THOSE economists who have joined the smarties in proclaiming Julia Gillard's resolve to get the budget back to surplus this financial year to be purely political and of no economic merit are revealing how little they know about political economy the politics of economic policy.
They don't understand the vital role faithful adherence to "frameworks" has played in giving Australia its widely envied record on fiscal responsibility.
It ought to be blindingly apparent just how much trouble successive governments in the United States and Europe have got themselves and their people into by their chronic failure to discipline their spending and taxing the way our governments have for many years.
Our pollies have done this by sticking to policy frameworks in particular, the bipartisan "medium-term fiscal strategy" to "achieve budget surpluses, on average, over the medium term" regularly supplemented by more explicit, shorter-term targets.
When, in the throes of the global financial crisis, Kevin Rudd embarked on huge fiscal stimulus, he nonetheless bound the government to various strictures to keep his actions consistent with the medium-term strategy and the requirements of Peter Costello's Charter of Budget Honesty Act.
He pledged to ensure all stimulus programs were temporary which they were. And as early as February 2009 he committed the government to a "deficit exit strategy" in which it pledged to avoid further income tax cuts and limit the real growth in government spending to an average of 2 per cent a year until the budget was back into significant surplus.
So far, the government has stuck to that commitment. When, in the 2010 election campaign, Gillard took Treasury's projection that the budget would be back in surplus by 2012-13 and turned it into a solemn promise, she was binding herself more than the medium-term strategy required her to.
As the future has unfolded, this has proved an ever-more difficult promise to keep, mainly because of weaker-than-expected growth in the world economy and the now-apparent structural weaknesses on the budget's revenue side.
In consequence, keeping the surplus in prospect has required Gillard to find further savings. Question is: why is that a bad thing?
It's not as if the economy's fallen off a cliff. It's continued growing about its medium-term trend rate, with unemployment steady in the low fives for the past three years.
What's more, the tightening in fiscal policy is occurring when the Reserve Bank has plenty of scope to compensate by easing monetary policy with an outside chance this could help lower the dollar a little.
This is consistent with the strategy: that, except in emergencies, fiscal policy moves in a more inexorable, medium-term way, with the far more easily adjusted monetary policy used as the "swing instrument". Admittedly, a lot of the savings measures have been cosmetic. But shifting planned expenditure by more than just a few weeks either side of June 30 is real. And not all the measures have just been "reprofiling".
Wayne Swan and Penny Wong have been chipping away at middle-class welfare in a way they probably wouldn't have were it not for their alleged "surplus fetish". Why's that a bad thing?
They've significantly reformed the tax treatment of superannuation, reformed the concessional treatment of company cars under the fringe-benefits tax, begun phasing out the dependent spouse tax rebate and are means-testing the baby bonus and the private health insurance rebate.
In last week's effort they cut the baby bonus for subsequent children (it was a substitute for paid parental leave, which has since been introduced) and further tightened the health insurance rebate (in a way that saves little in the first few years, but causes the savings to grow each year forever).
A further consequence of the surplus promise has been insisting new spending commitments be matched by savings on existing programs. Why's that a bad thing?
As for the smarties' claim that Gillard's motive in trying so hard to keep her surplus promise is purely political, it's naive. All of us do things for mixed, even ulterior motives. Pollies are no exception. Indeed, everything they do is politically motivated.
The real question is, regardless of Gillard's political motives, is what she's been doing consistent with disciplined fiscal policy? I've been trying to show it is.
Balancing budgets is politically hard. Most voters, interest groups, backbenchers and even spending ministers don't give a stuff. The temptation not to bother is huge. So it's crazy for the one group that cares economists to be urging pollies not to bother meeting their commitments to run a tight ship.
Of course, it would be a different matter if the economy was falling off a cliff. In any case, the smarties and slackos may yet get their wish. If you listen carefully to what Swan and Wong are saying about the future, it seems last week's effort to get the surplus back on track will be their last.
Should the revenue side deteriorate much further, they're ready to let it go.
Twitter: @1RossGittins
Frequently Asked Questions about this Article…
What is Julia Gillard’s budget surplus promise and why does returning the budget to surplus matter for investors?
The article explains Gillard tied herself to Treasury’s projection that the budget would be back in surplus by 2012–13 as part of Australia’s medium‑term fiscal strategy. Returning to surplus matters because the piece argues disciplined fiscal policy and commitment to frameworks have helped give Australia an enviable record on fiscal responsibility — a policy approach that supports economic stability and confidence for everyday investors.
How was Kevin Rudd’s fiscal stimulus during the global financial crisis consistent with the medium‑term fiscal strategy?
According to the article, Kevin Rudd implemented temporary fiscal stimulus but bound those actions to rules: he pledged all stimulus programs would be temporary and in February 2009 committed to a 'deficit exit strategy' that avoided further income tax cuts and limited real growth in government spending to about 2% a year until a significant surplus was restored.
What kinds of savings and reforms has the government introduced to help meet the surplus target?
The article lists a number of measures aimed at finding savings: reforming the tax treatment of superannuation, changing concessional fringe‑benefits tax treatment for company cars, beginning to phase out the dependent spouse tax rebate, means‑testing the baby bonus and private health insurance rebate, cutting the baby bonus for subsequent children and tightening the private health insurance rebate.
How might these savings measures affect middle‑class households and everyday investors?
The article notes Wayne Swan and Penny Wong have been 'chipping away at middle‑class welfare' — meaning reforms such as changes to superannuation tax treatment, fringe benefits and rebates reduce some concessions and benefits for middle‑income households. For everyday investors, this can mean smaller tax concessions or rebates than in the past, which could affect disposable income or retirement saving profiles.
What is the role of the Reserve Bank when fiscal policy is tightened to meet budget targets?
The article says the strategy is for fiscal policy to move more steadily in the medium term while the Reserve Bank uses monetary policy as the 'swing instrument.' That means the RBA can ease monetary policy — for example by lowering interest rates — to help offset fiscal tightening, and such easing might also put downward pressure on the Australian dollar.
Has the government been matching new spending commitments with savings from existing programs?
Yes. The article explains a consequence of the surplus promise has been a requirement that new spending commitments be matched by savings on existing programs — a budgeting approach the government is using to keep the surplus prospect on track.
Are critics saying Gillard’s surplus push is purely political, and how does the article respond?
Some economists (the article calls them 'smarties') claim Gillard’s drive to return to surplus is politically motivated. The article argues this view is naive — politicians act for mixed motives — and says the more important question is whether her actions are consistent with disciplined fiscal policy. The author argues they are.
Could the government abandon the surplus target if revenues weaken further?
The article notes that if the revenue side deteriorates much further, Treasury ministers Wayne Swan and Penny Wong appear ready to let the surplus promise go. In other words, the government may relax the target if economic conditions and revenue forecasts worsen significantly.
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