Chasing a budget surplus is a political game that could backfire
This budget - probably Swan's swansong given the state of the opinion polls - will have the rare distinction of being handed down after an election was announced, and therefore effectively during an election campaign.
So the focus on its detail will be sharper than ever. Will superannuation concessions be whittled away, will tax rates be tweaked, who benefits and who loses out? But an overriding focus will be on the size of the deficit.
The bigger the deficit, the bigger Swan's failure will be judged. It was supposed to be in surplus this financial year and the next. But the forecast, last May, of underlying cash surpluses of $1.5 billion in 2012-13 and $2 billion in 2013-14 were always seen as long shots.
An update in November revised those forecasts only a touch, but by then most serious observers saw them - particularly 2012-13 - to be a fleeting victory of hope over reality.
So Swan's acknowledgement just before Christmas that the surplus was not going to happen this year was no surprise to economists. It was more of a relief.
Even if the deficit came in at $15 billion in 2012-13, it would still mark the biggest reduction in the federal budget deficit, relative to the size of the economy, over a three-year period since the 1980s.
Back then the economy needed slowing. But it doesn't now - that's why the Reserve Bank has its cash rate at a 50-year low.
The fiscal screws are being tightened, there's no doubt about that. The interesting question is why. Swan has no need to impress investors the way Paul Keating, as treasurer, repeatedly "pulled a rabbit out of a hat" to impress skittish markets with a series of surpluses in the late 1980s.
Financial market economists these days typically express no concern about budget deficits, at least over the short term. They are much more likely to worry about the unwanted drag on growth from attempts to achieve surpluses.
NAB group chief economist Alan Oster is an example.
He recently suggested that both sides of politics had similar approaches to monetary policy.
"And unfortunately [on fiscal policy] I have no idea that they're going to change at all, because they're both trying to out-compete each other on who can get to a [budget] surplus first, which I think is really stupid," he said.
The dogged pursuit of the elusive surplus was never an urgent necessity, at least, not an economic necessity. It's always been political, a testament to the political skills of Opposition Leader Tony Abbott and shadow treasurer Joe Hockey, like a couple of little boys daring another to jump off the garage roof - and succeeding.
Frequently Asked Questions about this Article…
The article says the headline issue will be the size of the budget surplus or deficit. While economists care more about growth and policy detail, the government is expected to emphasise whether it can show a move toward surplus — a politically charged measure ahead of an election campaign.
Because this budget is being handed down after an election was announced, effectively during a campaign, scrutiny will be sharper. That means proposals — from tax tweaks to spending or superannuation changes — will be debated politically, which can influence market sentiment and public expectations.
No. The article notes that earlier forecasts (in May) projected small underlying cash surpluses of about $1.5 billion in 2012–13 and $2 billion in 2013–14, but most economists saw those as long shots. Wayne Swan acknowledged before Christmas that a surplus was not going to happen this year.
Yes. The article highlights that financial market economists worry the real risk is the drag on growth from attempts to force a surplus. NAB’s chief economist Alan Oster is quoted criticizing the political race to reach a surplus, suggesting it could be economically unwise.
The article says that even if the deficit were $15 billion in 2012–13, it would still represent the biggest reduction in the federal budget deficit relative to the size of the economy over a three‑year period since the 1980s — so it would be a sizable improvement compared with recent years.
The article flags that the budget could consider whittling back superannuation concessions or tweaking tax rates and that discussions about who wins and loses will be prominent. However, it doesn’t cite specific policy moves, so investors should watch the budget detail when released for any concrete changes.
The piece observes that ‘fiscal screws’ are being tightened but questions why — suggesting much of the push is political, intended to show responsibility and compete to be first to a surplus. Politicians like Tony Abbott and Joe Hockey are portrayed as driving the political narrative, with the surplus framed as a political prize rather than an exclusively economic necessity.
The key takeaway is that market economists are generally not alarmed by short‑term deficits, but they are wary of policy choices that could slow growth in pursuit of a headline surplus. Investors should monitor both the budget numbers and any growth‑constraining measures announced, and focus on the economic implications rather than just the political messaging.
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