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Nov 8, 2011

Budget surplus fetish means more harsh spending cuts

If the government is serious about guaranteeing an excess of revenue over expenses, it must make spending cuts now, writes Adam Creighton, a research fellow at The Centre For Independent Studies.

For public finance aficionados, two special things are meant to happen in 2012-13. One, Labor will run its first federal budget surplus since 1989. And two, government spending, adjusted for consumer price increases, will shrink — a feat more distant, and one that eluded even the relatively abstemious Howard government.

If the Gillard government manages to tick both boxes, it will deserve high praise, however grudging in view of the Rudd government’s reckless spending.

The odds are certainly stacked against it. The projected surplus, $3.5 billion, is a rounding error in the face of anticipated Commonwealth revenues of $380 billion. And these revenue forecasts assume surging income and company taxes, which look less likely every month that passes. The surplus is also hostage to politics: the mining tax, for instance, still unlegislated, is expected to raise $3.7 billion in 2012-13, more than the projected surplus itself.

If the government is serious about guaranteeing an excess of revenue over expenses, it must make spending cuts now. Cutting recurrent spending is the only sure way to bring about a surplus.

The best place to start is cutting wasteful emission reductions subsidies, direct and indirect. The Productivity Commission earlier in the year identified more than 200 distinct government subsidies to “clean energy” in Australia, together easily costing more than $1 billion a year.

Having legislated a carbon price, these other demonstrably wasteful and inefficient sops to the Greens should be removed. Some existing programs imply a carbon price of more than $400 a tonne! Remember, the carbon tax is kicking in at $23 per tonne of carbon abated. If you believe Australia should do something to mitigate climate change, then a carbon tax/price is the most efficient way to go about it.

Sadly, far from stripping these out, the government plans to introduce yet more bureaucratic subsidies when the carbon tax starts, including creating a Clean Energy Finance Corporation with $10 billion of public money to “invest”.

It is not too late to excise all these follies, using the heightened need for fiscal rigour as an excuse. However much they might huff and puff, the Greens are unlikely to put the Coalition in power.

I’ve roughly calculated, very conservatively, that at least $1 billion a year in the $60 billion Commonwealth health budget is wasted or of very dubious merit. “Healthy lifestyle” programs, “health information” campaigns, “drug strategies”, and superfluous “incentive” payments to medical professionals are not only wasteful, but of questionable constitutional validity too. A Labor government should be able to remove these corrosive schemes with the agreement of the opposition.

Older policies of profound stupidity and inequity remain on the books too. Let’s not get started on the Commonwealth-initiated first home owners grant, where taxpayers who can’t afford to buy a home subsidise richer people selling houses to those who can. That little gem costs about $1 billion a year.

It’s true that a small surplus or small deficit is neither here nor there in macroeconomic terms. Many are counselling the government to give up on its surplus “fetish”. Others worry that spending cuts, in these delicate economic times, will sap demand.

They are both wrong-headed. It will always be politically difficult to rein in spending, and economic circumstances overseas may remain fraught for many years. Is this therefore an argument for the government to go into ever larger, spiralling debt? Of course not.

Moreover, the Asian boom may falter, leaving Australia exposed with a raft of unsustainable and inefficient public spending programs. It is far more sensible to make inroads into wasteful programs in relatively benign times, rather than, Greece-style, having to make them on the brink of collapse.

In short, the government, and the opposition, should not be wasting a good crisis, to coin a phrase. The spectre of debt-induced economic meltdown across Europe should remind Australians what could easily happen here decades hence if spending is allowed to get out of control. That should give governments the opportunity to make seemingly unpopular decisions about spending.

It’s probably fair to say that Greece and Italy haven’t had a surplus fetish. We should try to sustain ours.

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15 thoughts on “Budget surplus fetish means more harsh spending cuts

  1. Jim Reiher

    Why not cut subsidies to the coal industry?
    Or stop paying middle class welfare by way of the family tax benefit to households on over $100,00 combined income a year?
    Why just attack subsidies that encourage renewable energies?
    Why not increase the tax on bank profits?

    And: obsession over a “balanced budget” IS a bit strange. It is kind of a religious dogma: “must balance budget… must balance budget”. It is a bit of a fetish. Who made the rule that you have to balance the budget? Bring in more than you spend? No household in Australia works that way – we get mortgages and we get loans – the trick is: can we service them? If we can, then it is okay…. it the debt gets too large, then there is a problem.

  2. Jim Reiher

    Should have said $100,000 combined income a year, above. Instead of the current $150,000 threshold that is in place now.

  3. Modus Ponens

    There is definitely a wedding of two conservative ideologies here. The first (surplus) is fair enoug as a aspirational principle. But why dump on subsidies that create a cleaner energy mix. SUre they are not super efficient, they should be replaced down the line, but why single those out?

    That is the second conservative ideology (keep things the same, do not make emerging industries competitive through initial government support at the expense of incumbent ones

    Which one must win? The creative destruction that market economies thrive on or upholding the status quo?

  4. JamesH

    I’d like a job at the CIS please. I know what to do in all circumstances:

    If times are bad: say “Cut government spending!”

    If times are good: say “Cut government spending!”

    If times are uncertain: say “Cut government spending!”

  5. Jim Reiher

    JamesH – lol! Indeed. It is a world view, not a reasoned position. It is a religious expression to hold to excessive free market capitalism: govts do as little as possible and private enterprise does as much as possible.

    I have talked to liberals who even want libraries to be privatised. Libraries! I asked how could the purchaser ever afford to buy the libraries that stand now? The value of all those books? An And how could they make a profit from a library? It could never pay for itself. He replied: the purchaser would not have to buy the current stock, that would just come with the subsidised purchase. In other words: give them to some private wealthy person or firm to make a profit on – a resource that the public paid for – just steal it from the community and give it to a wealthy group of people. … like I said… a religion…

  6. zut alors

    There’s already been a surplus of discussion on Swan’s surplus. Is this theme destined to be thrashed to death until 2013?

    The more fervently the government vows to deliver a surplus the more embarrassing it will be should they fail. A word of advice to the Treasurer: simply shut up about the surplus, treat us to a deficit of surplus. Please.

  7. Peter Logan

    Your first priority should be to abolish tax subsidies for fossil fuel – a finite resource, used by the highly profitable mining industry that stifles competition from (ultimately) more efficient alternatives.

    But, in Australia, powerful vested interests are getting smarter at pushing their case, backed up by PR campaigns to fight for the status quo.

    Who funds the CIS and the IPA? We need this disclosure on any articles published from these think tanks.

    My last question: If the CIS and the IPA only support established corporations cruising along courtesy of the taxpayer, how can capitalism adapt to encourage our economy to compete against the hybrid models like China or Singapore?

    Peter Logan –declaration of conflicts: I have shares in mining, retail, banking and a geothermal energy company

  8. mattsui

    I think this CIS mob have a kind of story wheel in the back room.
    It spits out themes and prhases like “government’s reckless spending”, “cutting recurrent spending (military, anyone?)”, “buracratic subsidies”, “make unpopular decisions”….etc.
    Some poor sap – research fellow – is the given these phrases and the usual invective pointers “attack Greens/moderates”, “make it scary for any one with out the slightest understanding of economics”.and told to come up with a story.
    Never mind weather it makes any sense at all or not.
    I’m now convinced that Crikey prints these articles purely for their satirical value – possibly at the suggestion of one Guy Rundle. That or it’s some kind of trolling exercise.
    Made me laugh anyway.

  9. gregb

    “Rudd’s reckless spending”. Credibility FAIL.

  10. Dogs breakfast

    For a troll, Adam Creighton certainly has a good marketing machine.

    “the relatively abstemious Howard government.”

    LOL, the outrageously spendthrift piss $300billion windfall up against the wall in the last 5 years.

    The baby bonus govt!

    The don’t tax the superannuants earning serious money govt.

    “Voted one of the worst tax decisions of the current generation” by respected economists.

    That govt?

    Adam, if the govt really wanted to get a surplus, apart from stripping out the wste they could just stop the subsidies to the coal industry, dismantle any ‘carbon sequestration’ money and stop the govt superannuation gift to the highest earners.

    There is a budget tree groaning wilt low hanging fruit, much of it put there by by the realtively abstemious Howard Government.

    Why does crikey give this guy air time?