STONE the crows! Swannie can’t take a trick.

Why surpluses are essential

Stone the crows! Swannie can’t take a trick.

Tony Abbott argues that Treasurer Wayne Swan penalises families by being profligate with the public purse:

The reason why he is now looking at cuts, including more means tests, including a means test on childcare, is that he doesn”t have the guts to cut wasteful and unnecessary government spending.”[i]

And on Friday a bunch of business leaders and economists tackled the Treasurer for sticking to his promise to provide a surplus next financial year. As respected economist and former Reserve Bank board member Bob Gregory put it, “The Treasurer and the government have hung their credibility on a word that doesn’t mean that much at the moment and is only being used for a political purpose.”[ii]

Standard stuff in the rest of the Fairfax press, (Tim Colebatch called the Treasurer’s “surplus fetish” “hari-kiri” in the SMH on Friday) but when it appears in the Fin![iii]

The Treasurer has every right to feel aggrieved. For a start, if he announced now that it was all too hard and that the surplus could wait until the economy picked up he would cope a hiding for inconsistency.

And he would also ensure that surpluses are off the agenda indefinitely because it is always easier for governments to spend than save and for social engineers to want to pour other people’s money into the trough they drink from.

But, before anybody feels sad for Swanny, he is also having billions of bobs each way. So, for that matter is the Opposition.

Both sides of politics are talking about spending less while promoting new programs that have more to do with equity or bribery (depending on what level of welfare you think the state should provide). According to The Australian, Wayne Swan will make a national disability insurance scheme the budget’s big-sell and the Opposition is all but signed up to the program, which will require $8bn in new money by the end of the decade.[iv]

To which Mr Abbott adds a nanny subsidy – a snip at an extra $545 million – saying it is worth investigating.[v] (Gosh, there is no chance people in the Opposition’s target audience will hear the word “subsidy” and think this is a done deal is there?)

And, before anybody starts banging on about the “automatic stabilisers” that push state spending into deficit in tough times and repair the budget when the revenue rolls in, both these programs are utterly independent of the state of the economy. They, like all health and welfare spending plus industry assistance (ever hear a car company saying things were great?), are ever-growing outlays.

If government spending is supposed to help us through hard times, how is it that the $50bn Canberra spent on cushioning us against the GFC, none of which went to bail out banks, appears to have had no enduring effect? A few years later in the midst of an export boom governments are struggling to balance their budgets. According to MYEF0 this year’s Commonwealth deficit alone will be $37bn. [vi]

The brutal reality is that the generality of increased government spending impedes rather than increases growth.

If Messrs Swan and Abbott can find cuts to fund their new programs, while restoring the budget to sustainable surplus, good luck to them But Wayne Swan will get no credit if he delivers the $1.5bn surplus he promises for 2012-2013.[vii] Certainly, it is an heroic improvement on this year’s deficit but it will leave him open to charges that it is fiscal sleight of hand.

To prove he is serious about economic management, Wayne Swan needs to promise hefty surplus in May with the promise of ever-larger ones to follow. And Tony Abbott must commit to matching it.

What is important is that government is seen to live modestly within its means, without taking more of our money – year in and year out. A surplus may not seem to matter all that much given Australia’s relatively low public debt. According to the World Bank, our central government debt equals 24 per cent of GDP, slightly less than a third of the US and UK figures and an eighth of Japan.[viii]

But, as debt grows it becomes ever harder to pay off. As Peter Costello put it, when he announced the Commonwealth’s $96bn debt inherited from Labor was finally paid back:

The effort to correct failed economic policy takes much longer than the failure. It takes years of good government to undo short periods of bad government. Beware of bad government. It takes a long time to recover from it.[ix]

This is why both sides of politics should stick to surpluses – which will require something we have not seen much of from governments since the first Howard budget – discipline.


[i] ABC TV, Lateline March 29 , “Opposition underwhelmed by ‘tough budget’ promises,” @ recovered on March 31

[ii] Claire Stewart and Gemma Daley, “Surplus ‘at any cost’ attacked,” Australian Financial Review,” March 29

[iii] Tim Colebatch, “Swan’s foolish surplus fetish,” Sydney Morning Herald, March 30

[iv] Sue O’Reilly, “Disability plan to be fast-tracked,” The Australian, March 31

[v] Lenore Taylor, “Nanny rebate would cost $2b,” Sydney Morning Herald, March 31

[vi] Australian Government, “Mid-year economic and fiscal outlook 2011-2012,” recovered on March 31

[vii] MYEFO ibid

[viii] World Bank, “Central government debt,” @ recovered on March 31

[ix] Peter Costello, “Debt free day,” April 20 2006 @ recovered on March 31

recovered on March 31