Signpost to 2014 budget

The Treasurer, Joe hockey, spoke last night about likely measures in the 2014 budget and his vision of the future for public finances.

The Budget is a major issue for the exam and understanding the philosophy of the budget measures is important. His speech last night gave important clues to this and it is useful to get a head start on that before the mind-numbing detail of the actual budget itself.

Hockey is concerned that government spending is growing in an unsustainable way and that this will lead to a growing structural budget deficit in the future. It's simple, if spending always grows faster than revenue then this will happen.

Note that most countries are envious of Australia's public finances. Australia has a low level of public debt and a low borrowing requirement as a share of GDP compared with other developed countries. 

That isn't what Hockey is worried about despite his attempt to persuade people there is a 'Budget crisis'. That's just politics.

Hockey is worried that unless the projected rise in spending is brought down then taxes will have to rise in the future to balance the budget.

He may be right. Australia's public spending rises by about 3.75% a year. If growth is less than 3.75% and tax rates stay the same then the budget deficit will widen. 

Some question the need to act drastically now. Growth could easily exceed 3.75% and 'bracket creep' would actually raise tax revenues faster than that. Government's would however be foolish to rely on that rate of growth.

Actually what Hockey is saying is that the growth years are over for Australia. Australia is a low productivity, high cost developed country which has lived off natural resource income while the comparative situation got worse. He also knows that an ageing population is going to put more strain on welfare spending over the next few decades. He is saying 'Winter is coming'.

The Age covers his speech here