We all know that in a perfect world, income would rise so that we could afford whatever we wanted to spend. However, most of us have learnt that in the real world, we have to reduce our spending to no more than our income. That is how we balance our budget.

The Treasurer has told us that incomes did not rise as rapidly as he hoped. He therefore blames incomes for the reason he could not balance his budget. Let us look at perhaps what the rest of us might have thought was the reason for the budget deficit.

In Chart 1 below, we see payments of the Australian Government General Government Sector as a percentage of GDP. This is drawn from Table 1, page 10-6 of Budget Paper No.1. In the period of the previous government, payments fall from 25.1 per cent of GDP in 2000/2001 to 23.1 per cent of GDP in 2007/2008. This is the level of spending when Wayne Swan first strode to the Treasury benches.



Spending will never be as low again as it was in 2007/2008. Over two years to 2009/2010 it rose to 26.1 per cent of GDP. Only then did it peak. It then began to decline. In 2013/2014, it has declined to 24.5 per cent of GDP. This is still 1.4 per cent of GDP higher than it is when Wayne Swan took office in 2007/2008. The result is that in 2013/2014, Wayne Swan produces a deficit of 1.1 per cent of GDP. If spending was the same as in 2007/2008, the result would instead be a surplus of 0.3 per cent of GDP.

It is important to note that even out in the distant year of 2016/2017, spending is still estimated to be 23.8 per cent of GDP. This is still 0.7 per cent higher than it was in 2007/2008.

In Chart 2 below we see the underlying cash balance as a percentage of GDP for the General Government sector. This budget deficit peaks when spending peaks. It peaks at 4.2 per cent of GDP in 2009/2010. As spending declines, the budget deficit improves. Out in 2015/2016 when spending falls to 24.0 per cent of GDP, the budget is forecast to actually return to balance. When it falls a little further in 2016/2017 to 23.8 per cent of GDP, the budget is forecast to move into slight surplus. In the real world, we balance our budgets by reducing our spending.



Where the Money went

Total spending by function contained in this budget is shown in Table 1 below. The budget for 2013/2014 for the Australian General Government sector will spend $398.3 billion. Overwhelmingly, the largest area of spending is Social Security and Welfare. This is 34.7 per cent of total spending. In relative terms, Social Security and Welfare spends slightly more than six times as much as Defence. The next major section is Health, which spends $64.6 billion. This is 16.2 per cent of total spending. Still, this is less than half as much than we spent on Social Security. Education comes next with $29.7 billion of spending. This is 7.5 per cent of the total. This is less than a quarter of the amount that is spent on Social Security. Still, it is almost 40 per cent more than is spent on Defence.



Defence comes next with $22 billion of spending. In the Treasurer’s speech, he made some discussion of Transport spending. In fact, Transport and Communication sees spending of a relatively small $6.5 billion or 1.6 per cent of total spending. Just as Social Security and Welfare sees the biggest absolute spending, it also sees the biggest absolute increase in spending. Increases in spending by function are shown in Table 2 above. Social Security and Welfare sees increases in spending of $6.5 billion. This increase is equal to the total that is spent on Transport and Communication.

Health sees an increase in spending of $3.6 billion. Household and Community Amenities sees an increase in spending of $1.5 billion. Transport and Communication sees an increase in spending of $1.4 billion.

Economic Outlook

What is remarkable about the spending above is the kind of outlays that you would increase if you thought you were going into a modest recession. We have said below that Australia is in fact in a “growth recession”. A growth recession is what occurs when employment growth is growing too slowly to take up the growth in the labour force. The result is that unemployment rises.

This is exactly the scenario which page 1-8 of Budget Paper No. 1 tells us that we facing in the year ahead. We are told that growth will slow from 3 per cent in 2012/2013 to only 2.75 per cent in
2013/2014. The result of this is that unemployment rises from 5.5 per cent to 5.75 per cent. This is a forecast for a growth recession.

Unemployment stays high at 5.75 per cent in 2014/2015. Growth picks up to 3 per cent but this is only enough to stabilise unemployment at a higher level. This is why we need high Social Security and Welfare spending. This is why we need higher public housing spending. It is to support higher unemployment during a period of growth recession.

Conclusion

It is apparent from the numbers published in Budget Paper No. 1 that the real problem with the Budget Deficit was spending, not revenue. Had the Budget for 2013/2014 reduced spending to the same level as 2007/2008, then the Budget would be in slight surplus.

The Economic Outlook published with the Budget provides us with a warning. Australia will continue in a growth recession with unemployment slowly rising. In that environment next year’s Budget will provide even greater challenges than this.