Too much surplus talk?
Labor MP Joel Fitzgibbon riled other Government MPs on Wednesday, accusing them of 'overstating the importance of returning to surplus'.PT1M59S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2jlva 620 349 May 15, 2013
You can be forgiven for missing the best news in the federal budget. The vast majority of the media have and Wayne Swan – a man who would have trouble selling free beer - apparently isn't capable of explaining it. Or maybe he's missed it too.
Oh, you certainly will have read about it, a big figure featuring in all the obvious headlines, but it's highly unlikely you will have seen that the really good and important news from Tuesday night is that we're forecast to have a federal deficit of $18 billion in the new financial year and one of about $19.4 billion this year.
No, seriously, that the government is not trying to peg back the deficit in the 2013-14 should be welcomed by everyone whose first priority isn't doing whatever it takes to change the government.
I know it's in here somewhere ... Treasurer Wayne Swan. Photo: Jesse Marlow
Having been subjected to abysmally simplistic “deficit bad, surplus good” chanting from both sides of politics over the past couple of years, where the political wedge and counter-wedge have overshadowed the economics, it's perhaps understandable that most commentary has gone along for the ride, suggesting that deficits this year and next year primarily represent budget failure instead of considerable relief.
Attempting to pull back from a $43.4 billion deficit in 2011-12 to nominal surplus this year was absurd. Dumb economics for silly political purposes, Wayne. It represented an unprecedented fiscal contraction that, if allowed to run its course and if not for some Treasury smoke and mirrors pulling forward and pushing back, could have stalled the economy. As it pans out, the $24 billion contraction achieved by trimming the deficit to $19.4 billion is itself without equal – a $24 billion turnaround, a hefty 1.6 per cent of GDP.
It's a moot point whether the deficit reduction efforts of state and federal governments or the strong currency has been the biggest brake on our economy over the past year. The Reserve Bank keeps politely mentioning it as a factor in cutting the cash rate to a record low in an attempt to sustain demand, but the pet shop seems to only have eyes on the currency on that score.
So before any business type whinges about the $19.4 billion deficit or the infamous $17 billion revenue “black hole”, please specify how much slower you would like our economy to be growing this financial year.
Between the lines of Tuesday's budget is an admission that we can afford a deficit more than a surplus in 2013-14 and thus there is no real attempt to rein in the deficit in the immediate delicate period – that's planned for later years when some other treasurer has the job.
Net public demand – governments' collective impact on the economy - is taking half a per cent off GDP growth this year. (It's “only” half a per cent thanks to some fancy footwork by Treasury and what some of the states have been up to.) Allowing a similar federal deficit to roll on in the new financial year means net public demand is forecast as having zero impact on GDP, neither contributing to or subtracting from economic growth.
Because economics is all about measuring the change in the moving goal posts, that's an improvement of 0.5 per cent of GDP from this year, but Treasury still forecasts weaker economic growth of 2.75 per cent while the Reserve Bank is a bit more pessimistic at around 2.5 per cent. (That RBA forecast assumes the cash rate remains at 2.75 per cent – maybe Treasury is quietly betting on the RBA being forced to cut rates further, and therefore stimulating the economy that little quarter-per-cent more.)
Given Treasury's forecast of what else will be happening in the economy in the new financial year, we should be very grateful indeed for the $18 billion deficit. Achieving 2.75 per cent growth is dependent on household consumption growing by 3 per cent, up from 2.5 per cent this year, and our investment in dwellings jumping by 5 per cent compared with a meagre improvement of a half a per cent this year and shrinking by 3.6 per cent last year.
Basically, keeping the economy growing at an “OK” rate is a big bet that if you give Australians cheap money, they will spend and buy houses. (Maybe that should be buy houses and spend, as new housing has a neat multiplier effect as carpets, white goods and bean bags are purchased to go in them and more tradies are employed to hopefully pick up some slack as fewer are needed for mine construction.)
It would not have been hard for Swan to have produced a lower forecast deficit next year. There is spending that could have been cut, a means test could have been applied to the child care rebate, tax rates could have been nudged up, but it would have been the wrong thing to do. Joe Hockey would have had the problem of dealing with the fallout from such further fiscal contraction, but it still would have been wrong and irresponsible.
Swan now is and Hockey next year will pay the price for dumbing down the role of fiscal policy. Assisted by ideological zealots on the far right and opportunistic shock jocks, they've managed to convince the public that government debt itself is a bad thing that must be paid off in total at the first opportunity.
The real world is more complex than that. Over time, governments should run surpluses, sometimes big surpluses, but it's not a contradiction to suggest they also should happily borrow to maintain a level of gearing like just about any large corporation.
That debt should be used to invest in areas that can show a demonstrable economic return. The easy example – as promoted by various present and past Reserve Bank board members – is for the government to use its strong balance sheet to borrow very cheaply to fund infrastructure that will deliver a double-digit return on investment.
Taking that a step further, the government should fund it, have the private sector run it (because the private sector does tend to run things better than government), and then, when that infrastructure has been de-risked (when we know how many cars really will go through a tunnel), the thing should be flogged off and the money raised used to build more infrastructure and continue the cycle.
Our massive superannuation industry would love such an outlet for its massive pile of money. Kept to a sensible limit – up to about 20 per cent of GDP has been suggested to me as an acceptable and prudent maximum - it would not hurt our credit rating and it would build a stronger, richer nation.
It can be argued that some of the current government net debt – which is at about half the suggested 20 per cent – is being used for infrastructure, but most has not. Instead it bought an unemployment rate that starts with a '5', it avoided a recession. Personally, I think that was a reasonable purchase. Those complaining loudest about business being less than robust now should be the most thankful for it.
With all the benefit of hindsight, it's likely we could have spent a bit less to maintain acceptable employment levels and some of the stuff that money was spent on and continues to be spent on is stupid, but the big picture stuff is sound. Despite the current and past popularity polls, it's likely that history will judge that Peter Costello's last two terms as treasurer saw more important mistakes – sins of omission and commission - than Wayne Swan's two terms.
But that comment will immediately degenerate along party political lines. Let them go at it and just be grateful we're not trying to immediately shrink next year's deficit – and hope that Joe Hockey won't try to either.
Michael Pascoe is a BusinessDay contributing editor.