Should we abandon the goal of a budget surplus?

THE MINISTER PENNY WONG

NEXT week the government will hand down its fifth budget.

It will be a budget that responds to Australia's current challenges and that is appropriate for the economic circumstances both globally and at home.

It will be a budget that recognises the importance of getting the fiscal settings right.

Australia's economy is moving back towards trend growth, we have relatively low unemployment and we are experiencing a once in a generation investment boom.

Given these strengths, returning the budget to surplus is the right thing to do.

It is the best way to continue to give the Reserve Bank the flexibility to move on interest rates, should it see fit and to ensure we are not generating price pressures in the economy.

A surplus positions the nation well in the face of global uncertainty and sends a strong message of confidence to investors both domestically and overseas.

The Gillard government will lay out its plan to return the budget to surplus on Tuesday, not just for 2012-13 but for the years ahead. Building budget surpluses and taking decisions to improve the sustainability of the budget are critical to ensuring support for generations to come.

Ensuring Australians can make the most of future opportunities is a key priority for this government.

That's why we are investing in skills and training, and in key infrastructure such as the broadband and rail network. That's why we're encouraging workforce participation and putting in place reforms which spread the benefits of the mining boom.

That's why we're returning the budget to surplus.

Of course, delivering a surplus will not be easy.

We saw significant revenue write-downs in the 2011-12 budget and midyear review, and further write-downs in revenue will be made in this budget.

But Labor will deliver a budget surplus with targeted and responsible savings while continuing to support jobs to help those who need it most.

We will progress on the path to deliver a National Disability Insurance Scheme. We will deliver tax relief through the tripling of the tax-free threshold.

We will deliver a budget surplus because it is the right thing to do for our economy and our future.

Senator Penny Wong is Minister for Finance and Deregulation.

THE ADVOCATE CASSANDRA GOLDIE

THERE are good reasons to restore the budget to surplus. However, it should not be an end in itself, nor achieved at any cost. The Australian Council of Social Service believes that we can achieve a surplus for the right reasons, and through savings measures that make our system fairer.

One good reason to restore the surplus is to save for the next rainy day. There has been much reflection that over the past decade we squandered the benefits of our sustained economic growth. However, we did build up a surplus to enable us to respond as we did to the global financial crisis. We need to ensure that, if necessary we can do so again, while keeping over all public debt levels low.

Another good reason is that unless the government acts now, the budget is likely to fall heavily into deficit as our population ages and we struggle to meet the increased costs of essential healthcare services. We favour meeting most of those costs through the budget, rather than user pays arrangements that leave people on low incomes to rely on second-rate services.

In the short term our priority for the budget is to repair a number of gaping holes in the social safety net, including disability insurance, dental care, and income support and employment services for people who can't find paid employment.

Unfortunately, during the height of the last economic boom in the 2000s, when federal budget revenues were flowing strongly, these priorities fell to the back of the queue. The reason the Newstart Allowance is $35 a day is that it hasn't been increased for 20 years. Instead, governments invested in poorly targeted schemes such as the private health insurance rebate, tax breaks for older people with too many assets to qualify for a pension, rebates for school uniforms and excessive tax breaks for superannuation for people on higher incomes.

The budget is in structural deficit now because those poorly targeted programs are still on the books while the boom-time tax revenues are falling away, and after eight years of tax cuts, the personal income tax system can no longer pull its weight. Australia is the sixth lowest taxed country in the OECD.

Dr Cassandra Goldie is chief executive of the Australian Council of Social Service.

THE ECONOMIST CHRIS RICHARDSON

THE surge for surplus in 2012-13 has become an article of faith - a goal to be hit seemingly irrespective of the state of the economy. That worries me. When Europe teetered late last year, threatening a new GFC, the government doubled down on its vow to reach surplus. That was the wrong response: the mirror image of the mistakes made in the last term of the Howard/Costello government, as it poured tax cuts on a booming economy.

Let's be clear about this debate. It isn't whether the budget should be on the road to repair or not. The turnaround already factored into the budget in the next year is huge - more than $30 billion. The debate is therefore over whether the budget needs to improve by an extra $5 billion in 2012-13 relative to 2011-12. Only the latter delivers a surplus.

It is true that a tougher budget could be offset by lower interest rates from the Reserve Bank. But the Reserve may well wait to see Canberra's new decisions rather than its rhetoric - suggesting there may be a gap in timing between Canberra shortening the policy leash and the Reserve loosening it.

And put yourself in the Reserve Bank's shoes.

Even if the government seeks a surplus, it has to get through a conga line of independents and a populist opposition first.

So there's no guarantee that a 2012-13 surplus would actually invoke an extra interest rate cut out of the Reserve Bank any time soon. Accordingly, even if the intent is not to further tighten the screws on the economy, there's a chance that's exactly what could happen.

Besides, further tightening into a potential downturn is doubtful policy in part because if Europe's economy does indeed blow, then Australia's budget policies would be firmly pointed in the wrong direction.

And therein lies a problem: changes to budget policy come slowly, not fast, even in a crisis. So the more we tighten budget policy right now, the less well-positioned we are to jump the other way if Europe blows a tyre.

Having said that, with Europe now looking healthier, achieving surplus in 2012-13 is less dangerous than it was - meaning I am less fussed about the potential dangers of a surge for surplus in 2012-13 than I was a few months ago.

Chris Richardson is a Director of Deloitte Access Economics.

THE LOBBYIST PETER ANDERSON

THE task for Tuesday's budget is not a surplus at any cost. The budget has to support weaker parts of the economy because Tuesday's economic backdrop is the same as the one that caused the Reserve Bank to cut interest rates this week.

The secret to achieving a budget surplus as well as supporting the economy is for the government to cut back on waste and duplication, and spend our taxes more wisely. This requires a root and branch review of government expenditures. Governments should only spend where it is required, for important social and economic purposes that can't be covered by individuals or the private sector.

The wrong pathway to a budget surplus would be to raise revenues by taxing more or withdrawing support for important economic and social infrastructure. Spending on roads, ports and workforce participation and skills is a down payment with future dividends.

The budget needs to move in sync with the Reserve Bank, which reduced interest rates to help thousands of businesses in the slower parts of the economy. It's no good having the Reserve Bank reduce business costs one Tuesday, only for the government to increase them the next. Cost relief is especially important for businesses thinking about retrenching staff because of the high dollar.

Everyone's energy costs have gone up. To take pressure off business and households, the most obvious step the government should take in this budget is to make a big decision not to go ahead with its carbon tax on July 1. This would boost confidence especially among small businesses. It would also be popular and might restore the government's fortunes.

Since revenues are below forecast, there isn't a lot of scope for other tax reforms. Tax reform is unfinished business. Just look at what New Zealand did last year with leadership and popular support - it increased its GST but made even bigger reductions to income taxes and company taxes. This is helping our trans-Tasman cousins arrest their economic slide.

The budget also needs to announce a way to fund the $20billion in extra superannuation levies the government intends employers to pay from 2013. If higher superannuation is to come as a wage trade-off, as promised, the budget needs to announce the details.Peter Anderson is chief of the Australian Chamber of Commerce and Industry.