A surplus promise is good politics but bad policy

The Abbott government, like others before it, has allowed the budget deficit to hijack economic debate on important issues, such as poor productivity levels and infrastructure challenges.

The surplus discussion continues to hijack the nation’s economic debate. Recent promises by Prime Minister Tony Abbott suggest that the Coalition may fall into the same political trap that Labor stumbled into: promising a surplus that they cannot deliver.

Whether or not you agree with their policies, the Howard/Costello government were always good at politics.

For years, the economic debate has been centred on the idea that the government must run a budget surplus, an idea that rose to prominence during the Howard / Costello years.

The idea became so ingrained that the Labor Party used the promise of a budget surplus to boost their credentials as fiscal conservatives leading into the 2007 election.

But the global financial crisis, beginning mere months after Labor took office, removed any hope of running a surplus, at least for a few years. Growth was preferred to a balanced budget and the Labor government responded with a range of fiscal measures to support the economy. We avoided a recession that claimed almost every other developed country in the world.

But the damage to Labor’s credibility as fiscal managers was complete. Budget after budget, they caved to political pressure, promising to deliver a surplus in the not-too-distant future. Time after time they failed. They dug their own political grave by legitimising the conditions on governing that the Howard/Costello government created. They paid a heavy price for these perceived failures in September.

At this early stage, it appears that the Abbott/Hockey government is falling into a familiar trap. On Friday, Abbott declared that the Coalition would get back to surplus ‘at least as quickly as the former government claimed that it would get back to surplus’. That would mean a surplus by at least 2016/17.

Abbott has already promised to abolish both the mining and carbon taxes this term, while keeping the tax cuts and compensation connected to the carbon tax. But he also promised additional tax cuts in their next term. These are all measures that hurt the bottom line.

Abbott has made the task more difficult by ruling out cuts to health and education expenditures, while also wanting to increase defence expenditures. But expenses are not necessarily the problem; it was the sharp fall in revenues that led to the Labor Party running deficits throughout its two terms.

The Coalition should look to address both expenditures and receipts, and a more balanced approach to restoring the budget may prove more successful. Otherwise, the Coalition risks the possibility of disappointing a public that views a surplus as the key economic goal.

To meet Abbott’s timeline, the Coalition had better hope that China continues to boost the Australian economy. Besides China, the Commission of Audit is now the great surplus hope, but like the National Commission of Audit in 1996, it will probably recommend a raft of policies that are political unpalatable and ultimately ignored. Good politics perhaps, but little change.

However, the biggest disappointment is that running a budget surplus is not hugely important, and is far from the most important economic indicator for a government. High levels of government debt (as seen throughout the eurozone) can be debilitating, but that situation has little relevance to Australia in 2013.

Both political parties have allowed the deficit to hijack the economic debate away from more important topics. Economic debate should centre on infrastructure investment, on improving our poor productivity performance, on the quality of our schools and our hospitals, and how best to deal with climate change.

Instead we focus on an accounting identity, placing faith in Treasury forecasts that are wrong within days of being published. But that’s not a criticism of Treasury; no organisation anywhere in the world can successfully forecast fiscal receipts and expenditures.

Our economy is faced with some notable headwinds. Creating another one to meet an artificial political objective is poor policy. It is time we changed our priorities.

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