Grattan Institute says government’s own budget forecasts would necessitate ‘significant cuts in spending’

Labor has accused the Coalition of planning secret spending cuts, growing to $40bn a year by the end of the decade, based on figures in its own 2019 budget.

Scott Morrison has dismissed the suggestion as “complete rubbish”. So, does the 2019 budget bake in spending growth or cuts?

Where does the $40bn claim come from?

The budget states that government spending as a percentage of GDP will decrease from 24.9% in 2018-19 to 23.6% in 2029-30.

The Grattan Institute undertook a separate analysis, which projected GDP growth over the decade and calculated that a 23.6% spending to GDP ratio implies that government spending will be $729bn in 2029-30.

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If the current level of 24.9% continued, the government would be spending $769bn. So the shrinkage in the spending to GDP ratio implies the government will need to cut spending by about $40bn a year by 2029-30.

The Grattan Institute has warned that “achieving such a reduction [in spending] would require significant cuts in spending growth across almost every major spending area, during a period when we know that an ageing population will increase spending pressures, particularly in health and welfare”.

Cue political contention.

What has the Coalition said?

On Tuesday Morrison said the claim of a $40bn spending cut is “absolute complete rubbish”. He didn’t feel the need to provide a detailed explanation for several days.

The Liberal senator Arthur Sinodinos did grapple with the detail, telling ABC TV the spending to GDP ratio would fall because the Coalition had reduced spending growth to “about 1.9%” in real terms.

“Spending may go down as a proportion of GDP, partly because the economy continues to get bigger and bigger and a stronger economy means there’s a bigger pie,” he said.

On Wednesday the Coalition campaign spokesman, Simon Birmingham, said the budget “still demonstrates year-on-year real growth in spending into the future”.

Morrison said the Grattan Institute analysis is “completely at odds with the work that is being done by Treasury which is set out in full in the budget papers”.

“It is the Treasury that go through and look at the medium-term expenditure projections and ensure that they are reflective of what the government’s policies are.”

Can fiscal restraint and growing the pie explain it?

The Grattan Institute analysis used projections about GDP growth from the 2019 budget and assumed 4.5% growth per year for the rest of the decade.

Danielle Wood, the budget policy program director at Grattan, told Guardian Australia that projecting growth higher than 4.5% would be a “non-standard assumption”. “Are the Coalition seriously saying they can boost GDP growth beyond that?”

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Wood also disputes the claim the Coalition has limited spending growth to 1.9%, explaining this is based on:

Using 2013-14 as the baseline and blaming Labor for that year – even though the Coalition were in charge for three quarters of the year, during which they gave a cash injection to the Reserve Bank of Australia.

Including the next four years, when spending is projected to be limited to 1.3% growth.

Wood calculates that since the Coalition was elected government spending has increased by 2.6%.

What does the budget say about it?

The budget only provides details for line-by-line spending over the near term (four years) and vaguer projections for the medium term (10 years).

“The medium-term projections reflect the assumption that current policy settings do not change over the medium term,” it says.

“The government will remain focused on ongoing expenditure restraint in order to deliver on its fiscal strategy to continue improving the strength and sustainability of the budget.”

What are the politics?

Before Tony Abbott was elected in 2013 he promised no cuts to health and education. But in the Abbott government’s first budget in 2014 the then treasurer Joe Hockey cut $80bn over a decade from projected spending growth in health and education.

Labor wants voters to remember this breach of faith, and it wants voters to think if the government has done this once, it will do it again.

In the short term Labor is offering a better tax cut for workers on low and middle incomes, but over the longer term it opposes deeper tax cuts for middle- and high-income earners to help pay for more spending on services.

The claim that spending will need to fall by $40bn will help Labor argue services will be worse under the Coalition and also that future income tax cuts are unsustainable and will never be delivered.

So far, the government has not had to provide a detailed account for the shrinkage in the spending to GDP ratio.

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A healthy counter-attack – such as targeting Bill Shorten for his slip-up claiming Labor will not impose new taxes on superannuation – has so far been enough to see the Coalition through.

On Wednesday the Labor states wrote to the federal Coalition demanding “urgent confirmation that the commonwealth government’s surpluses will not be built on funding cuts to hospitals, schools and infrastructure”.

This indicates Labor will seek to keep the pressure up and the case of the $40bn spending shrinkage will be a key issue.

Verdict

It is true that the budget shows spending to GDP will shrink from 24.6% to 23.9%, and spending would be $40bn higher if that were not the case.

The idea that shrinkage can be achieved without major cuts to programs relies on the assumption the government can keep spending growth at 1.3%.

What voters make of that may depend on which party – or leader – they trust.