Good riddance to a bad surplus
While the political fallout will be big, the economic effects from yesterday's announcement by Wayne Swan will be largely benign, even positive. Here's hoping it marks a switch to debate on microeconomic reform.
Mind you, given that the past four years of the Labor government has produced cumulative underlying cash deficits of more than $170 billion, and this year’s budget only postulated a sliver of surplus – $1.1 billion – after pulling forward spending, making unrealistic assumptions about revenue and keeping some very large slabs of spending off-budget even they must have realised that even had their promise been met it would have been more illusion than reality.
Swan’s retreat from the promise yesterday (after it became obvious with the disclosure of a near $4 billion fall-off in cash receipts to end-October) doesn’t have major economic implications, but it will have political ramifications given the strength of the repeated assertions Swan and the Gillard government, until very recently, have made about their ability to deliver a surplus.
Swan thought he could tap into a resources boom that actually peaked some time ago to bolster revenue. Not only has that windfall not eventuated but the economy generally is sinking under the weight of the dive in commodity prices, the continuing strength of the Australian dollar and the lack of confidence within business and consumers.
Whoever wins the next election (hopefully, regardless of the party, with sufficient seats to govern in their own right) will inherit a budget deeply in deficit once the gimmickry of the 2010-11 and 2011-12 budgets is stripped away and a whole series of unfunded but horrendously expensive promises like the National Disability Insurance Scheme or the Gonski education reforms.
They’ll also have to deal with the funding of off-budget spending like the $44 billion requirement for the national broadband network or the $10 billion Clean Energy Finance Corporation. There are some deep structural and not particularly visible fiscal issues that might not have been a major concern in a growing economy but will come firmly into the picture as an issue for government as the economy continues to slow.
The repeated commitment to a surplus in the election year was politically driven rather than an objective driven by economic circumstances.
While it is desirable when the economy is growing to restrain government spending and build surpluses against the inevitable periods when it slows, government action that contracts growth at a time when it is obvious the economy is contracting is destructive.
The fact that as this year has developed the Reserve Bank has been cutting official interest rates to near-record lows while Swan has been banging on about his commitment to do whatever it takes (until yesterday) to produce a surplus underscores how the politics was compromising the rational policy of allowing the budget to act as something of a shock absorber for the pressures on the real economy.
No one outside the government thought it was a great idea to do whatever it took to produce a surplus even as the growth in the economy began slowing and it became obvious that the resources sector, while still important, was going to be a diminishing contributor to growth. One suspects more than a few of the more economically literate inside it would have held the same opinion.
The abandonment of another core promise that had become obvious it couldn’t meet may hurt the government politically but it is a far better outcome for the economy than a politically-driven new bout of savage spending cuts and/or revenue raising.
If one assumes the Australian economy is going to have to live with a strong dollar and defensive, savings-minded consumers and businesses for the foreseeable future, the policy debate ought not to be about near term surpluses and deficits but about urgent, detailed, fundamental and structural improvements in productivity within both the private and public sectors of the economy, making the federal fiscal position an outcome of good policies rather than a politically-framed end in itself.