To understand the political uses of budget surpluses, we need to go back to the early 1980s when Australia and New Zealand governments self-imposed a fiscal straitjacket.
They decided that running a surplus constituted the principal evidence of sound financial management - that a government’s reputation as a good economic manager rested on delivering surpluses year after year.
At the same time in Australia we also asserted that debt was bad and that governments should aim to be net debt free. We went further than most countries along this spectrum in the early 1980s and late 1990s-2000s.
Having an annual surplus has become considered as a key indicator of good economic management that has been a norm in Australian politics for 30 years.
Budgeting for surplus is not as common at state level, with states often overspending (slightly) to meet their commitments.
But they also have a much more limited revenue base and are subject to Commonwealth largesse.
But what is the real relationship between a surplus and good financial management? This is a very complicated question.
It’s not just a budgetary matter of how much you’re spending versus how much revenue is coming in. That is clearly one dimension. And to assist with budget management governments have in recent years attempted to hold expenditure down (plateau spending) with the exception of the stimulus packages associated with the global financial crisis.
In reality, the large deficits we have seen in recent times (over $50 billion or 15% of expenses per annum) were largely caused by sudden declines and volatility in revenues - declining well below previous levels (say in 2007) and well below budget estimates of revenue (for instance in 2008-09 when revenues were $22 billion down).
Revenues have recovered to some degree but are still some $45 billion down on former estimates.
The fiscal balance is not the only factor causing a surplus or deficit. We need to consider other important dimensions not necessarily associated with the annual budget numbers.
These include: What is the growth rate of the economy? What is the inflation rate? What is the level of investment and business confidence? What is occurring with consumer spending? What is the level of employment and unemployment? What is the level of social assistance and payment benefits going out into the economy? How much is pre-committed to ‘middle-class welfare’ through family payments and income maintenance, much of which is ‘tax-income churning’?
These are all other highly significant factors that will affect that simple fiscal balance.
So it’s not just a question of good financial management of the budget (expenditure and taxation) - that’s only one component, and often only know late in the budget process.
There are all these other macro economic and social components that will affect the outcome and for which the government is ultimately responsible for as well.
Reducing the argument
We often reduce economic management to arguments over the existence of a surplus or otherwise.
Having a surplus is now taken quite simplistically as a signal that a government has the other components of economic management in order.
It is taken as indicating there is a strong link between the strength of economy and the strength of the government’s fiscal position or strategies.
Frequently this then all boils down to one figure - do we have a fiscal surplus or a fiscal deficit?
So in today’s political context it is now almost inconceivable that a government isn’t planning to aim for a surplus. There is almost no political alternative.
Shadow Treasurer Joe Hockey this week claimed the Coalition, if it were in power, would be able to achieve surplus by the end of next year’s budget.
But to do that he would have to cut out another $25 billion from the expense side - so some big stakeholders such as the states, the public service or those on benefit programs would have to suffer substantial cuts. And if one group was exempted (say pensioners) then higher cuts would fall on the other sectors.
A government would have to take a really sharp razor to the public service or some of the government’s ongoing programs.
Surplus as good government
The surplus has become a sort of leit-motif of good government but it doesn’t need to be. We saw in 2008-09 governments were quite happy to run a deficit, and in those years they didn’t face a barrage of criticism because of the worries of business and the community generally around the global financial crisis.
We have gone from a position where we were carrying forward a massive deficit of $30 billion in 2008-09 (close to 10% of spending), to $53 billion in 2009-10 (or 15% of spending), and what looks like $50 billion now in 2010-11, up from an original $40 billion.
If you add these three substantial deficits together, it ends up being around 50% of the annual budget.
Treasurer Wayne Swan may have to admit on budget night this year’s deficit has increased, and that the deficit for the year ahead was going to be around $12b in 2011-12, but now is going to be $20b or even $30b this year.
This is admitting the hard incontrovertible evidence.
But in the present political environment he cannot really say he is not aiming to have the budget back into surplus by 2012-13. If he couldn’t promise a surplus in 2013, then Joe Hockey and Tony Abbott would lambast him.
That is the position we’ve got ourselves into with the fiscal strictures of this discourse about ‘surplus equals good’ - ‘deficit equals bad’. It’s almost like an Orwellian chant from Animal Farm.
Labor in government often has trouble convincing the electorate it is a good economic manager.
Since Whitlam Labor governments have had to strive to prove that they are good and tough economic managers.
The reformist Hawke and Keating governments managed to do this from 1984-85 through to 1989.
They delivered a number of budget surpluses while at the same time they were also restructuring the economy. They felt they had to prove they were capable managers, they did prove it, and they got considerable kudos for doing it.
People tend to accept without much question that the Coalition will be more economically responsible. But if you look at the spending patterns of the Howard government from around 2002 onwards, there was a lot of revenue sloshed around by Costello and Howard for five or six years.
Revenues were growing exponentially and the government chose to increase spending accordingly, much of it used for expedient vote-buying purposes.
People are now saying (and some said at the time) that if some of the windfall money had been used productively rather than expanding middle-class welfare, expanding non-targeted benefits such as childcare for non-working carers, baby bonuses, then we wouldn’t be in such a bad fiscal position now.
There is also the Sovereign Wealth Fund argument that we should have been saving the surplus revenues and then be investing and earning money, rather than relying almost entirely on taxation for meeting government programs.
So is Wayne Swan just being paranoid about the need for a surplus?
I believe the Australian electorate wants government to balance the books in the immediate future. He’s right to aim for that.
The Coaltion would have a field day politically unless Labor committed itself to a subsequent surplus, and then delivered.
In holding onto the promise to bring about a surplus budget, Labor is being realistic and hard-nosed about electoral expectations and about the political situation of hyper-adversarialism they are now in.
But one consequence will be that there will not be much new money to commit to the things they want to do on their policy agenda.
The Commonwealth facing a very difficult position because many claimants are seeking and expecting increased funding.
The states, welfare beneficiaries, aged pensioners, public service departments and program providers all think they are deserving cases for some mythical largesse - which makes this a difficult budget to construct.
How much new funds will really be spent on mental health or reducing health waiting lists? It might be nowhere near enough. How much can be saved by pushing welfare to work? How much can be squeezed from middle to upper income earners before there is a tax revolt and electoral consequences.
States are currently suffering because the GST has declined, and they will be seeking some recompense from the federal government.
But GST funding has little to do with the deficit-surplus argument. The GST come in and goes out to the states.
Less GST is not due to federal tightening, but due to people tightening their own consumer spending.
Presently the federal government is talking about ‘fiscal consolidation’ - meaning forcing the budget to balance at all costs.
They are trying to squeeze as much revenue as they can by ‘skimming’ any low hanging revenues or hunting for soft targets - such as closing some tax loop holes, more means-testing, perpahs capping the private health insurance rebate, lifting HECS repayment levels etc.
These are all ways of ‘nickeling and diming’ the potential revenues to try to drive increased revenue out of the system without making any substantial tax changes or shifting tax rates for business or individuals. It’s laregly all smoke and mirrors in the tax system.
Meanwhile the government are trying to reduce expenses by around 2% of GDP, so expect some ‘savings measures’ (cuts) to be thrown in for good measure in this budget.
Only by upping the tax take by 2% GDP and holding down spending by 2% of GDP will the government be able to produce the magic pudding of the surplus by 2013.