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.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey