Article – Don’t rely on growth, says Treasury chief Martin Parkinson

3 April 2014
David Uren
The Australian

AUSTRALIA must be prepared for a recession in the next decade and cannot rely on rising income taxes to restore budget health.

Treasury secretary Martin Parkinson also believes the government’s tax review must consider an increase in the GST to ease the burden on personal and company income taxes.
But he has warned that spending cuts will have to do most of the work to restore the budget to a sustainable position. “The return to surplus must be underpinned by policy decisions, by individual hard decisions,” he said.
Dr Parkinson, whose term as Treasury secretary has been extended by Tony Abbott for six months to the end of the year, last night delivered the most comprehensive justification yet for the tough budget being prepared by the government.
In Perth yesterday, the Prime Minister led the last full meeting of the budget expenditure review committee before his trip to China, Japan and South Korea over the coming week.
In his speech to the Sydney Institute last night, Dr Parkinson ridiculed the suggestion that the budget could be returned to surplus in five years — as suggested by Labor Treasury spokesman Chris Bowen — saying this would require a miraculous surge of GDP growth to 5.25 per cent at a time of declining mining investment.
“Arithmetic suggests the dice are loaded against us and the economy is unlikely to ‘whirr back into surplus’, to borrow a phrase from another era,” he said, using a line from former prime minister Paul Keating.
Dr Parkinson’s warning came as long-established businesses BP Australia and Philip Morris announced they would close operations in Australia, with the potential loss of 530 jobs. BP will shut its Brisbane refinery and Philip Morris its Melbourne cigarette factory, with both citing red tape, high costs and the uneconomic size of the Australian market. Dr Parkinson said medium-term projections for the budget, based on the mid-year economic and fiscal outlook in December, showed it would still be in a small deficit of 0.5 per cent of GDP by 2023-24.
He said this was too optimistic for two reasons: it assumed that the economy would continue to grow at its long-term trend rate; and it assumed that there would be no personal income tax cuts, with inflation and real wage growth pushing an ever increasing share of wage income into higher tax brackets.
“If either of these two assumptions turn out to be false — and it is quite likely they will both be inaccurate — the fiscal situation, and the question of how to ensure fiscal sustainability, will be even more challenging,” he said.
Australia had already enjoyed more than 22 years of unbroken economic growth, which was longer than achieved by any other advanced economy with the exception of the Netherlands, which had a 26½-year stretch of growth after the discovery of oil in the North Sea. Continued growth to 2023-24 would be almost double the longest stretch enjoyed by any other advanced economy.
“Were Australia to record 33 years of uninterrupted economic growth, as projected in MYEFO, it would be an extraordinary achievement, and one of which we should be very proud as a nation,” he said. “It is not, however, something on which I would want to rely.”
Dr Parkinson said getting through the next decade without a tax cut was “unlikely to be politically feasible”. Within little more than a year, an average full-time employee will be paying 39c in every additional dollar they earn in tax. For most of the past decade, they have only been losing 31.5c in the dollar in tax.
An average full-time worker will pay a total of 28 per cent of their income in tax by 2023-24, compared with 23 per cent now, representing a rise in the tax burden of almost one quarter.
Besides being politically difficult, it would also be bad for the economy, resulting in lower workforce participation, and lower living standards. Living standards are already threatened by weak productivity growth and declining prices for exports.
“However, if tax cuts were provided in order to return fiscal drag and prevent the tax-to-GDP ratio reaching historically high levels, the savings task required to return the budget to surplus would be even larger,” Dr Parkinson said.
Dr Parkinson said the case for spending cuts was highlighted by the blowout in government outlays since 2007-08, when Labor was elected and the economy was hit with the global financial crisis. Although stimulus spending has now been withdrawn, real spending has risen by 40 per cent over the past 10 years during a period in which the real economy has grown by only 34 per cent.
However, the pace of spending was destined to accelerate. The National Disability Insurance Scheme, which is expected to reach $11.3 billion by 2023-24, is only a small part of the problem. Commonwealth spending on health and on the age pension are each expected to rise by more than $50bn over the next decade. “Underlying growth in expenditure on social programs … will place added pressures on fiscal sustainability over the decades ahead,” Dr Parkinson said.
He said there was no point arguing that the Howard and Rudd governments should not have delivered personal income tax cuts over the past decade. “If we had held on to that revenue, it may have been spent on outlays rather than tax cuts, meaning average earners would have faced higher marginal and average tax rates than they do now.”
Dr Parkinson said that despite those tax cuts and the introduction of GST, Australia still relied on personal income tax for almost half its revenue, about the same as in 1950. However, by 2023, it would rise closer to 60 per cent, in the absence of tax cuts.
Reciting the argument for a higher GST, he said research showed that lower income taxes and higher indirect taxes supported higher growth and living standards.
Dr Parkinson said he believed in a “glass half full” approach to Australia’s future economic growth and restoring the budget to surplus in the longer term, despite the difficulties he had indicated from Treasury projections.
One significant need, he said, was for governments to invest in infrastructure. The difficulty of currently inadequate infrastructure in Australia was not just the inconvenience felt by motorists and other commuters but that it was a “productivity destroyer”.
No single factor would be a “silver bullet” for the economy, but boosting labour productivity was vital, especially as the population aged, he said.
As people’s health remained good for longer into older age, there was also a need to think differently about work so there could be a transition from full-time employment to reduced hours, rather than full-time to nothing.
Dr Parkinson declined to confirm whether or not he had warned successive treasurers including Wayne Swan and Chris Bowen about the “individual, hard decisions” he believed were needed to restore the budget’s position. Nor would he say whether or not he was disappointed that his warnings were heeded.
“Nice try, no comment,” he told The Australian after his speech. “I have never revealed the advice I have given to a minister and I never will.”
The Treasury secretary said the an important factor in years ahead would be how China managed an inevitable reduction in economic growth as its population became more affluent.
He anticipated continuing economic volatility in Europe over the next decade, as well as political dysfunction in the US if its congress could not manage important budget policy decisions.
People often expressed their concerns to him, he said, about a future reduction in China’s growth. But he said the concern should also be held for any slight dip in growth for the US, considering it was still the world’s largest economy.
Courtesy of the Australian