Government must deliver a surplus, Grattan Institute report warns

The federal government must find savings of $60 billion in order to balance the budget, according to a new report from the Grattan Institute.

The warning comes as Treasurer Wayne Swan has blamed the strong Australian dollar for the current budget woes, as he revealed this weekend revenues have fallen $7.5 billion below official forecasts.

A study by the Grattan Institute released today of the federal and four largest state governments found “serious pressures which put our prosperity at risk” and recommends scaling back spending in health, welfare and education.

The independent think tank has warned the budget deficit will balloon to 4% of GDP by 2023 unless drastic action is taken, as institute chief executive John Daley told SmartCompany a change in thinking is needed.

“Over the past few years there have been a number of reforms, such as the Gonski reform, which instils this idea that no one will be worse off, at least not for those earning below $100,000.”

“If you’re trying to plug a substantial budget plug hole, the chances are the burden is going to be borne across the whole community,” he says.

In the past four years, the government has introduced budget measures which have resulted in approximately $60 billion in savings, but these have been matched by an almost equal amount of spending.

The report found the only reason the net impact was originally projected to be positive was because of the mining and carbon taxes, but it has since been revealed these measures have failed to result in the profits the federal government predicted.

Daley says it’s clear the government has the ability to save large amounts of money, but the effects of this will be felt across the entire community, not just the big earners. He says the government needs to recognise the importance of a surplus and start communicating this message to the public.

“In the 1990s, the Victorian government had to make strict budget cuts, but it communicated the need for the cuts to the community. The government was very explicit with the community that they had a substantial problem and that everyone was going to have to bear part of the pain.

“If we’re looking at budget deficits of 4% a year, we need net savings to the budget in that kind of order,” he says.

Spending in the health sector has ballooned by around $40 billion in real terms, but the report finds the primary reason, the ageing population, will have less of an economic impact than the government has predicted.

Instead, the Institute predicts the increase in health expenses is likely to be driven by the increase in “scope and volume of services”.

Given the economy’s strong growth, low unemployment and high trade terms, Daley says we should have already achieved a fiscal balance.

“We ought to be running a surplus now, so we can afford to run a deficit in the difficult times,” he says.

Daley’s comments come as Swan said on Sunday the budget will not be returned to surplus because of difficult market conditions including the strong Australian dollar.

“We’ve been hit in Australia with a high dollar, lower terms of trade, which has had a dramatic impact upon the profitability of companies and prices more generally in the economy,” he told the ABC.

Swan says these factors have acted like a “sledgehammer” to budget revenues and we’re “unlikely” to return to surplus in 2013.

Last week, opposition treasurer Joe Hockey also made comments which indicated the Liberal Party, if elected, was unlikely to push for a return to surplus.