Wayne's budget blues and beyond

As the mining boom winds down and high nominal GDP growth falls behind us, Wayne Swan's sixth budget may well be a bloodbath. But the Labor Party's future rests on his efforts.

In four weeks time exactly, journalists from around the country will flock to the nation’s capital to willingly submit themselves to “budget lock-up” in a vast suite of committee hearing rooms deep inside Parliament House.

This will be my ninth budget as an economics journalist and eighth time I will have lined up at 1:30pm to pass security and collect an attractive blue or black canvas satchel containing hefty budget documents (I now have quite the collection).

This year, I’m told, we’re allowed to take in iPads and download documents over internal wifi.

Yes, times have changed.

In more ways than one, this year’s will be a very different budget.

Thinking back to my first budgets, they were eye-popping affairs. In the mid 2000s, Australia’s once in a century mining boom was only just getting started.

Journalists would excitedly rush to see what budget largesse they would have the good fortune of telling readers about this year.

Will it be more tax cuts? Baby bonuses? Family tax benefits? Cash handouts for seniors?

Good natured Treasury officials attending the lock up would accept a gentle drubbing for once again having vastly underestimated the revenue windfall of the mining boom, allowing Treasurer Costello - magician style - to pull another super-sized budget surplus out of the hat.

As journalists marveled at these multi billion dollar upwards “parameter variations”, Treasury gurus would shake their heads in disbelief and draw your attention to some of the more blockbuster numbers buried in the budget.

Treasury always factored in a fall in the terms of trade in the forward estimates, but year after year, commodity prices defied their expectations.

By far the most awe-inducing numbers were for growth in nominal GDP.

At one point, nominal GDP was growing 7 per cent plus a year, while the real economy grew just 3 or 4 per cent. As commodity prices soared, national income grew much faster than output. The gap between real and nominal GDP grew. 

It all seemed too good to be true.

It was.

This year the budget is shaping up to be a revenue bloodbath. Murmurings from within government are not good. 

Treasury sources are now shaking their heads over another spectacular economic phenomenon: the collapse in nominal GDP growth. Never before in Australia’s history has nominal GDP grown by less than real GDP for three consecutive quarters as it did in the final nine months of last year.

Nominal GDP has only lagged real growth on three occasions since national accounts began in the 1950s: during the 1961 post-Korean wool boom recession, the 1997 Asian Financial Crisis, and of course the Global Financial Crisis.

The winding down of our biggest commodity boom since the Gold Rush days is upon us. The Reserve Bank sees the peak of the investment boom later this year.

But the peak of the nominal GDP boom, and hence government revenue boom, is well behind us already.

Journalists and other interested onlookers can now expect revenue write downs as big as the revenue windfalls of a decade ago. 

That is the big back-story to Wayne Swan’s sixth budget.

It’s easy to feel sorry for Swan. His predecessors presided over the halcyon days of the mining boom. He got a global financial crisis and the end of the boom.

The political reality is that Labor must demonstrate it can produce a path back to surplus in the forward estimates. But it may not be until the final year of the forward estimates – at 2016-17 – and even that will require spending cuts or tax hikes.

And even that will be assuming commodity prices remain higher than their historic averages.

Successive governments have spent the benefits of the mining boom and the budget has little to show for it. Howard and Costello are the biggest culprits, taking a once-off revenue windfall and passing it on to taxpayers as permanent tax cuts, a permanent drain on the budget.

Rudd spent up big on stimulus spending, which along with interest rate cuts and China, pulled the economy out of a nosedive which could have been even worse for the budget.

The Gillard government has an impressive track record of savings to plug its budget hole. But its attempts at fundamental tax reform have been feeble. All too often its tax hikes have been offset by even bigger spending, like compensation for the carbon tax and the mining tax related spends on super and small business tax concessions.

Political opponents will get easy mileage out of crowing that Swan will never have delivered a surplus.

And his backbench will be urging him to blow the lot and spend up big for reelection.

But Labor must labour on and find savings to offset its big spending policies on education and disability care. 

It cannot undo the damage to the budget of a receding mining boom. But it must at least clean up after itself and its expensive promises.

It may not win them the election. But that is no longer the point. Swan must prove that Labor can maintain fiscal discipline in the face of great political adversity. If he does not, Labor's brand will be trashed for decades to come.

We'll know in four weeks.