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The best of budgets, the worst of budgets

By Nicholas Gruen - posted Wednesday, 11 May 2011


As a temporary member of the press gallery, I had my 'gotcha' question ready for Wayne Swan, but alas didn't join the shouting match to get my question in. But I can share it with you gentle reader – a little esprit de l'escalier a few hours later.

Treasurer, do you support the Budget's Paper's call for the Budget to retain "the necessary flexibility for the budget position to vary in line with economic conditions to support macroeconomic stability," or your Prime Minister's commitment to return the budget to surplus in 2012-13 come what may?

That promise is the best of promises – and the worst of promises.

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Electorates like spending but hate the taxation to pay for it. Thus, while it's not the most rational approach, the obsessive concern with getting back to surplus has been a healthy counterweight to the drift towards endless deficits and mounting government debt.

The average government debt to GDP of the G-7 countries is just shy of 75%. Australia's will peak at less than a tenth of this. And Keynesianism isn't a perennial spendathon. If you plan to increase spending to fight recession you should use booms in the way the years of feast are used in the Book of Genesis – to replenish the fiscal larder.

This government has not proven itself particularly courageous in taking on middle class welfare, but wearing the hair shirt of returning to surplus come what may, is nevertheless delivering impressive constraints in outlays.

But the rigid timetable for restoring surplus could become a huge handicap – economically and politically. Announced in the haste of her very first press conference as Prime Minister and so literally the prototype for many other misjudgements of similar provenance, it looks decisive and statesmanlike – but not after a moment's thought about what could go wrong.

First, the macroeconomic success of the Government's stimulus in saving over a hundred thousand jobs is testimony to the importance of playing the short term exigencies of the economy on their merits not as you planned three years before. Locking in the pace of returning to surplus is at odds with the logic of the stimulus. Much worse, renders the government hostage to fortune.

If the economy remains strong, returning to surplus will be both straightforward and salutary – indeed we should be heading there more vigorously. This Budget revises down tax receipts by a whopping $16.3 billion over two years from the Government's late 2010 Mid-Year Economic and Fiscal Outlook published just six months ago.That's before counting the near $6 billion cost of 2010's national disasters.

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So that delicately poised 2012-13 $3.5 billion dollar surplus could easily slip from the Government's grasp. We don't need any dramatics for the surplus to evaporate. Indeed quite minor parameter changes send the into the red (See "Welcome our new, more fragile budget"). Heaven help the government if the Chinese (bubble?) economy took a serious hit. Returning to surplus by the due date would not only require a politically suicidal fiscal contraction, but also one which simply inflict more economic damage.

Second, making the return to surplus the touchstoneof economic responsibility exemplifies Labor's loss of nerve – its concession of the narrative to the Opposition. In fact – as the ALP had argued with increasing justification as its time in government drew nearer – its opponents had slipped into a fiscal torpor shovelling out the proceeds of the mining boom to fund a string of lame, improvised vote buying exercises. But Labor couldn't cut through from opposition, because Howard kept running healthy (looking) surpluses.

So forming government was a moment of truth – an opportunity to reconstruct the way things work and so the way they're thought about. The new Government might have done so by unhooking the Future Fund from its ostensible purpose of funding commonwealth superannuation and transforming it into a proper sovereign wealth fund and by building institutions to deliver more independent disciplines on fiscal policy.

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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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