Is it impolite, at the very start of the election campaign, to talk about the budget deficit? Impolitic? It’s certainly unfashionable.
Budget night was so long ago. Neither Labor nor the Coalition want to bring up this old chestnut. You can understand why. Each have in turn declared their intention to return the budget to surplus and each have failed, at great political cost.
Yet we must talk about the budget deficit. Steel yourself. It would show great disrespect to the treasurers of our ancestors if we were not to briefly acknowledge the land on which they fought and died, at least before the election carnival marches forward. Anyway, the deficit will be the unspoken theme of the whole campaign – always there, never really acknowledged.
Treasurer Scott Morrison declared in the budget speech that the Government was on a “sustainable path” to surplus. This language has become such a cliché that it’s easy to miss how sad it is.
Last Tuesday’s budget declared that the deficit would be just 0.3 per cent of GDP by 2019-2020 – the last year of the forward estimates. Morrison’s predecessor Joe Hockey declared in May 2015 that the deficit would be almost exactly the same (0.4 per cent of GDP) a year earlier, by 2018-19. And in the 2014 budget Hockey argued we’d hit 0.2 per cent of GDP by 2017-18.
The clear reason for this sustained failure to return to surplus is Treasury’s long-standing belief that economic growth will – very, very, very soon – jump above 2 per cent per year. They’ve been predicting this growth leap for half a decade now. No doubt Wayne Swan was very impressed when he first saw growth forecasts with a three in front of them in Treasury’s 2010 outlook. But Morrison’s heart must have dropped when he saw the same numbers again – still just a few years away.
Yes, the budget has to have forecasts. And treasurers can only accept what Treasury’s models tell them. But waiting for a growth spurt that never seems to come is hardly a comforting economic plan.
I’ll admit to some schadenfreude. The deficit has been a major political issue for nearly a decade. Every commentator has refined their arguments on the topic over and over and over. Here’s the hissy fit I had in The Drum on the eve of the 2013 election, when Hockey changed his promise of a surplus to a promise to be “on track” for a surplus.
But in the latter half of the Labor government it was commonplace to hear that there was no need to rush back to surplus. Take this Australian Financial Review piece, or here in The Drum.
Neither party will want to spoil the fun by talking about their embarrassing deficit. But it will be there, uncomfortably shadowing every minute of the campaign.
Many analysts and interest groups warned that the economy either could not handle the necessary budget cuts, or that the surplus was an irrational obsession cultivated by Peter Costello fan fiction. The budget would balance itself in good time. No need to stress about it.
The argument for a single-minded return to surplus was never that the small deficit – yes, our deficit is relatively small as a percentage of GDP compared to many other rich economies – was causing immediate and direct harm to the economy. It was that unless there was pressure on the government to balance the books the government would never feel the need to do so.
And a long-term budget deficit is harmful. Market economies are cyclical. It might not feel that way – growth is sad and sluggish – but it is very possible that these are the good times. When we face the next downturn the budget balance will plunge. It will plunge even deeper if the government of the day decides to stimulate the economy, believing Kevin Rudd’s program to have been a success.
A small deficit always threatens to be a large deficit. And a large deficit is costly, harms macroeconomic stability, and undermines economic confidence. It might not be much fun to cut spending during the good times, but, as Greece has shown, it’s far worse to be forced to cut spending during the bad times.
No doubt we are tired of talking about debt and deficits. Neither party will make it an issue during the campaign as neither party is confident it has a solution. Where tax increases are proposed – such as the tobacco excise hike – they are proposed in order to fund new promises, not pay back old ones.
And spending cuts? Not a chance. It appears that the government has locked in a permanently higher spending plateau. This year it is estimated the government will spend 25.8 per cent of GDP, just a fraction off the 26 per cent of GDP that Rudd spent on his extraordinary stimulus package. Under the Howard government this figure hovered around 23 and 25 per cent.
Elections are always full of spending promises – gifts of road upgrades and sports fields dropped into struggling marginal electorates. If the budget feels long ago now wait until we’ve had two months of pork barrelling. Neither party will want to spoil the fun by talking about their embarrassing deficit. But it will be there, uncomfortably shadowing every minute of the campaign.