Yes, Joe, there is a Santa Claus, his name is Wayne and he’s come five days early for you.
Ever since he became shadow Treasurer, Joe Hockey has been saying Labor would never deliver a surplus. Yesterday Wayne Swan came as close to vindicating him as we’re likely to see before the election campaign.
This is a humiliating backdown by Swan. Since the 2010 budget, Swan has been insisting Labor would be back in the black by 2012-13. He’s referred to the surplus around 200 times in 2011 and 2012 alone, the most recent occasion 11 days ago. Sometimes the surplus rhetoric got a little wild. “We’ve nailed our colours to the mast,” Swan said on stage earlier this year. In 2010, Swan insisted the surplus would be achieved “come hell or high water”.
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Well, the good ship Budget has now headed for safe harbour just four months into the voyage, though, to be strictly accurate in labouring this metaphor, the problem isn’t so much high water as the doldrums: as finance data to October showed, revenue is falling below forecast levels. While the strong dollar persists, corporate tax revenue will underperform as trade-exposed sectors of the economy struggle. And the flat housing market, not to mention politicians and newspapers insisting that the economy is a disaster, will continue to crimp domestic confidence.
The commitment has an interesting history. The Rudd government first made it in 2010 when the economy looked to be recovering from the financial crisis more quickly than expected, and Labor was spooked by the opposition’s incessant harping on debt and deficits. 2012-13 was safely off in the future and beyond the election at that point anyway, and the first version of the mining tax was expected to reap huge returns. Then came the floods at the start of 2011, and the government’s flood levy, and a chorus of criticism that there was no need to rush back to surplus so quickly.
The government defied that, the economy picked up in the second half of 2011 and the early part of 2012, but the surplus was continually winnowed back as Treasury realised tax revenue wasn’t springing back anywhere near as fast as expected and Labor kept having to bring spending forward or push it back, or cut it altogether, to keep its prospects alive. The slowdown in the second half of this year, which followed a comparative slowdown in China, was the final straw: Labor isn’t going to cut any more.
Still, Swan has reversed course, and Hockey can pick and choose from an extensive list of Swan’s own statements to throw at the Treasurer. As he well should.
The announcement has been attended by quite a bit of stupidity. Tony Abbott suggested Australian families would somehow pay for the departure from the surplus commitment, as if a switch between a $1 billion surplus and a $5 billion deficit is going to have an impact on inflation or, for that matter, interest rates.
“Swan has spent three years preparing the big stick with which Joe Hockey is going to belt him all the way to the election.”
It also sits oddly with Hockey’s lament that the RBA was being asked to do too much work to “catch a falling economy”; indeed, if the Coalition does believe the economy is falling — as Hockey and Abbott’s refusal to commit to a surplus next year suggests — their rhetoric on the need for surplus is bizarre (then again, all they need do is point to Swan’s many statement about why it’s economically necessary to return to surplus).
The opposition also continues to claim the government is “spending like drunken sailors” when its spending-to-GDP ratio this year — 23.8% at MYEFO, currently on track to be a tad lower — is lower than the average spending-to-GDP ratio of the Howard government.
Then there was the opposite reaction, by Rob Oakeshott, the Greens, some press gallery journalists, and various barrow-pushers, that having walked away from the surplus commitment, the government could now unleash the floodgates on spending, restoring savings made during the course of the last two years. One notable exception was ACOSS, which said the government should look to fund NDIS, Gonski and increased health spending by “clear[ing] wasteful and poorly targeted expenditure from the budget, and to avoid introducing new programs that are not rigorously designed to meet the country’s essential economic and social needs”.
The spend-up-big types — who in effect are saying “we’re going to have lower income this year, so let’s spend more” — missed or ignored what Swan specifically said, which was that the government was not going to make any further cuts to make up for the failure of revenue to meet projections; the surplus commitment has been abandoned only as far as tax revenue falls short. Nor is there strong evidence of a need for any fiscal stimulus. Unemployment remains low and steady; commodity prices have picked up significantly in recent weeks, buoyed by China’s return to strong growth, and there’s still plenty of stimulus to come from the RBA’s interest rate cuts, so a stronger second half of the financial year is a distinct possibility (with attendant higher tax revenues).
In fact Swan has steered a sensible fiscal course so far, refusing until now to react to the constant claims that the economy is in trouble and being endangered by a rapid fiscal contraction. In the end, the bulletproof dollar has defeated him, but there’s no case for abandoning fiscal discipline.
Still, regardless of the merits of the decision, Swan has spent three years preparing the big stick with which Joe Hockey is going to belt him all the way to the election. Whether that has any political impact remains to be seen. At the end of October, Essential found more voters opposed returning to surplus on the back of further spending cuts than supported it. Maybe voters are more sensible and realistic on budget policy than either Labor or the Liberals.