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Aug 11, 2011

David Murray takes on the fiscal consensus

Despite widespread agreement that the government doesn't need to return to surplus next year, one figure wants us to go harder and faster.

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A new standard in fiscal hairychestedness has been set this week, not in the United States, or Europe, home of almost unimaginable levels of government debt, but right here in Australia. And not from the opposition, despite its theoretical commitment to returning to surplus even faster than the government.

No, up stepped David Murray of the Future Fund to declare that the forecast surplus for next year wasn’t good enough, that there needed to be a “sufficient surplus to stabilise the debt levels”.

“Stabilising debt levels” of course is achieved by not having a deficit, but presumably Murray wants a bigger surplus than the near-token $3 billion forecast for 2012-13.

Murray appears to be alone in this; there’s few economists who are convinced a faster return to surplus — and the one forecast by the government is extraordinarily quick by previous standards — is warranted, even if there are plenty who think the Budget is loaded with spending that could usefully be slashed. Indeed, many take the view that the 2012-13 surplus is purely political and unnecessary.

That’s not the view of the IMF, which on the weekend gave the government’s fiscal strategy the tick.

Perhaps on this score, Murray is showing the same scepticism of economists that he shows about climate scientists, given it’s only a couple of months since he was declaring carbon dioxide was odourless and colourless (he omitted weightless, unlike some others) and not linked to climate change. For Murray, the economics of fiscal policy are clearly not settled.

Murray may well be disappointed, but it’s not yet clear how big the threat is to surplus. As Crikey and others like Nicholas Gruen have pointed out, our budget is more dependent than ever on corporate tax revenue, courtesy of repeated cuts to personal income tax. In particular, the mining and finance sectors are, far and away, the biggest contributors to corporate tax revenue. A global slowdown will reduce commodity prices, but unless Chinese growth seriously stumbles, our miners are still on course for substantial profits over the next twelve months. Domestically, a “two-speed”, “patchwork”, “insert preferred metaphor here” economy will mean the big banks only continue to grow solidly, rather than surge to yet further record profits, though the banks only provide a fraction of the finance sector’s overall tax revenue.

So far, the surplus doesn’t look under serious threat, but the downside risks are now substantially greater than they were back in May, and there’s very little room to move — $3 billion could be wiped out very quickly indeed.

Preserving the surplus — or expanding it, as the nation’s highest-paid climate denialist would want — would become a matter of cutting spending or lifting taxes, and further weakening demand. It might even undermine consumer sentiment further, curbing discretionary spending.

All things considered, there could probably not be a better way to talk ourselves into an economic slowdown than to follow the advice of the fiscal rugged individualists who think debt, point blank, is bad. Watch how they’ll point overseas and use that as evidence of why we should be going all out to slash debt, rather like someone insisting that because the bloke next door went bust after he borrowed too much to feed his gambling habit, you should sell your house to pay off your mortgage.

It’s an economic version of obsessive compulsive disorder and if revenue falls below forecasts next year, it’ll dominate our political debate. Watch.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Bernard Keane is Crikey’s political editor. Before that he was Crikey’s Canberra press gallery correspondent, covering politics, national security and economics.

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49 thoughts on “David Murray takes on the fiscal consensus

  1. Jackol

    Truthy, Suzanne Blake et al argue that John Howard’s government had mostly surpluses and the Rudd/Gillard governments have had deficits, therefore John Howard was a good economic manager and Rudd/Gillard/Swan have been poor economic managers.

    That logic ONLY works if you assume that economic conditions have been static over all that time and the only thing to consider is what the government does – Howard got surpluses then, therefore Gillard must be able to have surpluses now, and if she can’t it must be her failing.

    Strangely enough economic conditions change over time and it’s one of the jobs of the government to respond to changing economic conditions to get the best possible outcome for us, the Australian people. Yes, to some extent there is feedback – what the government does can affect local economic conditions – but for the past 4 years the Australian government has had no control over the economic conditions imposed on us by the rest of the world. To argue that 2008-2011 have in ANY way been comparable to 1996-2007 is just simplistic nonsense.

    And the ‘responding to changing economic conditions’ is why most people who have thought about this at all think that the government should abandon any commitment to a token surplus in 2013 – the surplus itself matters not a jot at the moment, but allowing the economy to be buffered against recessionary forces by the automatic stabilizers in the economy is the best thing the government can do – even Warwick Mckibbin has said as much, and he has been no cheerleader for this government – see http://www.abc.net.au/lateline/content/2011/s3288612.htm

    WARWICK MCKIBBIN: Well it reduces revenues and it potentially increases outlays and that means that the budget moves more into deficit, and I think what’s important here is that we don’t stick to this belief that a budget surplus by 2013 is anything other than a political promise.

    The economics of that is, in this crisis, we should let the automatic stabilisers adjust. That means we should let spending go up and we should let taxes go down and we should not prevent that process because it helps to buffer against the major shock.

    People can bluster all they like about ‘debt bad surplus good’, but at the moment Australia’s public debt is LOW by any standard; we are NOT in the same position as Greece or the USA or Italy or Spain or Ireland or the UK or France etc. Incurring modest amounts more public debt at the moment is not a great concern; keeping the economy ticking along is a much more important goal. When the economy picks up again we should return to surplus.

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