Don't cannibalise economy to save surplus
SOME times are much kinder than others to government treasurers. Before the global downturn, treasurers across Australia sat back and watched revenues roll in. It has been much tougher since then, as state Treasurer Kim Wells knows. The economy, and with it government revenue, has slowed so sharply that it raises the prospect of the state's first budget deficit since the mid-1990s. Mr Wells promises a responsible budget, but in current circumstances that is not necessarily a budget in surplus.
The Coalition did promise a minimum $100 million surplus before it won office in 2010. That creates a political burden, especially as ideologues have elevated surplus budgets to the prime goal of government and falsely made this synonymous with good economic management. The Age has long argued that budgets should match the economic priorities of the time: governments can responsibly go into deficit to buffer economic downturns as long as they bank surpluses to pay off debt in good times. The alternative, as austerity policies are proving overseas, is much riskier. Harsh budget cuts can create a self-defeating spiral of decline. If these tip an economy into recession, revenue shrinks and government debt soars relative to the economy.
Refreshingly, there seems to be some debate within the government. Mr Wells insists on building future surpluses, so as to finance infrastructure without borrowing. Premier Ted Baillieu, according to an Age source, has a more flexible attitude. He believes voters won't judge the government solely on whether it delivers a surplus, especially if that involves severe pain in next week's budget.
The Premier is right, and not only about the politics of the decision. Government should attend first to the needs of the economy and the citizens who depend on it. Unless economic activity and confidence are restored, revenue losses may well overwhelm budget savings efforts. The big writedowns for this financial year that Mr Wells cites - falls of $366 million in stamp duty and $428 million in GST - are the direct results of a slump in activity and confidence.
This is not just a national effect. Victoria has shed more jobs than any other state and gone from being the second-fastest growing economy in 2010-11 to trailing the pack. The government's actions haven't helped. It is breaking an election promise by cutting 3600 public service jobs. Rather than provide vital financial oxygen to the economy, the budget and December update cut spending by $4.1 billion. Net infrastructure spending is down by 42 per cent over three years.
Of course, governments must balance incomings and outgoings over time. The failure to do so in Europe has led to a dreadful time of reckoning. Victoria is a very different case. The budget update revised net debt in 2014-15 down to 5.8 per cent of gross state product - that does not imperil the state's AAA credit rating. The slim surplus budgeted for 2011-12 was dwarfed by a $1.3 billion surplus in 2014-15, for a four-year total of $2.55 billion.
These forecasts are likely to be downgraded on Tuesday, which means an even longer wait for government-funded infrastructure. All the while, the economic costs of inadequate infrastructure run into the tens of billions of dollars. Such a strategy makes no sense if borrowing at AAA rates. Western Australia, the only other state running a surplus thanks to the mining boom, is aggressively raising debt to finance its infrastructure needs. As long as the return on investment exceeds the cost of borrowing, that is perfectly sensible budgeting.
Voters rightly value jobs, economic activity and social well-being above the state of a government's budget in any one year. A budget's policy priorities matter more than whether it is simply in the red or black - provided the long-term balance of spending, revenue, assets and liabilities is sustainable. The best guarantee of that is a healthy economy; the economy must not be sacrificed to a surplus fetish. We shall see next week where the government's priorities lie.