Labor Stakes It All On Surplus


Only the real political tragics know what the MYEFO is. But right now, that ungainly acronym is the most important word in the Canberra bureaucracy.

"MYEFO" stands for the Mid-Year Economic and Fiscal Outlook, and is a part of Peter Costello’s Charter of Budget Honesty. It’s the half-yearly budget update that the Department of Finance prepares in November each year — six months after the federal budget in May. As the government website explains, "the purpose of the MYEFO report is to provide updated information to allow the assessment of the Government’s fiscal performance against the fiscal strategy set out in the current Budget Papers."

In other words, the MYEFO is the half-yearly budget scorecard. It tells us whether the government can expect a bigger surplus or deficit than previously thought. If tax revenues are flowing in faster or slower than expected, the MYEFO will update the budget forecasts to reflect this. If the government has gone on a spending spree, the MYEFO will also reflect that extra spending.

For several years in a row towards the end of the Howard government, the MYEFO regularly updated Peter Costello’s budget forecasts to reflect stronger-than-expected tax takes. In 2005, for instance, the MYEFO turned up an extra $4.1 billion in revenue. A delighted Howard government was able to deliver strong tax cuts the following year.

Last year’s MYEFO was a different story for Wayne Swan and Penny Wong. Tax revenues were $4.8 billion lower than expected. There was also an extra $2.3 billion in unforeseen spending on Queensland’s floods and cyclones. The government managed to pass the carbon tax, and decided to spend an extra $2.9 billion in carbon compensation.

All of this meant that the 2011 MYEFO was a whopping $14.5 billion further in deficit than the 2011 budget estimated. Australia’s economic performance was actually quite good, as I argued at the time. But the Opposition harped on the $37 billion deficit outlined in the MYEFO data. Much of the media followed suit.

When budget night rolled around in May earlier this year, Wayne Swan was able to announce a surplus for this coming year. A budget is a forward-looking statement, of course, so this means that Swan was banking on being able to hold spending below revenue for the first time in four years.

To do this, the government undertook some serious savings measures, including an across-the-board "efficiency dividend" that cut spending in every government department, as well as some big cuts to defence. There were also increases to revenue measures, for instance by removing superannuation tax breaks for the wealthy. All up, Labor needed to find savings of close to $40 billion in order to turn the budget around.

In most years, the MYEFO is of little political significance. But the politics of surplus and deficit mean this year’s MYEFO is no ordinary update. Labor has invested vast amounts of political capital in its promise to return the budget to surplus. Spooked by the Opposition’s relentless attacks on its deficit budgets, and mindful of the public’s scepticism of Labor’s credibility as an economic manager, Julia Gillard and Wayne Swan have staked much on their claim to be able to deliver a surplus. This means that even though a small deficit would make no meaningful difference to the state of the economy, the government continues to make a plus sign in the public balance sheet its single most important policy goal.

The forthcoming MYEFO thus looms as the acid test of that fiscal discipline. If tax revenues come in roughly on forecast, the government should be fine. But if they are again lower than the budget estimates, the government will need to find even more savings in order to deliver the magical surplus.

And revenues almost certainly will be down. The mining boom is slackening off, reducing company tax receipts from big mining companies. As the Reserve Bank has noted, the economy is in general more sluggish than expected, also affecting tax income. As a result, the government needs to cut spending further than it expected in May.

Labor’s desperate attempt to bring in a surplus is starting to cause real damage to many areas of public policy. On Tuesday we looked at Australia’s shameful record on combating poverty, including the recent decision to cut payment rates to approximately 100,000 sole parents. The current rate of the Newstart dole payment is fundamentally inadequate for those trying to live without extra support. These issues could be addressed at a modest extra cost to the budget. But that would mean spending more money.

The government’s efforts to bring in the surplus extend further than refusing to increase the rate of Newstart. All sorts of piggy banks are being raided. Government-owned health insurer Medibank Private is being asked to pay the Treasury a $300 million special dividend. There has been speculation of yet another hike in tobacco excise. And Penny Wong announced $550 million in public service "efficiencies" in September.

Perhaps the most serious examples of the government’s surplus fixation comes in the form of a freeze on all government grants. Existing grants programs that were fully funded in the May budget have suddenly been put on hold, to make sure no more money goes out the door before the MYEFO. All new grants have been halted for programs such as the $1 billion Clean Technology Innovation Fund.

The grants freeze has been especially disruptive for science and research, which relies on highly-competitive grant funding to finance research programs and industry partnerships. The government has announced that it has put at least $240 million in Australian Research Council grants on a "pause".

The ARC is Australia’s premier scientific and academic research body, funding the lion’s share of university research in areas vital to our nation’s future. This includes mathematics, the physical sciences, economics, climate change and environmental science, the social sciences and the humanities. The freeze has halted key ARC funding rounds, including the high-profile Linkage and Discovery rounds that can make or break the careers of scientists and academics.

Universities and academics are understandably dismayed. In an article today by Fairfax’s Peter Martin and Ben Priess, University of New South Wales Vice-Chancellor Fred Hilmer said that many researchers were preparing to leave the country, as they would no longer have jobs for 2013.

"These are the top 20 per cent because only one in five succeeds," Hilmer said. "They are mainly young, this is crazy."

"Researchers are preparing to leave. While we might think we have a budget problem Germany and France are actually increasing their research funding. They won’t come back."

The damage caused to Australia’s research and innovation by the freeze is likely to outlast any temporary halt on investment. Grant funding rates are already extremely low, leading to high attrition rates for talented researchers. Researchers typically have grants to last between one and three years, meaning those coming to the end of their grants this year will be left without new funding, forcing many to leave the workforce or move overseas.

Universities Australia, the chief lobby group for the university sector, was concerned enough to issue a media release yesterday. Universities Australia Chief Executive Belinda Robinson slammed the funding freeze, stating that "this short-term, stop-go approach to funding and public investment decisions is becoming an increasingly alarming feature of the modern budget process and is seriously eroding confidence in the policy-making process."

"We are now at the point where not only is everything up for grabs once a year through the budget process, but every six months through MYEFO," she continued. "Unfortunately, no matter the outcome from MYEFO, the freeze is already causing damage as universities move to backtrack on recruitment and investment commitments that they can no longer afford."

The government’s pursuit of a surplus at any cost is starting to look very costly indeed. Australia should be spending more on research, not less. The return on government investment of high-quality peer-reviewed research is massive, from cancer vaccines to climate change models to solar cells. Disrupting this research will therefore have big opportunity costs.

The tragedy of the situation is that is completely unnecessary. The only reason for the government to deliver a surplus is political. Economically, a slightly looser budget position would have essentially no impact. And as for those troublesome international bond markets? They’re so keen on Australian government bonds that the latest 10-year bond auction was oversubscribed by 405 per cent.

Ben Eltham is New Matilda's National Affairs Correspondent.