Is there any going back to a pre-pandemic fiscal world?

While everyone, politicians included, wants to move on from the pandemic, COVID clearly has other plans for us. And it has other plans for government spending.

The virus has ushered in a remarkable change in health funding. In 2019-20, the Commonwealth’s total health and aged care budget, as estimated in May 2019, was to be $73 billion. Funding for state and territory hospitals, handed out under national agreements, was planned to be about $22.5 billion.

The best-laid plans, etc. Spending in 2019-20 ended up at $77 billion for the Commonwealth and hospital funding at $25 billion. And that was only until June 2020, early in the pandemic. Much worse was to come in 2021: health funding was supposed to be just under $90 billion and hospitals $25.6 billion. They ended up, according to the April budget papers this year, at $98.5 billion and $29.6 billion.

In the current year, 2022-23, the Morrison government budgeted for things to improve a little: hospital funding would fall to $28 billion (despite inflation) and health portfolio funding would increase a tiny fraction to $98.9 billion — still about $20 billion more than estimated for this year back in 2019.

Safe to say that optimism won’t be borne out after the Albanese government gave the states an extra three-quarters of a billion dollars to help deal with the COVID surge.

We’ve come a long way from 2016, when the Commonwealth spent just $56 billion and handed $17 billion to the states for hospitals. Not all of it is COVID. Aged care funding has increased — though almost entirely for home care; the big expenses required to fix residential care are yet to come. But the pandemic’s fiscal impacts will be felt for years. The optimistic appraisal of the 2022 budget was that health funding would only gently rise above $100 billion a year over the forward estimates. Hospitals funding will be $32.6 billion on current estimates in 2026.

Even without factoring in the costs of fixing residential aged care (which costs more than $22 billion), health spending has been ratcheted up significantly by the pandemic, and further growth will be off a higher base. Unlike income measures such as JobKeeper, there’s little that’s temporary about the overall increased level of health spending, even if the government is moving to cut back on some pandemic-related spending like telehealth.

From a fiscal point of view, the other problem is that health spending increases come in the billions; it takes a lot of substantial cuts elsewhere to make up for a $20 billion increase. Ending waste and cutting pork-barrelling won’t get there.

Add in fixing aged care and the NDIS, where changes also come in the tens of billions, and you rapidly run out of other programs to cut to provide offsets.

This also partly explains why our health workforce is under so much pressure: years of extra spending have already soaked up considerable spare capacity in the workforce; there’s a finite number of additional doctors, nurses and allied health professionals who can be drawn into an expanded health system, even before you have to cover for the impact of COVID and flu. Beyond a certain point, state hospital systems are just bidding against each other to try to lift staff numbers, especially if our immigration system is unable to rapidly process temporary visas for foreign workers.

This is the future we knew was coming: a much greater need for health services, and a workforce too small to staff them properly. But the pandemic brought it several years early, and it’s unclear how we can go back even to 2019.

The other problem is how to pay for it all — extra health funding, aged care funding, NDIS, nuclear submarines, the lot.

The Coalition’s solution to a smaller spending problem — it hadn’t costed higher aged care wages, or fixing the NDIS, or what the subs would require — was simply to run it all up on the credit card. It budgeted for a permanent budget deficit between now and 2033, with spending of around 27% of GDP and receipts never reaching 26%. That would leave net debt north of 26% of GDP in the mid-2030s — the sort of figure that would have had armed mobs of economic commentators storming Parliament House if Labor had announced it.

The alternative is tax increases — and not just some token changes to multinational company tax revenue. It makes Labor’s obstinate refusal to fix the petroleum resource rent tax (PRRT) regime — costing us tens of billions of revenue over the forward estimates — look even more pig-headed.

The October budget (budget mark II) is the first test of how Labor will address the challenge. It can’t come soon enough — in a post-pandemic world, tax reform is increasingly urgent.