Sacred surplus could be dumped
Clues in the mid-year budget statement suggests the government is running out of programs to cut and might yet dump its prized budget surplus.PT0M0S 620 349
Labor's budget surplus comes at great detriment to the economy.
THE most important figure in the mid-year economic and fiscal outlook is in a table on page 56. It shows that unexplained variations to the budget estimates will cut spending in 2012-13 by almost $3 billion.
By definition, these variations are not due to changes to policy, the state of the economy, or in the costs of individual programs. Yet they are the reason why we will have a budget surplus of $1.1 billion, rather than a budget deficit of $1.9 billion.
But what are they? No information is given. We the taxpayers provide the money for this, but are kept in the dark about where and why $3 billion of planned spending suddenly will no longer happen. These unexplained spending cuts are the reason why the battered 2012-13 budget is still expected to end up in surplus.
It typifies the murky, spin-driven way in which governments now present the nation's accounts - and allow economic decisions to be driven by political imperatives rather than economic ones.
The overriding goal of this budget update is to ensure that the accounts for 2012-13 end up in surplus. That is not because the economy requires it - take out mining investment and the rest of the economy is anaemic - but because Labor pledged to deliver a surplus, and the Liberals have used their rhetoric to make it the test of Labor's ability to manage the economy.
Few economists agree. Australia's finances are OK, but outside mining, its economy is weak. Non-mining business investment is at the lowest share of GDP for 40 years. More and more shops are empty. Mining export prices have fallen, yet the dollar remains crushingly high. The job market has weakened. Housing appears to be turning, and more mines are ready to produce, but falling prices and weak overseas demand mean they can't support a fragile economy.
Treasury and the Reserve Bank agree that the economy is weakening. Yesterday they cut their estimate of real growth in 2012-13 from 3.25 per cent to 3 per cent: only a minor change, but the forecast of growth in current prices slumped from 5 per cent to 4 per cent, reflecting those falls in export prices, as well as a weaker economy.
Employment is now forecast to grow just 1 per cent over the year: 10,000 jobs a month, only half the growth in people defined as ''working age''. Forecast growth in wages and consumer prices is down marginally, forecast growth in business investment down sharply. In short, the economy is forecast to keep muddling along, with mining investment growing rapidly and the rest marking time. That's probably a reasonable call - if the world economy gets no worse.
Three points stand out. First, that is not a sensible environment in which to take $44 billion or 3.1 per cent of GDP out of the economy. The budget cuts haven't had a big impact yet, but if they are real, they will - adding to the contractionary pressures from cash-strapped business, cautious consumers and underfunded state governments.
Second, not all those cuts are real. If there is a surplus in 2012-13, it will be because a host of fiddles over the past year shifted $9 billion of spending from 2012-13 into 2011-12. On one hand, that means the real contractionary impact is more like $26 billion or 1.7 per cent of GDP. On the other, it means a fiddle-free bottom line would be not a $1 billion surplus, but an $8 billion deficit.
Third, those fiddles apply only to 2012-13. That explains why the biggest new measure yesterday will take effect in 2013-14. For no good reason, companies will face the added expense of making their tax payments monthly, rather than quarterly. They will not pay more tax, but in 2013-14, big business will have to pay tax on 14 months' earnings, with medium businesses suffering a similar fate over the following two years.
I warned months ago that Labor's pledge to slash its way to budget surplus in 2012-13 would force it into more and more bad policy decisions to keep ahead of a slowing economy. In May it scrapped its plan to cut company tax. Now, in effect, it has ordered a one-off increase in company tax to keep the budget in surplus in 2013-14. Both make Australian business less competitive at a time when we need to make it more so.
The same is true for many of yesterday's announced savings - and probably for the $3 billion of unexplained savings on page 56. It's fine for a government hiring more tax auditors to cut tax avoidance, which is the second biggest saving ($2.1 billion over four years). But some of its savings are bad policy born of fiscal desperation: cutting skills training and investment in research spending and higher education, hiking visa fees, cutting support for new exporters. How do they help to develop the future Australia?
They only intensify the real problem facing Australia: our overvalued currency. The International Monetary Fund's database shows Australia now has the third most overvalued currency in the world, when you compare prices in each country. The high dollar has raised our incomes, but also our prices. It is great if you earn money in Australia and spend it overseas (as increasingly, we are). It is awful if you run a business that makes things here to sell to the world.
A decade ago, we had a low dollar that meant goods and services in Australia were produced at 77 per cent of the cost of those in the US. Now we have a high dollar that means it costs $US161 to produce here what you could produce for $100 in the US, for $67 in China, and for $41 in India.
That, not the deficit, is the real problem. We ignore it at our peril.
Tim Colebatch is economics editor.