The penny has dropped. The Australian government is spending too much and there is not enough revenue to close the gap and return a surplus any time soon.
What surplus is forecast arrives in financial year ending in June 2021, is a ginger 0.4% of GDP. Then it will start declining again, on current forecasts.
The recognition of this is the big shift at the heart of the Mid-Year Economic and Fiscal Outlook released yesterday by treasurer Scott Morrison. Australia’s economy does not have either the economic momentum or the policy firepower to continue the pursuit of near-term budget surpluses, an-ever frustrated exercise at the core of national political debate since the 2007-2008 financial year.
Morrison underlined this with his quirky characterisation of the debate that focuses so insistently on surplus delivery. He said it was like “the family saying ‘are we there yet, are we there yet?'”
He added: “The path back to budget balance is similar to that. We need to take a safe and careful route and one that does not put at risk our jobs and growth.”
But here’s the thing. Parents with nippers in the back seat who ask “Are we there yet?” know that conversation only ends in one way.
Put a sock in it, you lot. We’ll be there when we get there.
Perhaps Morrison was betraying that frustration has set in with the continual stymieing of the Coalition’s grand plans for a return to surplus. This has had two inseparable but distinct causes: an inability to control spending through delivered policy, and revenue being hollowed out, chiefly because the downturn in China came on a bit faster than most people were expecting.
Irving Kristol, a favourite of conservative purists, famously said that a conservative was a liberal who had been mugged. To butcher the aphorism, the budget hawks in the Coalition have been mugged by economic reality.
The reality is as a mid-sized, open economy heavily reliant on exports, Australia is at the mercy of certain global economic trends and decisions taken by some companies and foreign governments – especially China’s.
The reality is in this environment there is a limit to government power over how Australia’s economy performs and the prices it secures for its experts, and therefore over taxation income that flows onto the government books on a year-to-year basis.
The reality is that you can either raise new taxes or slash spending, and in the current political environment, with a tricky Senate cross-bench, both are difficult.
Now this has sunk in, there there appears to be bipartisan agreement on a major economic issue, and that is: surpluses are out of reach for now.
The surplus wars have left significant political casualties. The Coalition government under Abbott and Hockey, no voter will forget, promised to end Labor’s “debt and deficit disaster”.
So unshakeable was their belief in the importance of returning the budget to surplus that they bet on a strategy which slashed spending across health, education, welfare, and science, perhaps believing they would be rewarded by an equally tough-minded public which understood the need for a fiscal scorched earth policy.
The strategy backfired horrendously and the 2014 budget will be remembered as one of the most poorly-designed and poorly-sold acts of economic management the nation has seen.
And who can forget the reception for Wayne Swan in 2012, when he stood before the parliament and promised surpluses for years to come, in a budget speech opening that is worth reprinting at length:
The four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies.
In an uncertain and fast changing world, we walk tall — as a nation confidently living within its means.
This Budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time.
As they say on the internet: fkn LOL.
This drew much guffawing at the time from the Coalition ranks. There’s not so much crowing about better fiscal management now.
None of this, for a minute, diminishes the importance of rebalancing the budget; in fact, the practical realities underline the importance of Australia’s ability to protect itself from economic shocks through prudent budget management.
But it does leave some very tough questions hanging in the air. As Deutsche Bank wrote in a note to clients yesterday:
“The challenge, of course, is that a structural budget deficit ultimately requires structural solutions (i.e. a fiscal tightening). That is easier said than done – especially given the backdrop of still sub-trend GDP growth, a declining terms of trade and pressure on household incomes.”
Add to that “a well-understood economic message and the ability to deliver politically”, two things which have been so damagingly absent through the last two parliaments and under four prime ministers.
“We suspect part of the intention behind today’s fairly muted Budget update was to leave last week’s Innovation Statement as the key narrative heading into the Christmas break,” was the verdict from Morgan Stanley, “whilst also drawing less attention to Australia’s growth and Budget challenges, given the risk of spoiling the improved consumer and business sentiment.”
The point is that it suits Malcolm Turnbull to keep the current, relatively buoyant, economic conversation around innovation and agility to persist.
But a billion-dollar outlay on innovation that’s mainly targeted at government programs is not going to address the budget’s structural issues. With the wage price index at the lowest point in its history, not even the old lazy trick of bracket creep is any use.
More from Deutsche Bank yesterday:
Perhaps that means there is a case for re-thinking Australia’s broader approach to setting fiscal policy. After all, it would appear that managing fiscal policy for the medium-term and using medium-term forecasts to do so, has not worked out quite as well as might have been hoped (with Treasury now forecasting twelve years of deficits – 2008-09 to 2019-20).
“Has not worked out quite as well as might have been hoped” is investment bank economist’s language for “it’s rubbish, hey”.
Blowing up the budget process might be extreme but it does underline the point that someone needs to come forward with some policy ideas.
Malcolm Turnbull wanted to unleash an ideas boom in the private sector to drive the next level of economic growth. Something similar in political circles would be most welcome, too. Much of the anticipation around Turnbull’s ascent to the prime ministership has been about his command of ideas and his inventiveness. Now he has a chance to prove it.
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