Banking on an Abbott bounce

There's nothing particularly new about the Business Council of Australia's call, in this year's annual budget submission, for both sides of politics to abandon their plans for a federal budget surplus in the near term – it's been banging that drum for some time. But it is a useful reminder that either party will face a fiscal crisis when the next government is formed.

The BCA is continuing to call for a 'hard cap' on the expenditure side "below the level for 2007-08 (23.7 per cent)".

That's pretty tight in global terms (New Zealand is struggling to bring its spending down from 35 to 30 per cent between 2011 and 2016), but then the commonwealth tax base is wildly out of balance and revenues continue to slide.

This year the BCA is firmly pointing its finger at Labor – its submission accuses the government of "time shifting" spending commitments to give a short-term rosy glow to the Mid Year Economic and Fiscal Outlook. It quotes a Deloitte Access Economics report that found half of the $28 billion in savings at MYEFO were down to time shifting.

So Labor, should it win government again (a hypothetical that will have some readers reaching for their blood pressure tablets), would need to totally overhaul its approach to budgeting.

Rather than look for short-term 'savings', the BCA wants the government to find structural savings and commit to demonstrating a path back to sustainable fiscal surpluses in the range of 1 to 2 per cent of GDP.

Labor has lost control of spending. It's recent spending promises – most notably the Gonski education reforms and the National Disability Insurance Scheme, which the BCA says could cost up to $17 billion annually – are popular, but neither side of politics can afford to deliver them.

But spending is only one side of the coin, and in its submission the BCA reminds us that the Coalition also helped put the budget on an unsustainable footing by giving away too much of the revenues flowing from 'mining boom mark I'.

It notes: "The structural balance ... improved thanks to the tough budgets of 1993 and (particularly) 1996, and the structural budget surplus reached a new peak in 1999-2000. But both the structural and cyclical sides of the budget lost ground thereafter, battling both (1) a series of tax cuts and a huge dollop of family benefits and baby bonuses, followed by (2) a striking surge in stimulus spending."

We knew that, but we shouldn't forget it going into a federal election. The Howard government must take the blame for the first problem, and the Rudd/Gillard governments for the second.

That is not to say the 2009 stimulus splurge wasn't justified – only that it could have been reined in far quicker than the Gillard government chose to do. The BCA states: "Three years into recovery after the global financial crisis, more should have been done to achieve greater structural savings and put the budget on a more sustainable long-term footing. Instead, savings have been oriented towards deferrals and one-off measures rather than a proper reprioritisation of expenditure."

That's Labor's failing, pure and simple.

The BCA call for Labor to correct its fiscal mistakes all looks a bit academic at this stage. The overwhelming probability, with Labor's primary vote at 30 per cent, is that Tony Abbott will lead the next government.

The big question, then, is what the BCA's diagnosis and prescription for our fiscal ills means for the Coalition.

The first thing to note is that the Coalition's vague promise to 'return to surplus more quickly' than Labor can remain just that – vague. The BCA doesn't want a short-term headline figure but a full review of government spending to figure out where government has become too big. That's exactly what the Coalition has already promised in the form a full spending 'audit'.

Once the audit is done, the cost-cutting will begin. Liberal sources suggest the most likely approach will be to cut entire programs, rather than shave a little off each department.

The danger is that an Abbott government will attack this project with too much vigour – la Campbell Newman, who took the knife to 14,000 public service jobs.

The economic impact of such cuts must be watched very carefully. Bank of America Merrill Lynch Australia chief economist Saul Eslake told me yesterday that the Newman cuts had added around 1 percentage point to Queensland's unemployment figures. And, because Newman has done a poor job of selling the need for such cuts, it has likely had a serious impact on consumer confidence and, by extension, on business confidence.

That's the danger that the entire nation will face if Tony Abbott fails to heed the BCA's warnings – don't obsess about a surplus in years one or two, but do the work that neither the Howard or Rudd/Gillard governments got right, to return to long-term structural surpluses.

I must point out that for some time I have argued that Labor's surplus dream was, in fact, important – mainly because of the continuing deterioration of tax revenues and consequent inexorable rise in federal net debt (Swan's lost surplus was more than a fetish, January 15).

While the BCA wants to let both sides off the hook on delivering short term surpluses, it is also calling for the tax base to be overhauled – suggesting again that indirect taxes, such as the GST, must shoulder more of the burden.

The context for this budget submission is an economy poised for growth, but in danger of serious decline if the wrong fiscal policy is adopted. That 'wrong' policy could be aggressive cuts by an Abbott government, bumping up the unemployment numbers, stirring industrial unrest and damaging business and consumer confidence. 'Cutting into a downturn' could be a tragic mistake in 2014.

On the other hand, Eslake points out that Abbott might just get away with it – for a very simple reason. The Gillard government is very unpopular with a large section of the business community, and many consumers. The switch from a Gillard government to pretty much any other government could boost business confidence to such an extent that firms that have deferred new investment and recruitment might inject new life into the economy.

That idea underpins Abbott's entire electoral platform. Whether an 'Abbott bounce' actually arrives is something nobody can forecast with any accuracy – and voters will need to decide whether, despite Labor's failings, it's a risk they're prepared to take.