Expect A Deficit. And Don't Worry


The first thing you need to understand about tonight’s budget is that it will be in deficit. The second thing to understand is that this is not a bad thing. 

It’s a measure of just how effectively the Opposition has crafted its economic message against Labor — and just how poorly Julia Gillard and Wayne swan have explained their own policies — that the Government’s entire fiscal strategy is being framed around getting the budget back into surplus by 2012-13.

Believe it or not, the sky won’t fall in if the budget does not get back into the black in the next couple of years. Australia has one of the smallest government debts of any industrialised country. The economy is growing and the expected income and company tax receipts from rising wages and corporate profits will automatically take the balance sheet into the positive in the next few years.

In other words, all the tough talk from the government and doom-laden rhetoric from the Opposition is simply smoke and mirrors.

Australia is not even a very highly taxed nation. Depending on what measures you use, Australia is either below average or almost at the bottom of the list when it comes to the tax take of the government as a percentage of the economy. Compared with many high-taxing European nations, we run our welfare state on a shoe-string; nor do we spend anything like as much on infrastructure or health and education as many other OECD nations.

So there’s plenty of room for the government to move — if it wanted to. But, for a range of reasons entirely to do with politics, the government has tied itself to an ambitious program of spending restraint in order to demonstrate that it is a "responsible economic manager". That’s because the Opposition has effectively won the battle of ideas over whether we should be borrowing to invest for the future, or running down our shared physical and human capital in order to balance the books. Debt and deficit = bad; surplus = good.

The problem is, there is no way the government can deliver a surplus tonight. This will allow irresponsible critics like Joe Hockey to bang on about massive debts and deficits when, in fact, these numbers are tiny by international comparisons.

It doesn’t help that many of the so-called impartial commentators, like Deloitte Access Economics’ Chris Richardson, share the curious fixation on government spending, without stopping to ask whether a modest deficit might be a good price to pay for a stimulus package that avoided the deep recessions still gripping the US, UK, Spain, Ireland and many other rich nations.

Yes, this Government has certainly overseen some debacles in spending programs. The home insulation program may not actually have been the safety disaster everyone seems to believe it was, but it certainly was an expensive way of addressing greenhouse gas emissions. The Defence Department continues to warm its metaphorical slippers by burning piles of $100 bills, and there have been the usual blow-outs in immigration detention costs. But these are quite minor in the broader scheme of a federal budget worth more than $300 billion. Let us not forget that one of the single biggest Commonwealth outlays are grants that go straight to the states in order to pay for schools, roads and hospitals.

The madness of Wayne Swan’s quest to prove his budgetary mettle is that on any objective measure, he’s already proved it. As a Labor Treasurer, he’s been highly successful at avoiding a recession, restraining government spending, while still looking after the least fortunate with measures such as a permanent increase to the base rate of the pension and big tax cuts low-income earners. Unfortunately, Swan gets very little credit for such achievements. In the topsy-turvy world of Australian political commentary, the government cops a lot of criticism for things it has no control over, like the cost of electricity bills, and very little credit for the things it has done that have been highly successful — such as the stimulus package.

Hence, tonight’s budget will unsurprisingly be analysed in terms of whether the Government has been "tough enough". This is nonsense. The Government does not need to be tough. There is no crisis in government spending — in fact the Government spends quite responsibly.

Of course, there will be winners and losers. Some people will have their benefits trimmed and some public servants will lose their jobs — or at least be made redundant and moved elsewhere in the bureaucracy.

There will also be plenty of small, targeted bribes for certain interest groups — many of which have already been announced. This is the normal politics of the budget.

And there will be a deficit. A very large sounding deficit, perhaps of as much as $50 billion. But when your hear that number, just remember that it would have been perhaps twice or even three times larger if the Government had not implemented the stimulus, and Australia had slipped into a deep recession.

Finally, pay no attention to anything Joe Hockey says in response to the budget. That way you can save yourself the trouble of trying to work out why it doesn’t make sense.


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Ben Eltham is New Matilda's National Affairs Correspondent.