and social security and ensure spending is fit for purpose
  • A plan is needed to reduce net public debt over the medium to longer term

MYEFO 2018/19 indicated that government spending for this financial year is tracking at 24.9% of GDP, with projections showing that this percentage will fall further in future years. This downward trend is welcome, and the Government should maintain its vigilance in this area. The 30-year average revealed in MYEFO was 24.7% and this average should be seen as a cap on government spend as a percentage of GDP.

1. Restore the Efficiency Dividend

In the 2016-17 Budget, the government decided to “maintain the efficiency dividend at 2.5 per cent in 2017-18, then reduce it to 2 per cent in 2018-19 and further reduce it to 1.5 per cent in 2019-20.”

An increase in Government recurrent spending cannot be supported at a time when Government debt has reached a historically high level and is continuing to increase. It is important that the Government continue to constrain its expenditure until it has returned to a budget surplus and can show it has regained control of Government debt. While a small surplus in the underlying cash balance is forecast for 2019-20, it is yet to be realised and proven that it can be sustained.

We encourage the government to maintain the efficiency dividend at the 2018-19 level of 2% until the budget has achieved a sustainable structural surplus and a debt reduction strategy has been successfully employed.

Policy Recommendation: 

  • Retain the efficiency dividend of 2%

2. Expenditure Efficiency Boards

In order to identify savings priorities outside of departmental running costs, we propose separating complex policy spending or program areas (health, social security and welfare, education, defence, ‘other’ purposes) from the non-complex expenditure areas (recreation and culture, general public services, public order and safety) noting there are some complex expenditures within these areas (e.g. superannuation).

As outlined in our 2017-18 pre-budget submission, for complex policy expenditure areas, the Chamber recommends establishing efficiency boards/panels, tasked with finding efficiency savings in each area. The boards/panels should comprise a panel of experts from industry and independent former bureaucrats. These boards/panels would audit the effectiveness of current programmes in the policy expenditure area in order to determine whether they remain fit for purpose and make recommendations on where saving could be achieved. For example, these recommendation may include proposals to simplify and merge payments in social security and welfare, or cut administrative waste.

In addition, the Chamber proposes that spending on social security and welfare, health, education and defence be examined closely to determine how spending can be placed on a much more sustainable path in those areas. In each case, legitimate and reasonable questions should be raised over whether the magnitude of spending in every case is fit for purpose.

Non-complex expenditure areas should be subject to a 2% nominal budget reduction until the budget achieves a structural surplus. Expenses could then only rise in line with revenues (subject to a tax receipt cap) once a debt reduction strategy is successfully employed.

Policy Recommendation:

  • Establish efficiency boards to find savings in the large, complex spending areas of defence, health, education and social security, and to ensure spending is fit for purpose.

3. Reduce Net Commonwealth Debt

Stronger than expected collections from individual and company tax, higher corporate profits and employment growth over the past year, have driven improvements in the Government’s debt situation. However, it is not clear this good fortune will continue over the next year or beyond. Some market analysts are suggesting that real GDP growth will slow as a result of weaker investment and private consumption growth in 2018-19, while slowing Chinese growth will weigh on demand for Australia’s mining exports which experienced a resurgence in 2017-18.

The Chamber stresses that budget repair should not be reliant on temporary fluctuations in government revenue which are largely outside its control.

The Government needs to develop and put in place a clear plan to reduce net public debt over the medium to long term. This should include a review of major spending programs which sets out strategies for longer-term spending reductions and prioritises future spending in areas that contribute most to growth and productivity.

Policy Recommendation: 

  • Budget repair that doesn’t rely on temporary fluctuations in government revenue
  • A plan to reduce net public debt over the medium to longer term
  • Cap government spending below 24.7% of GDP