Rarely have economic commentators been so united on an issue arguing that the Australian Government should not aim for a budget surplus this year. From John Quiggin to Warwick McKibbin, the OECD to the IMF, respected economists across the political spectrum have taken the view that the best economic approach is not to try and fill the 2012-13 government revenue shortfall by making further budget cuts.

Vintage Knight, circa May 2009….

From a macroeconomic standpoint, there’s barely any difference between a $1 billion surplus and a $1 billion deficit. Far more important is the fact that when the Global Financial Crisis hit, we increased spending: supporting jobs through household payments and infrastructure programs.

In the past five years, we’ve found savings that total $138 billion. We boosted government spending when private demand fell, and cut spending as private demand recovered. Cutting spending isn’t easy. When we means-tested family tax benefits and the Private Health Insurance rebate, the Coalition said we were playing ‘the politics of envy’. When we phased out the outdated Dependent Spouse Tax Rebate (a measure that discourages secondary earners to work), we were accused of attacking the family. When we reduced the Baby Bonus for second and subsequent children, Joe Hockey drew comparisons with China’s One Child policy.

One marker is whether spending falls in real terms (that is, adjusting for inflation). As economic commentator Stephen Koukoulas has observed, during their combined total of more than twenty years in office, the Fraser and Howard governments never once cut their real spending.

By contrast, Labor governments have cut real spending on five occasions since the mid-1980s. Painful as it is to admit, aiming for a surplus in 2012-13 probably instilled some additional discipline into the budget process – even if we don’t end up achieving the target.

Had revenue as a share of GDP been at the same level as in the early-2000s, these spending cuts would easily have ensured a 2012-13 budget surplus. Yet company tax revenues have recently been hit by a double-whammy: lower commodity prices (caused by a softening of world demand for our minerals), but a high dollar (due to a demand for our AAA-rated government bonds). Revenue for 2012-13 is $20 billion down from what Treasury projected back in 2010.

To understand the recent announcement by Wayne Swan that a surplus will be difficult to achieve, it’s worth comparing taxes as a share of GDP with the Howard Government. If we had Howard Government revenue today, the current budget would easily be in surplus.

Conversely, if the Howard Government had today’s revenues, many of their budgets would have been in deficit. From an international perspective, Australia’s economic performance remains in the top tier, with better growth and unemployment numbers than almost any developed country.

But overseas problems have directly hurt Australian government revenues through an unexpected channel: as European demand for our government bonds drives up the Australian dollar, company tax receipts fall.

The debate over the 2012-13 surplus risks obscuring the bigger picture, which is that sensible Keynesian fiscal policy means more government spending in bad times, and less in good times.

That’s why we boosted spending to save 200,000 jobs in the Global Financial Crisis, and it’s why we’ve cut spending in recent years. The essence of good fiscal policy is a willing to switch tack if the economic outlook changes. Given the $20 billion shortfall in revenue this year, it may not make sense to aim for the same target. As Keynes himself said, ‘When the facts change, I change my mind – what do you do, sir?’.

Andrew Leigh is the federal member for Fraser, and his website is www.andrewleigh.com.

Comments on this post will close at 8pm AEDT.

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    • AdamC says:

      09:25am | 07/01/13

      Andrew, why did you (ghost-)write an article so critical of your own Treasurer?

      “Rarely have economic commentators been so united on an issue arguing that the Australian Government should not aim for a budget surplus this year.”

      So why did Wayne Swan do just that? Are you suggesting that he ignores expert advice? How can we have a Treasurer who disdains qualified opinion? 

      “From a macroeconomic standpoint, there’s barely any difference between a $1 billion surplus and a $1 billion deficit.”

      So why did Swan make such a big deal of achieving that $1bn surplus? Are you accusing Wayne Swan of not understanding basic macroeconimic? How can we have a Treasurer who cannot grasp the budget basics?

      Anyway, I am glad that even you, a left wing Labor MP, agrees with me (not to mention most of the rest of Australia) that Wayne Swan is a terrible Treasurer. Maybe they could give you the Shadow Treasury gig when Labor loses the next election?

    • Tim says:

      10:15am | 07/01/13

      Adam C,
      Is that all you got from the article?

      At least by agreeing with Leigh you’re admitting that the vast majority of Coalition members have made some shocking statements on this issue and on general spending cuts as mentioned in the article as well.

      Good on you, there’s been plenty of stupidity going around.

      And it would be interesting if Leigh was given Treasury or Shadow Treasury in the future. Imagine if we had a respected economist who actually knows what he’s talking about in charge? Unheard of.

    • AdamC says:

      10:47am | 07/01/13

      Tim, I am not ‘admitting’ anything. I do not speak for any Liberal Party members other than myself. And my comments about Labor’s fiscal policy (or lack thereof) have been consistent.

      Andrew Leigh’s article was written as if Swan decided, taking account of all the circumstances, that targeting a surplus is no longer sensible. Of course, that is not what actually happened. Labor’s surplus volte-face was not due to any sort of policy change, but because Swan’s rosy revenue expectations did not come to fruition.

      As for Leigh’s comments (excuses) about lower revenues since the GFC, all I can say is welcome to reality, Andrew! Most of us have been living here for the last five years, but it seems Labor MPs have only recently realised that the mid-noughties revenue boom is over. Shame they didn’t do that before they promised the NDIS and Gonski spendathons.

      A Treasurer that can only deliver a surplus in a perfect world is a Treasurer that will never deliver one.

    • Tim says:

      12:17pm | 07/01/13

      Adam C,
      well I don’t think Leigh was agreeing with you that Wayne Swan is a terrible treasurer either.

      Labor have been terrible in their politics on this issue but I think their actual policies and spending on the whole has been reasonable to date (with a few obvious exceptions).

      I fully agree with you that we can’t afford increased spending through the NDIS and Gonski at the moment.

      “...but it seems Labor MPs have only recently realised that the mid-noughties revenue boom is over”

      Yep, the Labor politicians have been right there alongside the Liberal politicians in not realising that the boom years of Howard are over with their ridiculous statements over these issues to the electorate.

      As Leigh has shown in his article, the Liberals have been just as guilty by rejecting or complaining about spending cuts, whilst at the same time complaining about too much spending.

      It will be interesting to see if the Libs are willing to take the hard, unpopular steps necessary when they get back in office this year.

    • AdamC says:

      03:40pm | 07/01/13

      Tim, maybe he wasn’t, but I must say I was struck by how this article could be interpreted as weirdly backhanded and critical of the Treasurer. As I noted, Andrew Leigh is implicitly claiming that Wayne Swan took decisions that were against expert advice and ignorant of macroeconomic principles. (I am not convinced on the latter as I do not believe we are at the bottom of the economic cycle. Rather, we are in a new normal of lower revenues.)

      On spending generally, Joe Hockey has made some promising noises about restraint, but Tony Abbott’s gold-plated maternity leave scheme suggests the Coalition is not entirely serious about keeping a lid on spending.

    • Jaqui says:

      09:26am | 07/01/13

      I wonder why your revenues are lower?
      Would it be that you fiddled while a large portion of Australian businesses are experiencing a recession like environment?
      Would it be that you hate small business and do everything in your power to make running a small business as horrific as possible thereby killing them off permanently?
      Would it be that you destroyed most Australian businesses through your punitive taxes that add nothing for the Australian taxpayer yet drive business offshore?

      Would it be that you to date have not treated imported labour or offshore labour services as a commodity and taxed it accordingly?

      Then again, since when did Labor actually care about Australia and Australians!

    • Anubis says:

      11:09am | 07/01/13

      Revenues are lower than “what Treasury projected”. That is just it - what Treasury projected. A dubious number to start with and generally wrong because treasury are busy sucking up to their political masters. By projecting revenue higher than what reality would dictate gave this mob of Labor morons a green light to continue wasting Australian Taxpayers money. Revenue has not reduced since last year it is just the projected revenue that is down.

      As for the authors comment about ” barely any difference between a $1 billion surplus and a $1 billion deficit” - I doubt very much that it will be a $1 billion deficit when spending is already overdone by about $20 billion.

    • JoniM says:

      10:20am | 07/01/13

      “If we had Howard Government revenue today, the current budget would easily be in surplus. “
      What if you had Howard’s problem of paying back the $96b in left behind Labor debt whilst still balancing almost every budget in 11 years ?
      How would Swannie go with that ?
      He has managed to generate his own record $170b in net debt in just 5 years all accumulated during record boom times and increased revenues some $100b per year more than the best Howard revenue years !
      Get serious Andrew !
      You are really are just another of the ALP charlatans desperately spinning for all you might to hoodwink the ignorant !

    • Tim says:

      11:07am | 07/01/13

      Did you even read the article?

      “He has managed to generate his own record $170b in net debt in just 5 years all accumulated during record boom times and increased revenues some $100b per year more than the best Howard revenue years !”

      And Howard’s revenue was tens to hundreds of billions of dollars per year more than what Keating had. According to your analysis Howard should have brought in surpluses of hundreds of billions of dollars? Why didn’t he?
      Could it possibly be because in a growing economy and country, even discounting inflation, that spending will naturally increase to match population, services and infrastructure needs?

      Have a look at the tax receipts as a percentage of GDP and then spending as a percentage of GDP. After the rise in spending to stimulate the economy during the GFC, spending is being cut to levels below what Howard was spending yet you still complain?
      Revenue is way below what was predicted even a few years ago.

      Honestly, no wonder some politicians make ridiculous claims over economic management. They know there are so many economic illiterates in the electorate that will fall for them.

      “You are really are just another of the ALP charlatans desperately spinning for all you might to hoodwink the ignorant ! “

      Well obviously not because it didn’t work on you.

    • Economist says:

      11:12am | 07/01/13

      No. the last Howard Budget, 2007/08 was approx. $294b. In 2011/12 estimated budget revenues were approx. $330b, that’s a difference of $36b not $100b as claimed.

      If Labor had experienced the on average just over 7% average increase in nominal budget revenues experienced by the Howard government by 2012/13 they would have had $413b in revenue. With the estimated expenditure in 2012/13 of $364b, they would have had enough money to implement the NDIS and Gonski twice over.

    • PJ says:

      12:44pm | 07/01/13

      Australia has a two speed two tier economy remember.
      - One is run by China and those investors mining our Resources.
      - The other is run by the Gillard Government.
      And what a shambles that is in. Every week it seems, closures, job loses, off shoring jobs, record numbers of temporary workers taking newly created roles.

      In only 4 years the Labor Government has lifted the debt ceiling four times, from $75 billion, to $200 billion, to $250 billion and now $300 billion. On each of the 4 occasions, Swan has promised not to lift the debt ceiling higher. No consultation or democratic process when doing this, they just grab a loan in your name.

      In one year Labor blew out our Net Debt from $106.6 billion to $142.5 billion. They have us looking at a new record for Net Debt at $145 Billion. Net Debt Interest is $8.2 Billion per year requiring us to pay $22 Million per day in Interest alone.

      Even if the Gillard Government had delivered on it’s promise of a Surplus in 2012-13, you still need to understand, that it’s still going to take over 100 years to pay off the $174 billion of cumulative deficits Labor has delivered in just four years. 100 plus years to pay off 4 years of Labor Government.

      Remember when you read these figures, the Gillard Government has declared the $50 Billion plus NBN project is ‘off budget, ..... ’ like it doesn’t have to be paid for, or accounted?

      Despite the China run Resources boom, the top tier economy in Australia, the Gillard Government has still managed to reach in and stuff that up.

      You have heard:
      BHP Kloppers tell investors, whilst referring to the loss of the $30 Billion Olympic Dam project, that investment in australian mining projects is not as profitable at this time because of taxes.
      Chevron CEO tell you $100 Billion dollars worth of Projects is ‘in the balance’ thanks to high costs from taxes, Labor and an uncertainty from our Federal Government.
      Rio Tino China MD tell you that Australia is 40% more expensive to mine thanks to taxes than the US. And Australia is 60 percent less productive thanks to Federal Government red tape duplication.

      Swan tells you it’s Commodity prices our booms going. But Bloomberg reports African Mining is booming in 2012; moving from a minus 16.8% to a plus + 32% increase, growing GDP by 3% in that region.

      Our own RBA projected that the days of 3% growth for Australian GDP were over recently.

      Our only hope is to get shot of the Gillard Government and let the Coalition attracted back the investors and stimulate future jobs.

    • Tator says:

      02:45pm | 07/01/13

      the Economist.
      Going back over the last few budget papers, you will find that the forecast figures vary wildly even under Swans reign as Treasurer.  For example, for 2011/12, the forecast in the 08/09 budget was for revenue of $366.9 billion, same year in the 09/10 budget had a forecast of 320.8 billion yet a year later, the forecast was back up to $356.4 billion yet it came in at $338 billion.  So had they stuck to the 09/10 forecasts, they would have come close to the mark but instead, they chose to use probably the more optimistic newer forecast and have come unstuck.  The same pattern occurred in 2010/11 as well.

    • Economist says:

      03:38pm | 07/01/13

      @Tator, I took the number from MYEFO 2012-13 which was 329,874 and rounded it up. http://www.budget.gov.au/2012-13/content/myefo/html/13_appendix_d.htm . If you have a figure of $338b fine but it’s not a $100b increase.

      You’re talking about their predictions which yes were consistently off the mark and overly optimistic. While Sinclair’s analysis on the deception of using the percentage of GDP figures was a useful bit of info, thanks for that, the point still remains that revenues are not comparable pre and post 2007-08. Do the percentage change each year from 1996/97 yourself to verify my assertions.

      Is it just me or are there only a few people (AdamC, Tim, Marley, TimB, Shane of Melbourne, Mouse, St Michael, Chris L and a few others, sorry if I’ve missed you) on these blogs that have the ability to recall past discussions and maintain an intelligent discussion without being overly repetitive? Constantly the same people post the same misrepresentations resulting in the same rebuttals?

      Personally the Coalition must love the fact that they lost in 2007. Nothing more could have benefited them in the medium term.

    • Brett says:

      10:24am | 07/01/13

      So because you promised a surplus, then were unable to deliver a surplus, you now say that you shouldn’t be delivering a surplus.

      Two separate issues.

    • St. Michael says:

      01:59pm | 07/01/13

      George Orwell had a word for it.  In 1984, it was called “doublethink” - the mind-crushing ability to hold two diametrically opposed concepts in mind at the same time and somehow conclude that both are true.

    • Michael says:

      11:31am | 07/01/13

      Andrew, I love this line from your article, “Painful as it is to admit, aiming for a surplus in 2012-13 probably instilled some additional discipline into the budget process…”. So that would be the discipline of spending the Mining Tax before you raised any money from it? Or the previous billions in increased spending from have virtually open borders, or warping entire industries with unsustainable handouts? So now you have to pull massive amounts of money from government spending to make the figures look reasonable. Have you spoken to the people in large departments who have suddenly had 10% of their budget ripped out, with no warning, and are having to deliver the same services? I have, and I tell you that they are struggling to achieve it! All the keep the facade that this government can manage money. Truth is that it can’t manage much without overspending, warping the market or having the opposite effect than was planned. Part of the reason we have had constant movement from the RBA has been to counter the effects generated by the government’s mismanagement of its own finances; so congratulations on such insightful and considered management!

    • Shane From Melbourne says:

      11:44am | 07/01/13

      With both parties pandering to the middle class with lavish handouts, I doubt there will ever be a surplus again. The problem is not with revenue even though it is down but with unnecessary expenditure. The other problem is the high Australian dollar which is making exports competitive and imports too cheap. Might have to do what the rest of the world is doing and do some quantitative easing and print more money

    • St. Michael says:

      01:57pm | 07/01/13

      “The debate over the 2012-13 surplus risks obscuring the bigger picture, which is that sensible Keynesian fiscal policy means more government spending in bad times, and less in good times.”

      Actually, Keynesian fiscal policy means government spending in bad times to flatten out the lower part of cycles, and then taxing more in good times to pay for the spending.

      Because governments know taxing their voters loses them those votes and spending gives them more votes, they spend but don’t tax.  It’s the same old half-Keynes shell game America and the EU have been playing for decades and which is rapidly running out of time.  Your suggestion that Keynes fiscal policy means “spending more or spending less” is a profound Freudian slip.

    • Esteban says:

      04:42pm | 07/01/13

      200 billion of debt to “save” 200,000 jobs.

      That is $1 million of debt per job.

    • OzTrucker says:

      06:46pm | 07/01/13

      Here’s the thing.

      No matter all the points anyone makes about how it’s ok to have a deficit the ALP as a party with Gillard as leader and Swan as treasurer with full access to the books and their hands supposedly on the wheel have been promising at every opportunity there would be a surplus. Ad nauseum for the last three years!

      They kept promising it right up until the week before Christmas. Not the LNP. Not Abbott. Not Hockey. It is not their job to control the budget (or anything) at this point.

      This snafu is their own doing. Like all the other snafu’s since they came to power. They could not organise a chook raffle. The electorate know it. About the only thing this government is going to get right is they will run a full term. The last thing we need!


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