If Treasurer Wayne Swan and Treasury secretary Martin Parkinson really do pull off a surplus in the 2012-13 budget it will be an incredible achievement.
It won’t actually be achieved, of course, when we come to look back on 2012-13 in hindsight, because it is bound to contain over-optimistic projections, and they will be pilloried for the savage spending cuts required, but the attempt will be magnificent — a budget for the ages.
The political pickle Swan is in is tragic and ironic.
It’s tragic because, as Alister Drysdale writes this morning, the prospect of near-certain defeat next year should liberate the government to get some decent reforms done — to cast aside the inclination to be politically timid, as he puts it. But they’re shackled with this promise to budget for a surplus, so any careless courage it can muster will be spent on spending cuts rather than progressive reform.
And it’s ironic because one of Tony Abbott’s key claims is that Labor spends too much and that he will stop the waste. In fact, as Swan pointed out last Thursday, Labor has already cut $100 billion from spending and this year’s budget will cut even more — it will have to be tougher than Peter Costello’s first, and only tough, budget in 1996 if it’s to produce a surplus.
But he will get no credit for it. On budget day Abbott and everyone else will come to bury the spending cuts, not praise them.
In fact the Opposition Leader will probably do his usual double back flip, with pike, by criticising the cuts and claiming he would do more because he will get rid of a mining tax or a carbon tax.
Last Thursday Swan said tax revenue had fallen $140 billion since the GFC, $90 billion of which has been due to lower company tax. This is partly due to lower profits, tax losses from the GFC and the depreciation from the mining investment boom. In addition to that, capital gains tax has fallen $11 billion and won’t recover until 2014-15 — “There has been a structural shift here,” he said.
He also talked about how the structural shift in consumer behaviour — higher savings and lower spending — has meant that the non-mining sector is not generating enough growth in tax receipts to offset the mining depreciation deductions.
None of this is his fault; most of it is either good or inevitable, such as the mining investment boom and the higher savings rate.
But he can’t just shrug, budget for a deficit and patiently explain why: he has to produce a surplus, which means a budget turnaround for more than $40 billion in 12 months.
As Tim Colebatch wrote in the Fairfax newspapers on Friday, this will take at least 2.6% of GDP out of the economy in 2012-13 (on Treasury’s estimates). With GDP growth at just 2.5% this is, in conventional modern economics, a reckless thing to do — more than twice the fiscal austerity of the 1986 and 1996 “horror” budgets.
It’s true that fiscal stimulus in 2008-09 helped stave off the effects of the GFC on employment in Australia, but Keynesian counter-cyclical budgeting isn’t always the best thing to do.
In 1920-21, the US had a short and very sharp economic depression, with nominal GDP falling 23.9%. As the publisher of Grant’s Interest Rate Observer, Jim Grant told the New York Fed in a speech recently, “How did the administration of Warren G. Harding respond to this economic calamity? Why, it balanced the budget.”
“The President (declared), as the economy seemed to be falling apart, ‘there is not a menace in the world today like that of growing public indebtedness and mounting public expenditures’.”
Of course, Australia is not in an economic calamity, but the principle is the same. We live in a strange world when Wayne Swan is a reincarnation of the Republican Warren Harding.
*This article was first published at Business Spectator
Some interesting facts here that the bloggers seems to miss.
1. One of Tony Abbott’s key claims is that Labor spends too much and that he will stop the waste.
In fact, as Swan pointed out last Thursday, Labor has already cut $100 billion from spending and this year’s budget will cut even more — it will have to be tougher than Peter Costello’s first, and only tough, budget in 1996 if it’s to produce a surplus.
2. He will get no credit for it.
3. Abbott will probably do his usual double back flip, with pike, by criticising the cuts and claiming he would do more because he will get rid of a mining tax or a carbon tax.
4. Tax revenue had fallen $140 billion since the GFC, $90 billion of which has been due to lower company tax, partly due to lower profits, tax losses from the GFC and the depreciation from the mining investment boom. Capital gains tax has fallen $11 billion and won’t recover until 2014-15 — “There has been a structural shift here,” Swan said.
5. There has been a structural shift in consumer behaviour — higher savings and lower spending — which has meant that the non-mining sector is not generating enough growth in tax receipts to offset the mining depreciation deductions.
6. None of this is Wayne Swan or Treasury’s fault; most of it is either good or inevitable, such as the mining investment boom and the higher savings rate.
Very salutory when considered against all the shrieking and posturing about “The Gillard Government’s economic incompetence” coming from Coalition bloggers!
I’d be more likely to rely on Mr Kohler’s analysis if he didn’t produce those dreadful graphs on ABC 7.00pm news. I mean the ones with different units on either side of the the Y axis, and different scales as well. One night the left scale was without any units at all.
With such freedom to collapse or expand one side you can make all sorts of unrelated measures seem dependent on each other.
Perhaps it’s time to start handing responsibility for setting the fiscal stance of the budget over to someone who isn’t a politician … maybe the RBA or something like the Fewcha Fund.
This notion that it is in any way economically responsible to get all Johnny Weissmuller 12 months out and start promising surpluses is patently absurd. Budgets are about anticipated conditions and, given the interesting times in which we live, the stance of the budget should be determined when the internal organs of the chook have been lined up closer to the due date.
Ministers don’t speculate on interest rates. Why do they make big bets on economic circumstances 12 months away. Talk about long shots.
And now it becomes a matter of “credibility”, of being tough, of making the hard decisions. Sometimes the hardest decision is to change one’s mind.
” the prospect of near-certain defeat next year should liberate the government to get some decent reforms done”
Nope. Because this Government is and always has been weak.
Instead of Gillard telling Brown to back Labor or shove it – she bent over and asked him how deep he liked it?
Then when it comes to their policies, they’ve been lead by the nose by Abbott, the Mining Industry and someone’s dog. It was Abbott’s claims of a “great big new tax on everything” that made Labor capitulate, run up the white flag and pledge that “there would be no salsa on their Dorrito’s”. It was Abbott’s claims about the boat people invasion that saw Gillard run to Malaysia, begging for salvation.
Of course, that all was after the mining industries’ advertising campaign that had already seen off Rudd. And we’ve just finished the Club’s pokies campaign which saw “mandatory pre-commitment” become “voluntary undertakings”. And remember, this was an issue we were “absolutely committed” to.
This is a limp, ham-fisted Government lead by a bunch of weak-kneed, lilly-livered, spineless trollops who have no idea what they want, other than to be in power – and the sad thing is they will literally do anything to get it. Always has been, always will be.
If the payment is even a smidge of power, this lot are willing to sell anything to get it. And by doing that, they have no power at all.
John64;
I think you are ‘jumping the gun’ along with the likes of Colebatch and Kohler and many other members of the MSM commentariat.
You also forget to include in your assessment the MRRT and the ETS. Both of which have been the greatest drivers of contrary campaign by vested interests that I have witnessed in fifty years of mature observation of Australian politics.
The frenzied speculation over the budget is lacking critical and perceptive observation and commentary
The extension of the PRRT to CSG gas would hand the tax payer many millions if not billions of funds that are destined for overseas pockets.
Swan’s recent article about our national billionaire treasures may have been an early shot across the Mining Industries bow and a fair warning that a lot of their corporate welfare maybe coming to an end. Once again this corporate welfare is mainly devolved to overseas pockets in the form of dividends.
The retention of these moneys in Australia for the government to balance budgets and maintain their normal activities will be far less deleterious to our national GDP than many of our so called experts have suggested.