What I wrote in Budget day: A long shot that didn’t pay out
I’m going to post a bunch of pieces I wrote for Crikey during my day at the Budget lockup. Here’s some pre-budget speculation. The reasoning still looks OK, but the government didn’t go for the rabbit from the hat I thought possible: a return to surplus in 2011-12.
The government’s pre-budget spin has focused on issues of credibility with promises of ‘no frills’. No doubt there will still be lots of carefully targeted spending initiatives, but that rules out most of the traditional kinds of rabbit from the hat, either unexpected tax cuts or big new spending programs.
The only serious surprise the government could spring tonight is a return to surplus much earlier than expected. The current tip is 2012-13, so the question to ask is whether it would be possible to return to surplus earlier than this.
The natural place to start is the Mid-Year Economic and Fiscal Outlook published last December. That projected a 2012-13 (cash balance) deficit of $16 billion, down from $28 billion in the 2009-10 budget. Given continued improvement in the economic outlook, at the same rate, getting back to balance in 2012-13 looks like it should happen automatically.
And there is every reason for the outlook to improve. The MYEFO estimates for growth and employment remained quite pessimistic. Unemployment was supposed to stay above 6 per cent through 2011-12 and growth projections were also weak.
So, with a bit of effort, the government ought to be able to announce a return to surplus before 2012-13. The political damaging decks-clearing exercise of a couple of weeks ago makes sense only in the context of such a payoff. The government took a series of big hits to get expenditure commitments of the books, when it could have just scaled them back.
The grand prize would be a return to surplus, or at least balance in 2010-11. That looks like a bridge too far. MYEFO cut the projected cash deficit from $57 billion to $46 billion, and an optimistic further revision might bring this down further to $30 billion before any budget measures. That’s too much to find in budget cuts.
The same logic, though, says that a return to projected surplus by 2011-12, four years ahead of the original schedule, is at least a possibility. The MYEFO forecast was $31 billion down from $44 billion in the 2009-10 Budget. So, the starting point for the Budget forecast ought to be below $20 billion. The government claims, in past budgets, to have found around $55 billion in savings (this number is expressed over a four-year horizon, so it amounts to around $10 billion a year).
If that $10 billion could be matched in a single year through general efficiencies, the deficit would be below $10 billion. At that point, the backflips announced recently would start to make sense, but would probably not be enough to close the gap.
There is one big promise the government could ditch to bridge the gap. The third stage of the tax cuts promised by John Howard in the 2007 election campaign and matched by Kevin Rudd, are due to start on July 1, at a cost of $4 billion. If they were deferred for a couple of years, the surplus might be reached.
Politically, this would be a high-risk strategy. But economically, a rapid return to surplus makes more sense than ever in the light of the European sovereign debt crisis and the likelihood of future global macroeconomic instability. The government’s willingness to introduce a large and early fiscal stimulus helped to protect Australia from the impact of the recent crisis. But running big deficits to fight recessions is sustainable only if the budget is in surplus the rest of the time.
In this respect, the Howard-Costello government deserves one or two cheers out of three. In a period of sustained prosperity, it managed to run fairly consistent surpluses. But the electoral strategy of running the surplus down to zero to deny Labor a ‘war chest’ to fund campaign promises meant that the surplus was smaller than it should have been. Most of the reductions in debt came, not from genuine savings, but from the sale of income-earning assets such as Telstra. The Future Fund was a late attempt by Costello and Treasury to keep some of the surplus and deserves applause.