Recently our Chief Economist, Michael Know, produced a piece titled ‘Defying Gravity’ which is worthwhile reading in its entirety.

Defying Gravity

By Michael Know

We rejoin our two adventurers, the Boy Wizard from the North and his avian familiar the Swan, as they set off in another adventure in Budget Land.

In the last adventure, we left our two heroes trapped in the frightening forest of financial crisis. A storm was coming up. Our duo had decided to try and make the storm disappear through the magic of debt.

Revenue fell from 25.7 per cent of GDP in 2007/08 to 22.7 per cent of GDP in 2009/10. This increased the magic deficit by three per cent of GDP. The magic deficit would now rise to 1.4 per cent of GDP.

“Spend,” intoned the Boy Wizard.
“Spend,” repeated his avian familiar.

And they did. Expenses, as a percentage of GDP, rose from 23.7 per cent in 2007/08 to an estimated 26.5 per cent in 2010/11. This increased the magic deficit by 2.8 per cent of GDP. The magic fiscal deficit would now rise to 4.2 per cent of GDP (this is the same as an underlying cash deficit of 4.4 per cent of GDP).

While our two adventurers were thinking of what else they could spend money on, a big wind came up. This was called “The Wind of China”. The Wind of China came up and blew the storm of Financial Crisis away.

“Aren’t we clever,” thought the adventurers. “Our spending spell made the wind come up and blow the storm away”.

“We have defied global economic gravity,” said the Swan.

With the storm gone and the sky clear, the outlook was very good. GDP would grow by 3.75 per cent in 2010/11 and four per cent in 2011/12. Nominal GDP would grow by 8.5 per cent in 2010/11 and 5.75 per cent in 2011/12. High growth in nominal GDP meant high growth in tax receipts.

This high growth in tax receipts would make the magic deficit disappear. In Figure 1 above, we see that the improved environment makes the underlying cash balance improve from a deficit of 4.4 per cent of GDP in 2009/10 to 2.9 per cent of GDP in 2010/11 and a surplus of 0.3 per cent of GDP in 2013/14. The move to surplus was improved by a new spell called the “Resource Super Profits Tax”. 

Where the money goes

In Table 1 below, we see our heroes’ new spending spell. In 2010/11, $115 billion will be spent on Social Security and Welfare. This is 32.4 per cent of the budget. $56.9 billion will be spent on Health. This is 16 per cent of the budget. $33 billion will be spent on Education. This is 9.3 per cent of the budget. Coming fourth is Defence. $21 billion will be spent on Defence. This is 5.9 per cent of the budget. Expenditure on Defence is less than one-fifth of the spending on Social Security and Welfare. Total spending is $354.6 billion.

Where more of the money goes

In Table 2 below, we see the increases in spending within individual budget areas. We calculate this by showing first the intended spending in last year’s budget. We then show the intended spending in this year’s budget. Allowing for reclassifications in individual budget areas, we then show the increases.

The biggest increase in spending in 2010/2011 is an increase in $5.3 billion in Social Security and Welfare. The second biggest increase is a rise of $4.1 billion in Health. We then have an increase of $1.5 billion in Public Order and Safety. Defence then has a very small increase of $380 million. Total spending increases by $11.5 billion.

Medicare expenses are the major driver of growth in medical services and benefits. These are expected to increase in real terms by 10.1 per cent over the forward estimates period, or by an average increase of 3.3 per cent per annum. Medicare expenses over the forward estimates are linked closely to the increase in the Australian population, and particularly the increasing proportion of older Australians.

Our next adventure?

The next adventure of our two heroes is likely to be when they come into combat with the Abbott of the East. To practice for this battle, our duo has already been learning to copy his spells. The Abbott of the East has a spell called “The Direct Action Fund”. To combat this, our duo have copied it and called it “The Renewable Energy Future Fund”.

The Renewable Energy Future Fund will cost $652 million and will support renewable energy projects and the development and deployment of lower emission technologies. It might also enhance Australia’s take-up of energy efficiency including helping household and businesses reduce their energy consumption.

Conclusion

Our intrepid duo has had another adventure. This time a change in the weather brought about by The Wind of China came up and blew the storm of Financial Crisis away. Our heroes have learned how to use the Spending Spell. They have even learned how to “defy economic gravity”.

“Aren’t we clever,” they thought.

“Let’s go home and have tea and scones,” they said.

And so they did.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.