There is a real question over whether Australia any longer has a political system that can deliberately run a fiscal surplus -- ever, let alone over the course of the economic cycle, which is the official strategy.
Yesterday’s MYEFO forecasts an eventual return to surplus only because nominal GDP growth is predicted to bounce back to more than 5 per cent, from this year’s 1.5 per cent, and to stay there.
That’s less growth than during the golden years in the first three-quarters of last decade, but there doesn’t seem to be a plan B in case growth falls short of that for some reason.
The last deliberate surpluses, if we can put it that way, were in the 1990s after John Howard and Peter Costello focused on fiscal repair following the 1996 election.
Minor parties held the balance of power after that election, but there was a common purpose in returning the budget to balance and then surplus.
In 2001 John Howard introduced the GST and ended the indexation of petrol excise. As the election of that year approached, he capitulated on the latter, declaring: “I was plainly wrong in not understanding some of the concerns held by the Australian people about the price of petrol. And I acknowledge that…”
That seems to have been a turning point, marking the end of budget repair and, indeed, of watching the economic cycle and trying to run a surplus over the course of it.
In fact the commodity boom that was then underway thanks to China does not seem to have been seen as a cycle at all, and even after they won control of the senate in 2004, Howard, Peter Costello and Treasury did not feel the need to build sufficient surpluses for its eventual end.
And end it did, of course, once in 2008 and then again, decisively, in 2011.
Source: JP Morgan
That 15-year period between 1993 and 2008 of steadily increasing growth in both the terms of trade and nominal GDP was Australia’s temporary miracle.
It led to payments falling as a percentage of GDP and receipts staying roughly the same.
Payments and receipts as a percentage of GDP
The underlying cash surplus reached $19.7 billion in 2007-08. Total surpluses between 1996 and 2008, according to the figures in the back of yesterday’s MYEFO, were $103.5 billion against deficits in the prior six years of $80.3 billion. Deficits since then, including this year, total $280 billion.
So where does the cycle start and finish? There were three surpluses before the 1991 recession totalling $12.8 billion, so if the cycle was 1987 to 1997 the net result was minus $67.5 billion.
The following cycle -- 2008 to, say, 2018 -- will be all deficits, no surpluses, and the total will be $343.5 billion according to the MYEFO.
So no “surplus over the course of the economic cycle” for the last two cycles then, which is how long that has been the official government strategy.
And the forecast deficits come despite a presumed return to nominal GDP growth of 4.5 per cent next year and 5 per cent in 2016.
Essentially expenditure was permanently increased during the terms of trade boom. The average annual increase in government expenditure between 2001 and 2010 was 4.92 per cent.
But whereas the new conservative government of 1996 was able to return the budget to surplus despite modest growth in receipts and despite not having control of the senate, the conservatives elected in 2013 have found that impossible.
This cannot be blamed entirely on the Opposition and the minor parties, although they carry a large share of the blame.
The Howard government was more focused on budget repair than ideology in 1996 – its ideological years came later.
The Abbott government seems to have been intent on clearing some ideological cobwebs quickly, at the same time as repairing the budget. Australia’s polity, already polarised, became more so, and therefore more dysfunctional.
There is no sign that this could change in the years ahead. Positions are entrenched and the senate numbers unreliable. Any big budget reform seems impossible and the only way back to surplus is through a return to “normal” terms of trade and nominal GDP conditions.
Perhaps the key difference between the late 90s and now is that the recession was fresh in everyone’s memories. This time there has been 23 years of economic growth; memories of crisis have dimmed and Australia’s relatively “good” GFC may have even helped reinforce the insouciance.
Perhaps another crisis is the only thing will change that. I hope not.