Post-Costello Australia has been absolutely surplus mad. Frothing.
Peter Costello, Australia’s treasurer from 1996 to 2007, ran surpluses for a decade and paid off the Commonwealth government’s debt. An impressive achievement to be sure. But thereafter the budget balance became a totem, fetishised to an absurd degree.
It wasn’t always like this. Once upon a time budgets were about economic policy as much as balance.
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When the budget balance was debated, it was because of fears about the current account deficit. That’s why Bob Hawke and Paul Keating ran surpluses. Now we don’t care about the current account and in public debate no reason need be sought nor given for pursuit of surpluses.
Costello’s achievement changed Australian political discourse — but it must be seen in context.
Australian government revenues increased violently on his watch. He was able to run consecutive surpluses without little political cost, especially towards the end of his term as treasurer. Nevertheless surpluses were then transformed into the yardstick by which subsequent treasurers had to be judged.
If we look back at history we can see the Costello budget myth developing in real time.
The Howard government took office in March 1996 and Costello — in his first budget speech that August — spoke of reducing the deficit but gave no hint he intended to reduce national debt to zero. His rhetoric was indistinguishable from that of his predecessors. That year he ran a budget deficit.
In 1997-98 he edged the budget a bit closer to balance, and used the proceeds of the sale of Telstra to retire national debt, which had previously peaked at $96 billion, or 19% of GDP.
By 1998-99 the budget speech began to draw sharp distinctions between the old Labor approach and the new approach.
“Looking out to the next century there was just a haze of deficit upon deficit and climbing ranges of debt which hemmed us in and closed off our future opportunities,” Costello said of the debt built up under Keating.
But remember: Costello was sitting on booming tax revenues. Tax receipts rose 7.5% that year, adjusted for inflation.
It was not until the next year, 1999-2000, that he began to speak of eliminating net national debt.
He eventually did, in 2006-07. Of course, annual tax revenue had doubled compared with when he took over the treasurer’s office. Tax had risen from 22.7% of GDP in 1997-98 to 24.9% in 2005-06, even as the government gave out repeated tax cuts.
By the end the Howard government was gasping for breath under a gushing hose of unexpected revenue. They funded multiple wars, huge tax cuts, a vast increase in middle-class welfare — including the baby bonus — upgraded our defence forces enormously and still had enough spare to pay back debt.
Budget surpluses were hard to avoid by the end. Paying down debt was easy. I was working in Treasury at the time and I saw scant political will to say no to a spending idea.
Successors live under a long shadow
The point is, Costello’s achievement is as much a product of the era as the man. But his successors — Wayne Swan, Chris Bowen, Joe Hockey and Scott Morrison — have all lived in his long shadow. Liberal or Labor, they all felt obliged to strive for surpluses. Not just one but lots.
Who can forget Swan announcing “four years of surpluses” in 2012-13 and delivering none. Or Hockey, obsessed with Labor’s “debt and deficit disaster” introducing the most-hated budget in living memory — thereby signing his own political death warrant.
“Our economic action strategy is not about weakening government,” he said in his 2014-15 budget speech.
“He doth protest too much,” said Australia, with eyes on the Medicare co-payment.
The media has whipped treasurers into a frenzy, judging each by his fiscal rectitude. Trying to live up to the achievements of Costello has only made subsequent treasurers look like idiots. Surpluses have not been the right strategy for the times, especially not in the years 2011-15 when unemployment was rising. But they had to be strived for.
The absurdity reached a peak last year when the Liberal Party was selling mugs with “Back in Black” printed on them. They have since been removed from the merchandise store.
Time to break the mould
Josh Frydenberg, the newest treasurer, may be the one who breaks the mould. Not because he brought the budget back to surplus (although he got close) but because he has had to steer the economy past the icebergs of COVID-19.
Frydenberg will deliver his economic and fiscal update on Thursday. He has, throughout this crisis, shown a welcome willingness to understand that fiscal policy has a purpose beyond balancing out. He has used fiscal policy cleverly to keep households afloat, keep businesses in business and prevent the unemployment rate from rising too high.
The risk is that he changes course to budget consolidation too soon and pursues a damaging strategy of austerity.
It will be a relief if he can shake off the legacy of Costello — not just for the economy as the pandemic rages, but also for all the treasurers who come after.