If Treasurer Wayne Swan and Treasury secretary Martin Parkinson really do pull off a surplus in the 2012-13 budget it will be an incredible achievement.
It won’t actually be achieved, of course, when we come to look back on 2012-13 in hindsight, because it is bound to contain over-optimistic projections, and they will be pilloried for the savage spending cuts required, but the attempt will be magnificent — a budget for the ages.
The political pickle Swan is in is tragic and ironic.
It’s tragic because, as Alister Drysdale writes this morning, the prospect of near-certain defeat next year should liberate the government to get some decent reforms done — to cast aside the inclination to be politically timid, as he puts it. But they’re shackled with this promise to budget for a surplus, so any careless courage it can muster will be spent on spending cuts rather than progressive reform.
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And it’s ironic because one of Tony Abbott’s key claims is that Labor spends too much and that he will stop the waste. In fact, as Swan pointed out last Thursday, Labor has already cut $100 billion from spending and this year’s budget will cut even more — it will have to be tougher than Peter Costello’s first, and only tough, budget in 1996 if it’s to produce a surplus.
But he will get no credit for it. On budget day Abbott and everyone else will come to bury the spending cuts, not praise them.
In fact the Opposition Leader will probably do his usual double back flip, with pike, by criticising the cuts and claiming he would do more because he will get rid of a mining tax or a carbon tax.
Last Thursday Swan said tax revenue had fallen $140 billion since the GFC, $90 billion of which has been due to lower company tax. This is partly due to lower profits, tax losses from the GFC and the depreciation from the mining investment boom. In addition to that, capital gains tax has fallen $11 billion and won’t recover until 2014-15 — “There has been a structural shift here,” he said.
He also talked about how the structural shift in consumer behaviour — higher savings and lower spending — has meant that the non-mining sector is not generating enough growth in tax receipts to offset the mining depreciation deductions.
None of this is his fault; most of it is either good or inevitable, such as the mining investment boom and the higher savings rate.
But he can’t just shrug, budget for a deficit and patiently explain why: he has to produce a surplus, which means a budget turnaround for more than $40 billion in 12 months.
As Tim Colebatch wrote in the Fairfax newspapers on Friday, this will take at least 2.6% of GDP out of the economy in 2012-13 (on Treasury’s estimates). With GDP growth at just 2.5% this is, in conventional modern economics, a reckless thing to do — more than twice the fiscal austerity of the 1986 and 1996 “horror” budgets.
It’s true that fiscal stimulus in 2008-09 helped stave off the effects of the GFC on employment in Australia, but Keynesian counter-cyclical budgeting isn’t always the best thing to do.
In 1920-21, the US had a short and very sharp economic depression, with nominal GDP falling 23.9%. As the publisher of Grant’s Interest Rate Observer, Jim Grant told the New York Fed in a speech recently, “How did the administration of Warren G. Harding respond to this economic calamity? Why, it balanced the budget.”
“The President (declared), as the economy seemed to be falling apart, ‘there is not a menace in the world today like that of growing public indebtedness and mounting public expenditures’.”
Of course, Australia is not in an economic calamity, but the principle is the same. We live in a strange world when Wayne Swan is a reincarnation of the Republican Warren Harding.
*This article was first published at Business Spectator