The Government today appointed its Commission of Audit into the functions of government. The terms of reference are here.

I’d like to take a look at a few of the premises of the terms of reference.

1) “It is almost 20 years since there has been a thorough review of the scope, efficiency and functions of the Commonwealth government. During this time the size of the Commonwealth government has expanded significantly, as has the remit of some of its activities.”

The truth of this statement depends on how you define and measure “the size of the Commonwealth Government.”

As a proportion of GDP, Commonwealth Government revenues are lower than they were in 1996-97, when the last audit took place. Government spending accounts for 0.2% of GDP more than it did in 1996-97.

Receipts

payments

If you define “the size of the Commonwealth Government” to mean either the amount that is raised in revenue or the amount that is spent by government, and you measure these as a proportion of GDP, then I don’t believe it is accurate to say the size has “expanded significantly”. The Government may be referring to a measure of its size that doesn’t take into account the size of the broader economy.

It’s also worth remembering that Australia’s governments are among the very smallest in the OECD, as you can see below.  Our governments spend a lot less, and tax a little less, than governments in the USA. Note that the chart below incorporates federal, state, and local taxes, non-tax revenue, and spending.

oecd size of govt

Source: OECD Economic Outlook May 2013, Annex tables 25 and 26.

2) “It is also essential that the Commonwealth government live within its means and begin to pay down debt.”

This gives the impression that fiscal policy has been very loose. However, the Final Budget Outcome for 2012-13 recently released by Mr Hockey shows that the fiscal tightening (reduction in deficit) in the last financial year was the biggest on record.

change in fiscal position

This was driven by the largest reduction in real spending in any fiscal year since at least 1970, when the Treasury’s public data begin:

growth in real payments

Now, admittedly, some of the apparent tightening in 2012-13 was due to spending being artificially shuffled back into 2011-12. But that accounts for only a small portion of the spending reduction. It’s also true that estimates of the structural budget balance (by the PBO, the Treasury, the OECD, the IMF, the Grattan Institute, and Deloitte Access Economics) suggest that we still have a structural deficit, and have done since the latter years of the Howard Government. From my point of view, the issue here (at least in the short run) is more about unsustainable tax cuts and changes in the economy that have eroded revenues.

3) “…the Commission of Audit (‘the Commission’) has a broad remit to examine the scope for efficiency and productivity improvements across all areas of Commonwealth expenditure, and to make recommendations to achieve savings sufficient to deliver a surplus of 1 per cent of GDP prior to 2023-24.”

If this is the Commission’s main task, they will not have to work very hard. Most projections of the fiscal balance ten years from now anticipate the Commonwealth achieving a surplus of close to 1% of GDP. For example, here’s a chart that the Business Council of Australia included in its Action Plan for Enduring Prosperity:

bca

The Treasury’s projections don’t quite go out to 2023-24, but they do project a surplus of around 1% of GDP in 2021-22 and in each of the few years before that:

Tsy

We’re already on track to hit the surplus target that the Government has set for the Commission of Audit. The Treasury also projects that we will have a small structural surplus by then. Given this, it is difficult to understand why additional cuts in government spending (which it’s widely expected the Commission will recommend) will be necessary to meet the target.

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