Sense should squib a surplus promise

Joe Hockey made a big song and dance over returning the budget to surplus immediately. This week he will hopefully indicate a more prudent path to the black.

At some time within the next week, Treasurer Joe Hockey and Finance Minister Mathias Cormann will release the final outcome for the Commonwealth Budget for financial year 2012-13.  

This will, of course, be the budget of the Labor government, but such are the complexities of calculating government revenue and expenditure, Treasury and Finance have until 30 September each year to prepare the final budget numbers for the year just passed. This is why the budget outcome was not released prior to the  September 7 election.

Hockey and Cormann will no doubt ham it up – they should. The budget deficit is likely to be $20 billion, plus or minus a couple of billion. The government rhetoric will be that Labor under Kevin Rudd and Julia Gillard never delivered a budget surplus despite countless promises and commitments to do so. These six years of budget deficit should also feed into the narrative that there is a crisis or emergency in the fiscal settings. The new Treasurer and Finance Minister will crank it up and it should be entertaining.

But that is the politics. The real issue of fiscal management of Australia’s rolled-gold, triple-A budget is now for Hockey and Cormann to deal with. They are the ones managing Australia’s $1.6 trillion economy with government spending and receipts to the order of $400 billion each a year.

In a National Press Club speech in 2012, Hockey as Shadow Treasurer promised that “we will achieve a surplus in our first year in office and we will achieve a surplus for every year of our first term”. In January this year, he followed up saying that “our commitment [to budget surpluses] was emphatic” and that “we will deliver a surplus in our first year and every year after that.”

Tony Abbott agreed at the time, saying “we believe we can deliver surpluses in each year of the first term of a Coalition government”.

Most respectable economists are not as surpluses obsessed as Abbott or Hockey. They understand that the budget is the means to an end – economic growth – and is not an end in itself. What is also clear to those economists in managing the budget is that small changes in the economic outlook for China, a dip in commodity prices, a swing in mining investment or unexpectedly subdued wages growth can leave the budget many tens of billions of dollars worse off in a very short time, without any policy changes from the government of the day.

Given the assault on the budget from Abbott, Hockey and Cormann prior to September 7’s election in the form of an “emergency” or “crisis”, they are the ones now in a position to deliver on their promised surpluses.

A surplus is possible this year, if they really want it.

On current figuring, the starting point for the 2013-14 budget is a deficit of around $30 billion – or a little under 2 per cent of GDP. If the budget surplus and debt reduction objectives are so urgent and an emergency, this $30 billion could be made up with immediate spending cuts, tax changes and outlay deferrals, among other things. Hockey and Cormann are in the big chair now and can make the tough decisions. 

The reality suggests Hockey and Cormann will squib on the surplus promise. It would be dumb economics. Treasury and Finance will have told a few home truths to their new ministers in the past couple of weeks, including the fact that there is no budget problem in Australia, something that is slowly filtering in to the Coalition’s understanding.

Linked to that is how damaging wholesale cuts to spending or changes to tax rates to achieve an unnecessary surplus would be. At the moment Treasury, and the Reserve Bank for that matter, are forecasting a period where economic growth is a little below trend and the unemployment rate is inching up and is forecast to reach 6.25 per cent. Having the government sector clip even 1 per cent of GDP, let alone 2 per cent, would be ridiculous and threaten a deep downturn in the economy in the year ahead.

The previous government realised this, which is why it abandoned its commitments to a surplus (at huge political cost). It is to be hoped Hockey and Cormann are similarly responsive and responsible. 

According to the costings released by the Coalition just prior to the election, its big picture agenda on the budget is all but the same as the previous Labor government’s – which was for deficits from 2013-14 to 2015-16 before a thin surplus in 2016-17.

Given the current economic outlook this looks to be a prudent path, even though it makes a lot of the Coalition’s rhetoric prior to the election somewhat glib.