The Government as a frugal fiscal manager

From today’s Financial Review

You can tell when governments get long in the tooth: ministers keep recounting the good old days, when they first came to power. So it was last week when the leader of the government in the Senate, Senator Robert Hill, gave one of the reasons for the government’s sound economic record: “this government took hard decisions to cut back public expenditure.” Hill’s teeth must be near Walrus proportions because it has been a long time since the government’s first tight budgets. There has been no frugality in recent years.

We shall know more about the 2005-06 Budget when the Treasurer, Peter Costello, overcomes his embarrassment and releases the mid-year review which languishes in his Canberra office. But we already know that the Commonwealth has recently embarked on a spending spree the likes of which we have not seen outside of a recession.

Using Government Finance Statistics – which treat GST as belonging to the Commonwealth – federal government spending for 2005-06 was estimated to be over 26 per cent of Australia’s Gross Domestic Product. In the early years of the Howard government, Commonwealth spending accounted for around 24 per cent of GDP.

A two percentage point movement in $930 billion – the GDP estimated for this financial year – is around $18 billion. Now some of this increased spending is sensible. It allows higher transfers from the Commonwealth to the states for health, infrastructure and education and it has funded important social security benefits. But there is also evidence that the Commonwealth has significantly increased spending on its own purposes, for much more dubious results.

It is difficult to track this kind of spending because, from the first Howard budget, there has been a sharp decrease in the amount of information provided about expenditures. The budget papers now provide no information on departments running expenses, for example. This can only be gleaned from a tedious examination of other sources and even then, we only get an incomplete understanding.

But the national accounts published by the Australian Bureau of Statistics show the Commonwealth’s final consumption expenditure – a term which describes money that the federal government spends to acquire goods and services for its own purposes. This spending increased by 70 per cent over the eight years between 1996-97 and 2004-05, from $38.7 billion to $65.6 billion. In the same period, nominal GDP increased by 63 per cent. In real terms, the government’s final consumption expenditure has been increasing by nearly five per cent a year.

Some of this increased spending has been directed to Hill’s own portfolio. In 1997-98, Defence cost $10.4 billion. In 2005-06, the Defence budget was fifty per cent higher at $15.6 billion with more to come. There is nothing mean about an annual compound increase of 5.5 per cent. But much has gone on increased salaries.

In the early years of the Howard government, ministers reduced the number of public servants. Since 1999, however, numbers have grown by over 20 per cent, or 23,000, adding over $2 billion a year to Commonwealth costs. Annual staff increases of about 3.5 per cent do not suggest ministers have been making hard decisions.

The number of senior executive service officers has been growing even faster. SES numbers were at their nadir in June 1998 when there were 1561 SES officers. Last June, there were 2025 SES officers, an increase of 4.3 per cent a year. The increase in SES numbers last year was greater than six per cent. There is no sign of abstinence here.

Trying to determine the Commonwealth’s salary practices is difficult. The government allows departmental heads great latitude to determine their own salary practices, as long as wages are affordable. This means that there has been little effective control over remuneration increases. In the last five years, Commonwealth wages in certified agreements grew by nearly 4.5 percentage points faster than in the private sector. They grew nearly six percentage points faster than Australia’s wage cost index.

Had the Commonwealth kept its final consumption expenditure constant in real terms its spending would be $17 billion a year smaller. Had it merely limited these spending increases to keep pace with GDP growth, it would have saved $2.5 billion a year.

All of this largesse means that Hill has to search for a reason other than hard budgetary decision making to explain the government’s good economic record.