Swan's lost surplus was more than a fetish

Labor's surplus backpeddling underscores a lack of gumption in both parties as they fail to protect budget revenue from the risks that lie ahead.

As we enter the federal election year, Wayne Swan's been thumping the table at a Hong Kong conference to tell the US it had better sort out its public finances.

Ironic, really, when his own budget is in tatters.

Swan also said in Hong Kong, according to The Australian, that he'll find further savings to fund Labor's ambitious spending program. What bravado.

Unfortunately such promises are emblematic of a nation not so much punching above its weight, as one suffering the mass delusion that it can. We're a nation of price takers, and that applies just as much in diplomatic matters. To the big boys in Washington and Beijing, Swan's honking is about as audible as a hobbit's fart in a dark New Zealand forest.

When the Treasurer announced in December that Labor was giving up on achieving a budget surplus this financial year, one of the clear causes was the mineral resources rent tax raising not a dollar from the major miners in its first quarter of operation. This week we've seen the second quarter will raise the same amount.

And why is that? Because the miners who negotiated the tax with Swan's boss, Julia Gillard, had very large teams working on what the MRRT, and the failed policy that preceded it, the RSPT, would cost them.

The generous provisions for offsetting profits with investment spending mean the companies have so far avoided helping the government bottom line at all. The government claims this as a victory, saying that's exactly how a profits-based tax should work.

However, it is not the way the Henry tax review, which spawned the original RSPT, saw the reform working. To the authors of that report, federal public finances were in deep trouble on the revenue side, and capturing some of the mining wealth was a way to rebalance things.

Now, there is no balance at all.

I notice in recent days that the 'surplus fetish' has been under attack. Going into a year with considerable downside risks from global economic events means, so the argument runs, that carrying a bit more debt is the prudent thing to do. Public sector demand can help fill in a bit if private sector demand collapses.

That's a good argument, and yes, our net federal debt is still low by global standards – around 10 per cent of GDP before the new budget blowouts are factored in. Our net debt is nothing like the drag on the economy of public debts in the US, Japan and most European nations.

But that is not the relevant argument. What we have in Australia is a political problem, that can only be solved when one side of politics or the other takes the bold steps required to shore up the federal budget. It can be done by slashing costs (and especially not creating new lines of expenditure such as the Gonski education reforms or national disability insurance scheme) or by bulking up revenues.

The latter option is difficult, because corporate tax and non-performing mining tax just won't cut it, and hiking income tax or the GST would be electoral suicide.

So Labor, really, is not prepared to either make real spending cuts or raise taxes. While it claims it is making 'savings', the expenditure to GDP ratio is heading back from around 22 per cent to "under" 24 per cent, according to Finance Minister Penny Wong.

This is a subtle point to grasp – both those figures are very low by world standards. We're all fiscal conservatives now, it would seem. But if you can't pay for them, then those spending levels are still high.

In 2013 there are major risks to our economy as a whole. The reserve banks who've taken a shine to Australian government bonds may decide, en masse, to take their money elsewhere leading to a sharp correction in the Australian dollar. The nation would begin importing substantial inflation.

Even if that doesn't happen, low commodity prices, as well is continuing to make MRRT revenues nothing more than a dream, will filter through the economy and keep corporate profits/taxes low. Many SMEs will close, or not be established in the first place.

That's why the surplus mattered, before it was abandoned. Because at present neither side of politics has laid out a way to balance demand from tax payers for services and infrastructure, with their willingness to pay for it all. The revenue side of the equation was in trouble, and the risk is it will be in much bigger trouble some time this year.

I, like many people, wish to see the Gonski reforms put in place, and the NDIS transforming the lives of struggling Australians. But until a leader can convince the nation – that is, the voters – to pay for these things, we only edge further into debt.

Exactly what Tony Abbott will offer as an alternative won't be clear until closer to the election, but dramatic cuts, in a net sense, just look impossible. Going from fiscally conservative to ultra-conservative really would be too much for voters to stomach.

Australia is walking tall on the world stage at present, and as a nation we've enjoyed boasting about out healthy finances. But we are living on borrowed time.

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