A bipartisan surplus shipwreck

Heading into the 2012 federal budget and beyond, both sides of politics are promising much while skating over unpleasant economic realities. It seems they are hell-bent on misery.

What kind of political landscape will emerge from the rancorous and unedifying politics seen between the 2010 and 2013 elections? Heading into the 2012 federal budget, the signs are not good.

The three main parties – Liberal, Labor and Greens – are skating over some of the unpleasant truths facing the nation, and launching policies unlikely to deliver the kinds of prosperity and sustainability voters want – safe in the knowledge that an increasingly partisan national media is either unable, or unwilling, to correct them.

Popular opinion on issues such as ‘debt and deficit’, climate change, the mining tax, middle class welfare and so on turns slowly, like a ship at sea.

So, in the past few days the news media – particularly the Murdoch press – have started laying into Wayne Swan for ploughing ahead with a budget surplus, when a loud chorus of economists now think that’s a dangerous thing to do.

But the 'hit the surplus at all costs' ship has been gaining momentum for a long time, fuelled by commentators on the right who are still incensed that this Labor government was ever formed. (Never mind that Tony Abbott came very close to forming minority government and, had he done so, would have been ‘democratically’ elected by the very same process.)

Having pushed along the ‘debt and deficit’ boat for so long, those same commentators can now enjoy putting the boot into Swan for reining in public finances too hard and forcing thousands of workers, public and private, onto dole queues.

All of which achieves nothing. It’s too late to turn the ship around, and, therefore, too late to change Swan’s mind – or Joe Hockey’s for that matter. Both the big parties are locked into continuing to slash public spending.

Swan’s 2012-13 budget will be Australia’s sharpest fiscal U-turn since the dramatic rebalancing of Treasury finances by Arthur Fadden in the 1951 ‘horror budget’. Fadden did it by hiking taxes, while Swan’s doing it by slashing 2.5 per cent in public sector spending from GDP. Fadden got a small recession in 1952 following the collapse of wool prices (which had previously been fuelling domestic inflation), and Swan will likely get some kind of recession in the three-quarters of the economy not directly linked to the resources boom. And if commodity prices soften or fall, he’ll get a bigger economy-wide recession.

The Liberal Party is bent on cutting public spending even more, post-2013, despite the fact that in the late Howard-government years the Coalition spent a significantly higher proportion of GDP than Labor’s current expenditure, funded by tax receipts from mining boom mark I, and capital gains tax flowing from asset inflation in the last years of the pre-GFC credit bubble. So the Liberal party is making a dramatic switch back to true fiscal conservatism at the same time as economists and the likes of the Business Council of Australia are calling for a more gradual approach to fiscal consolidation.

The Greens, who command around four times the vote of the National Party and have a firm grip on the balance of power in the Senate, want to head the other way – they oppose the extension of corporate tax breaks to large companies (though they’re happy to pass cuts for SMEs), want to scrap fuel tax rebates for miners and farmers, and argued long and hard for a higher minerals tax. They want federal surpluses, but paid for by higher taxes that many economists think would unnecessarily drag on investment and national productivity. They’re the Faddens of current fiscal policy and had they succeeded in building more MRRT revenue into the federal budget, would have set us up for further structural deficits, which would convert neatly into real deficits when coal and iron ore prices fall.

A year ago, Swan handed down a budget indicating that net Commonwealth debt would peak at 7.5 per cent of GDP in 2011/12. By the time MYEFO arrived, with tax receipts already plummeting, it was revised up to 8.9 per cent of GDP (around $130 billion). On both occasions he pointed out that the average across the G7 economies was around ten times that figure.

Commonwealth debt (the states, in aggregate, have slightly more debt on issue) cannot be allowed to balloon to levels seen in the US, Japan and the eurozone. Allowing that to happen would put a real drag on our economy. But the really crucial point is that the acrimonious parliament voted in in 2010 has resulted in fiscal policy swinging too violently the other way at a time when consumer confidence, business confidence, retail sales, housing starts, credit growth and many more indicators of economic vitality are heading south.

The democratic process is never perfect, granted – budgets tend to swing a bit too far in a familiar thesis/antithesis/synthesis pattern. But when both sides of politics line up to pull in the wrong direction, and when only the Greens appear vaguely fiscally moderate, something’s gone horribly wrong.

Abandoning Keynesian largesse too abruptly, as Swan is doing, is likely to result in more stimulatory borrowing/spending by whoever wins the 2013 election. That’s far worse than simply shuddering at the national credit card bill, and setting about paying it down gradually.

Howard and Costello took a decade to pay off Keating’s $90 billion dollar debt, despite governing through a period of booming corporate and capital gains tax, and then kindly left Kevin Rudd a $22 billion surplus.

Now, the national debt is, according to Treasury, peaking at around $130 billion. By spooky coincidence that’s about what Keating’s debt would be worth in today’s dollars.

So should we pay it down as fast as Howard and Costello? All the economic indicators, and most economists, now say ‘no!’

It’s a national debate that needs to be sorted out well in advance of the 2013 election – or we’ll go to the polls with both sides of politics promising ‘sensible’ fiscal policy and, in fact, delivering misery.

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