Step back from all the sound and fury about budget surpluses and the European debt crisis for a moment, and have an unbiased look at the latest Treasury figures on the health of Australia’s economy.
Unemployment is expected to peak at 5.5 per cent next year, and remain at the level into 2013. Inflation will be 3.25 per cent. Wages will grow at 4 per cent. Consumer spending will grow at 3 per cent, and the economy as a whole at 3.25 per cent.
These are figures that would make finance ministers in Europe weep. The Australian economy is growing. We’re adding jobs and keeping unemployment low, consumers are still spending, and inflation is modest. And yes, the budget will return to surplus.
They’re not quite "a beautiful set of numbers" in and of themselves — they show that Australian growth will be moderate, rather than booming — but in comparison to our northern hemisphere trading partners, they’re almost utopian. Take a look, for instance, at Britain’s latest economic data. British numbers tell a tale on unalloyed misery. Growth is a sickly 0.5 per cent and falling. Unemployment is at 8.3 per cent and growing. Despite this, inflation is galloping along at 5 per cent. This is stagflation of a particularly nasty variety. And Britain, like the Euro area, Japan and the US, remains awash in a sea of red ink (see below).
You can argue about precisely how much credit Wayne Swan and the government are entitled to take for this world-beating performance. What you can’t deny is that this is a world-beating performance. Sure, the economy is not enjoying the frothy exuberance of 2007. But it’s still ticking along quite nicely; these figures suggest that this could be the best Christmas for retailers in several years.
Wayne Swan and Penny Wong have had to cut reasonably deeply to keep the budget in surplus. Nearly $7 billion in extra money has been found, through a series of measures such as cuts to the Baby Bonus, deferments of tax cuts, some tweaks to superannuation, cuts to a tax break called the living away from home allowance, and an extra 2.5 per cent "efficiency dividend" imposed across the public service.
Expect to hear more about this last item, the new efficiency dividend. The measure is a blunt instrument, to say the least, as it imposes a uniform cut on all government departments and agencies, no matter their size. Some job losses and program cuts are almost certain.
But then again, cutting government spending was always on the cards, because Treasury says slower growth has wiped something like $20 billion off expected tax revenues. Politically, Swan and Wong will be only too happy to ear a bit of pain in return for the giant black ribbon reading "Surplus!" that they can pin on the government’s chest.
That’s assuming we record a surplus next year, of course. Events in Europe could yet take a disastrous turn, with many commentators predicting the break-up of the Euro currency zone within weeks. Should something so truly catastrophic occur in Europe, we can expect another global credit crunch, a plunge on world markets and some serious repercussions in our own economy. All bets, in other words, will be off. Even draconian government cuts will not be enough to keep the budget in the black.
But if Europe can muddle through, as the government is so desperately hoping, then there is every likelihood that Swan will be able to announce his first surplus on budget night next year. This means almost nothing, economically. But politically, it’s a very big deal indeed. With its reflexive bleating that all deficits everywhere are always bad, the Opposition has long exploited misconceptions about economics widely held in the Australian media and citizenry. Rather than try to educate voters, the Government has instead staked much of its economic credibility on returning to surplus next year. It’s become something of a millstone around its neck.
On the other hand, if Swan can get over the magic plus-minus line, it will blunt one of the Opposition’s best talking points, and buttress the Government’s economic standing leading into the 2013 election year. In the meantime, the Reserve Bank might even lend a hand by lowering interest rates another quarter of a percent. I’d say that’s exactly what Wayne Swan is writing away to Santa for.