Why Swan Deserves Kudos – And Won't Get It

It’s a measure of the parlous standing of the Labor Party in Australian politics that this budget will almost certainly not be seen as a triumph. But for Wayne Swan, at least, I think it is. The Labor Treasurer has pulled off a savings program the likes of which Peter Costello could never have delivered.

Think about it: faced with one of the most dangerous economic situations since the Great Depression, the Labor government had the courage to spend up big to stimulate the economy — but also the discipline to return the budget to surplus, far faster than any other developed country.

But events have turned against Julia Gillard’s government. With Craig Thomson and the Health Services Union still dominating the headlines this morning, and with the electorate seemingly deaf to any good news that the government tries to announce, it’s likely this budget won’t make much of a dent in Labor’s standing among voters.

That’s a shame, because this is an economically sound budget that deserves a far better political reception than it will likely receive.

Take a look at the big picture macro-economic forecasts in Budget Paper 1 and you’ll find a surprisingly optimistic assessment of Australia’s economic position. Gross domestic product is expected to grow by a healthy 3.25 per cent next year, and 3 per cent the year after, which will hold unemployment at around 5.5 per cent for the foreseeable future. And inflation will remain "well-contained", to use the Treasury’s phrase, a potentially hopeful code word for those seeking further rate cuts from the Reserve Bank this year. CPI will be only 1.25 per cent in the year to June this year, before rebounding to a still manageable 3.25 per cent next year under the modest influence of the carbon price.

Speaking of the carbon tax: its rolling out is not expected to have a "material impact" on the domestic economy. Treasury thinks it will have essentially no discernible impact on unemployment, for instance, and expects investment in the resources sector to continue apace.

And the mining boom shows no sign of running its course. Investment is estimated at $120 billion in 2012-13 alone, with a resources investment pipeline approaching $450 billion. That’s a mind-boggling half a trillion dollars in expected investment for giant projects like Olympic Dam in South Australia, not to mention the myriad of coal and gas projects in Queensland and Western Australia.

The robust optimism of the budget papers is underpinned by a nuanced analysis of the state of Australia’s domestic economy, which the boffins at Treasury think is in much ruder health than many (including yours truly) believe.

For a start, they argue, the resources boom will spill over to other sectors such as construction, mining services, and engineering. "The patchwork economy is mufti-faceted," they argue, pointing out that there are non-mining sectors that are still doing well, such as health care, education, social assistance and professional, scientific and technical services. Treasury writes that there are even "pockets of strength" in manufacturing.

In summary, while "there is a complex structural transition occurring in the economy", it is still growing at "around trend". Even leaving out mining, the non-resources part of the economy will still expand, albeit at only 2 per cent or so. Consumers won’t be binge-spending 2007 style, and this will contribute to flat housing demand and slightly negative dwelling investment. But household consumption will grow at 3 per cent, a good sign for the long term as householders focus on rebuilding their savings and paying down debt. Similarly, wages will grow modestly but sustainably, at around 3.75 per cent.

It all adds up to an economy that is waving, not drowning. The fundamentals, say Treasury, remain strong, and the outlook favourable. Don’t get your hard hat out yet.

Because of this, the government is in rather better shape fiscally than might have been assumed.

The surplus, a small but respectable $1.5 billion, has been achieved by a roughly 50-50 mix of genuine spending cuts and tax rises, as well as what analysts have been calling "smoke and mirrors". Where possible, the government has moved all the spending it can into the current 2011-12 financial year — for instance, in measures like the carbon tax compensation, which will begin to roll out within weeks.

It has also achieved a lot of consolidation by holding spending roughly steady in nominal terms, and allowing tax revenues to increase. Thus, spending is going to be $373 billion in 2011-12, and $376 billion in 2012-13. That’s a fall in spending in real terms — a fall of 1.8 per cent in fact — and it means public spending is subtracting activity from the economy. But it also means that in the short term the front-loading of spending that was to have happened in 2013 will now flow into the economy immediately. This may well act as a kind of mini-stimulus that will help consumer confidence and flush cash into the economy.

On the revenue side, there are yet more downgrades in expected tax receipts, as taxation returns slowly from the depressed levels of 2009. There’s been a $5.8 billion downgrade since November’s MYEFO alone, expected to flow through to $18.7 billion less than forecast out to 2014-15. In his press conference, Swan noted that the Commonwealth is missing something like $150 billion in taxes it expected to collect since the onset of the GFC. This means that while tax receipts will grow by around 11 per cent this year, they are still coming off a low base.

But for those worrying about the impact of falling government spending, Treasury is basically saying "relax". While public final demand is expected to fall in 2012-13 and remain flat in 2013-14, the economy will continue to grow despite this.

One of the reasons is that government spending is only around a quarter of the domestic economy; Treasury thinks there will be private sector demand to make up for the decrease in public spending. Another reason is that Commonwealth spending cuts will be partially offset by modest growth in state and territory spending, "notwithstanding the planned fiscal consolidations announced by most states".

So, despite the obvious concern shown by the Reserve Bank this month, when it lowered interest rates by a half percentage point in an attempt to revive stalling economic growth, the assembled wisdom of the Australian government seems to be that advanced by Douglas Adams in The Hitch-hikers Guide to the Galaxy: "don’t panic".

Can we take Treasury at its word? That’s the key to any substantive analysis of the buidget itself. There seems every chance that the budget forecasts are too rosy. Treasury has a habit of under-forecasting the swings and roudabouts in the economy. In the boom years under Peter Costello, Treasury regularly under-estimated the size of tax receipts, giving the Howard government surprise bonus surpluses. In the bust years after 2008, the forecasts have been on the other side, with tax receipts regularly lower than expected.

A more prudent budget would have taken this into account and returned to surplus more gradually, and perhaps even considered a 2009-style cash stimulus to try and kick start consumer confidence again. 

But the political constraints of the Gillard government in 2012 (for which Swan and Gillard are as much to blame as anyone) meant this was impossible. You could perhaps argue, therefore, that this was the best result possible given the current popularity of the surplus fetish. Growth may well be lower than "around trend". How much lower will be the critical issue for the Australian economy. We’ll find out next year, provided no nasty surprises engulf the global economy.  

Budgets are by definition political documents — so how does this one stack up politically?

That depends on what you think about orthodox economic management. Because if we are indeed grading this budget on the scorecard of what Kevin Rudd once called "fiscal conservatism", then it really is a triumph.

It’s tempting to consider how history might have judged Wayne Swan and Peter Costello if their places had been reversed. If Wayne Swan was a Liberal treasurer, he may well be hailed now as a kind of economic genius, a man who faced down the demons of global crisis, and reduced the size of government in a way not seen for two decades. If Peter Costello’s record was that of a Labor treasurer, his profligate spending in the mid-2000s would likely have been decried as an unsustainable run-up in the long-term structural deficit: a spend-thrift light-weight who wasted the fruits of the long boom. Of course, it hasn’t worked out quite that way for either of them.

That’s the point about being a Labor treasurer in this country: it’s hard to get voters, business and the media to see your achievements in their true light. It doesn’t help that Wayne Swan is deeply uncharismatic. At his press conference today, he only occasionally rose above meek self-effacement, and then only to deliver a determined one-liner or two.

But if we were to judge Swan purely on the neo-liberal calculus of orthodox fiscal policy aimed at maintaining economic growth, his performance is hard to fault. Australia has a AAA credit rating from all three major ratings agencies. Our government bond rates are at near all-time lows. Whatever the electorate thinks of him, the numbers say markets love Wayne Swan.

And he’s done all this while still finding funding for traditional Labor priorities, like the National Disability Insurance Scheme, payments for families, funding for indigenous development, dental and mental health, communications infrastructure, pricing carbon, not to mention lowering taxes for nearly everyone. He has even raised the base rate of the pension. It’s hard to understand the hostility out there in the community to this government’s economic management. It goes to show that some people just don’t believe Labor can ever be trusted with the nation’s purse-strings.

If there are criticisms you could make of this budget, and indeed of this Labor government’s economic policies, then they stem most plausibly from the left, not the right.

Labor’s political obsession with balancing the budget and keeping the size of government small has meant it has ignored historic opportunities to invest in Australia’s future productivity, for instance through genuine funding increases to higher education, scientific and medical research, in nation-building infrastructure, in innovation in small firms throughout the economy, and in a far more radical approach to decarbonising the economy. In fact, for me, the real tragedy of Wayne Swan as Treasurer has been that he has been so fiscally responsible. Opportunities to set this country up for the inevitable resources crash have, I fear, largely been missed.

But these are quibbles you won’t hear from anyone in the mainstream media. Nor are you likely to hear them from Australia’s business community, which remains sadly myopic and self-centred in its approach to public policy debate. Indeed, such is the nature of the current confusion, it is Labor that is currently the major party proposing a company tax cut, while the Liberal Party proposes to actually increase company tax (with practically no criticism from the business lobby for its stance).

Given the ingrained hostility against this government, its achievement in charting a middle path for the economy in difficult times is one that will come to look more and more impressive in time.

As for tomorrow’s reaction: get ready for more unhinging.