Remind me why we need a surplus again?
There is no compelling economic reason for Wayne Swan to deliver a budget surplus in 10 days time. Indeed, a growing chorus of economists and business figures are arguing that a surplus will in fact be bad for the economy.
As we know, Australia’s economy has hit something of a rough patch lately. If you subtract out the strong performance of Western Australia and the mining sector, there’s not a lot of good news to write home about. Australia’s manufacturing sector is effectively in recession, and many export industries and import competitors are struggling against the high Aussie dollar.
Consumers remain cautious, with the emphasis on saving rather than spending. As a result, the retail sector is anaemic. And real estate is in the doldrums: house prices are falling and new home construction is heading towards levels not seen since the depths of 2008. As a result, local businesses are in no position to raise prices: Australia’s inflation figures are running at a subdued 1.6 per cent for the year up to the March quarter. Given all this, the clamour for interest rate cuts from the Reserve Bank has reached a noisy crescendo in recent days.
Why is it, then, that the government plans to deliver a surplus? A surplus that will cut something like $40 billion from government spending over the next year or two? A surplus that will represent the fastest fiscal consolidation — that is, a return from recession-level deficit spending — since the Treasury started keeping records? A surplus that could cut as much as 2 per cent from economic growth, at a time when economic growth is running at only 3.2 per cent?
Oh that’s right: because the Labor government has staked its entire political credibility on delivering a surplus.
Why it did so is ultimately known only to Wayne Swan and the senior ranks of the Labor leadership. Labor is hoping that a budget surplus and a post-carbon tax campaign to convince voters that it is a steady hand in turbulent times can form the basis of a re-election strategy.
It’s a forlorn hope, but I guess it’s something to hold on to. Over the next few months, the first carbon tax compensation cheques from the government will start to flow. The dream in Labor’s ranks is that these payments — and the absence of any major upset in the wake of the dreaded carbon tax — will allow the government to begin the long climb back to electoral competitiveness.
Just right now, with the Peter Slipper scandal still playing out, it’s hard to see how Labor can possibly regain any kind of electoral respectability. Mind you, if the government has any chance at all, it must continue to be able to claim superior economic performance. One of the reasons that the government is polling so badly currently is that, for many voters, times are rather tough. The Australian economy in 2012 feels very different to the boom times of 2007.
In fact it is different — in composition and in the spending patterns of consumers. At the top of the long boom of 2007, Australian consumers had never felt so flush. Those who owned homes were the lucky beneficiaries of two decades of asset price growth that had turned many ordinary home-owners into paper millionaires. Consumers couldn’t get enough big televisions and other household gadgets. Credit wasn’t exactly cheap, and costs were rising, but unemployment was low and consumer confidence was sky high. Companies with lots of cash on their books had "lazy balance sheets". Retailers with high debts and uncompetitive business models were still hanging on making decent profits, while lean and mean businesses like JB Hi-Fi were awash with cash.
The seemingly boundless confidence engendered by 16 years of unbroken economic growth was punctured and then quickly deflated by the global financial crisis. All of a sudden, ordinary Australians woke up to how indebted they were, and how vulnerable they might be if times turned bad. For a family with a $500,000 mortgage, two incomes are almost certainly necessary to keep the bank from foreclosing. Hence, even though Australia avoided a severe downturn (in large part due to a big, rapid stimulus package), consumers battened down the hatches. Australia’s household savings ratio went from negative (that is, we were borrowing more than we earnt) to levels not seen for a generation. The "new normal" was more modest, more sustainable, and far less lucrative for for large sections of the domestic economy. For those burdened by unsustainable debts, the end was nigh.
One of the side effects of the new normal, in this hypothesis, is Labor’s difficulties in convincing voters that Australia is the economic miracle of the western world. It just doesn’t feel like boom times — and indeed, with home prices falling and much of the economy in the eastern states flatlining, it’s not.
What happens when you subtract large amounts of government spending from an economy in the doldrums? The answer from Britain is: recession.
The United Kingdom has just stumbled into a double-dip recession, as recent official figures confirm, after bumping along at basically zero growth for the past 18 months. In late 2009 and 2010, Britain was experiencing a robust recovery. That recovery was financed by cheap money and a big dollop of giovernment stimulus.
But the troubles of the British finance sector, the ongoing Eurozone economic crisis and — importantly — the contractionary fiscal policy unleashed by the new Conservative finance minister, George Osborne, have all conspired to nip the recovery in the bud. With little in the way of domestic demand, all the cheap money in the world can’t drive new investment. The British economy is now experiencing its longest downturn in 100 years.
Is there a chance Wayne Swan’s surplus fetish could do the same here? Yes, there is. It’s true that Australia has a lot of room for interest rates to fall — a luxury not shared by the UK, where interest rates have been close to zero for years. And it seems almost certain that the Resevre Bank will lower interest rates at its next meeting, especially ow those inflation figures have come in below forecasts. But even if the RBA cuts interest rates by half a per cent, the extra stimulus that provides to the economy will have to work against the demand being subtracted by falling government spending.
Canberra is already bracing for a round of redundancies in the coming budget. 1,500 jobs are expected to go from the Australian Public Service as a result of efficiency dividend cuts already announced, with more pain to come on budget night on 8 May. Throw in the significant budget cuts planned by the various states — the Victorian government for instance plans to shed 3600 jobs, while Queensland is preparing a special budget, expected to result in thousands more redundancies — and you can see the potential for falling public spending to affect the rest of the economy.
Of course, things may well pick up in the domestic economy. All of this pain may have a happy ending, with interest rates falling and the private sector taking up the slack as government spending reduces. That’s the plan inside Treasury, and the fervent hope in Wayne Swan’s office. But if things go sideways, as they certainly could, then Labor may end up contesting the 2013 election in the midst of a mild technical recession. And all because Labor painted itself into a corner in its desperate desire to prove it could deliver a surplus.
That’s the problem with the debased level of policy debate Australia currently suffers from. In an environment where few in the media are willing to contest the talking points of either major party, demonstrably false arguments — such as the argument that Australia needs to move back into surplus in order to start paying down government debt — falsehoods are allowed to multiply, to the stage where they can end up dominating the debate.
Unfortunately, if Australia does end up in a mild downturn as a result of the government’s hairy-chested desire to prove its virtue in accountancy, it won’t just be Labor MP’s losing their jobs. Labor’s surplus vanity will also be measured in lower employment growth, and higher unemployment, particularly among our society’s most vulnerable. And why? All to prove Labor can "manage the economy", on a measure of management that is economically ludicrous in the first place.