Wayne Swan’s budget surplus is in peril. Dark clouds have gathered over the global economy, especially the rich economies on either side of the Atlantic. There’s a looming sovereign debt crisis in Europe, the US is bouncing along the bottom of an economic contraction that has now lasted half a decade and Japan is still recovering from its devastating earthquake, tsunami and nuclear meltdown. All this adds up to slower world growth — which will inevitably take some of the heat out of China’s booming economy on which so much of Australia’s resources wealth is based.
At home, many parts of the Australian economy are themselves struggling, notably manufacturing, which is clearly contracting and shedding jobs in the process. We’re not headed for a recession on current indicators, but Swan has a problem: the economy is slowing down, and that is going to crimp tax revenues at the very time the Government needs them to pick up. Swan himself recognises the issue, as he told Australian reporters gathered outside the ceremony in Washington where he received his prize as Euromoney magazine’s Finance Minister of the Year award.
"We’re determined to come back to surplus but I just make the observation that these events globally have an impact upon global growth, that has an impact upon domestic growth that has an impact on revenue collections and or course it makes it tougher to come back to surplus," said Swan.
"But I want to make it very clear we are determined to come back to surplus. That’s what we’ve said we will do and we’re determined to do."
But is that what he should do?
The Government’s entire economic policy has been built around a rapid return to surplus next year, after the comparatively small deficits racked up in 2008-11 as the government spent up to keep the economy out of recession.
Of course, the economy did stay out of recession, largely thanks to the prompt and effective stimulus policy.
Ordinary Australians may not realise it, but compared to Europe and America, Australia is unusually blessed with high-quality economic policy-makers. Glenn Stevens at the Reserve Bank and Ken Henry at the Treasury made a huge contribution to our future prosperity with their sound advice to Swan during the crisis, but it was Swan and Kevin Rudd’s determination to back this advice that enabled Australia to execute a textbook economic turnaround.
Let’s just remind ourselves that our economy is still growing and that unemployment is just above 5 per cent. Despite some serious early job losses in the mining industry (giving the lie to the myth that Australia was saved by our mining industries — we weren’t), prompt action by the Government kept consumer spending at reasonable levels and put spare capacity to work in the construction sector with a much-needed infrastructure boost to our nation’s primary schools.
The hostility inside Australia towards Swan and the Government’s manifestly successful stimulus package astounds foreign observers.
Euromoney’s Eric Ellis has been chronicling the attacks on Swan in Australia with some amusement. "Surrounded by the consumer baubles that wealth brings, grumpy Australians don’t seem to appreciate how good they’ve had it," he wrote this month — and it’s hard to disagree.
Unfortunately for Labor, voters here seem to take a very different view of their own finances to the government’s. Many Australian families groan under the weight of huge mortgages taken out to buy houses they can barely afford. But they simultaneously abhor the Australian Government’s tiny budget deficit of $22 billion, or around 1.5 per cent of GDP. Australia’s debt will peak at something under 8 per cent of our gross domestic product, a manageable burden in any sense of the word.
But, as with so many other issues, the Gillard Government has found itself out-maneuvered by a nimble Opposition prepared ruthlessly to attack Labor’s supposedly profligate ways. Tony Abbott and Joe Hockey may struggle to make their own election costings add up, but that hasn’t stopped them from repeatedly tearing at Labor’s fiscal credibility with their ominous prediction that Labor will never return a surplus while in government. It doesn’t help, either, that two of the Government’s most prominent policies are taxes. As a result, many voters seem to have taken on board the message that Labor is a wasteful government and a poor manager of the economy.
Wayne Swan’s long-term plan to address the credibility issue has been to promise a surplus in 2012-13. To say he and the government are desperate to return a surplus next year is rather to understate matters. Returning to surplus is essentially Labor’s single and entire fiscal policy goal for this term, and the threat of not achieving it must be truly terrifying for a Treasurer who already has plenty to keep him up at night.
Bear in mind that the current fall in government spending is already the fastest correction from a recession since Treasury began to keep records. The government’s plan to rapidly return to surplus is slicing perhaps two full percentage points off growth this financial year. The broader economy would certainly be in a healthier state if the drop-off in Canberra’s spending was slightly less rapid.
After all, the issue of whether Australia should turn in a surplus next year is entirely political. From a purely economic standpoint, it would be far preferable to keep fiscal settings roughly as they now and to let the budget return to surplus a year later, in 2013-14. Indeed, the Commonwealth Bank’s Ralph Norris said precisely this in a speech yesterday. But that would constitute another broken promise for Labor, and the Opposition would be understandably cock-a-hoop.
So Labor may very well decide to cut deep and hard in the budget next May in order to show some kind of surplus. For political purposes, almost any amount would do, even in the few hundred million dollars.
It won’t be easy. We won’t know the full fiscal situation until the mid-year economic and fiscal outlook papers are released later this year, but on every indication, the budget deficit looks to be widening.
So by April next year, Wayne Swan and Penny Wong will be faced with some tough choices. Remember that the government has already squeezed many of its departments hard, capping spending increases at 2 per cent a year and enforcing an increased annual efficiency dividend, which requires all government departments and agencies to slash 1.5 per cent off their spending every year. This means that the government won’t easily be able to find billions in nips and tucks here and there.
A more likely scenario is that significant cuts will have to be made to one or more national spending programs, such as defence, family tax benefits or the private health insurance rebate (which Labor has been trying to means test for years, but has been stopped from doing so by the Senate).
Swan’s upcoming tax summit offers some equally unattractive possibilities, such as raising taxes or eliminating tax loopholes in areas such as superannuation, capital gains tax or negative gearing. Tax concessions in these areas cost tens of billions, but Labor would not be relishing the prospect of yet another battle over taxes in the run-up to the doomsday election of 2013. Slashing spending would also further damage the domestic economy at a time when confidence is low.
On the other hand, Swan could simply leave the budget in deficit another year. If he really wants to live up to his new title as Finance Minister of the Year, he should be able to explain the policy to the Australian public.
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