The rush to surplus

The rush to surplus (Published in the Geelong Advertiser, 19 April 2011, p. 20 as ‘Time to reassess the sanctity of surplus.’

By Roy Hay

Except in an election year, the run-up to a Federal budget is usually filled with horror stories about tough times ahead. This time the underlying story is the current minority Labor government’s commitment to return the budget to surplus in the next couple of years. Because it feels it still needs to prove its economic credentials and cannot risk breaking any more pre-election promises the goal has not changed though economic circumstances certainly have.

The budget’s income side has been hit by natural disasters including the cyclone in Queensland and the floods along the east coast.

The mining and energy sectors are going ahead rapidly, but at present they are in a major investment phase so that in the short run companies can claim substantial tax offsets, which means less net contribution to revenue. They also managed to stop the resources rent tax that was designed to draw off some of the profits which they are currently generating.

Manufacturing is doing it tough, especially in the export or trade exposed industries in Victoria and New South Wales. Companies like Ford, still major employers in Geelong, are laying off workers. The cries for subsidies, incentives or protection grow louder from backbenchers in marginal seats.

Retail is flat as people save and/or reduce their debts rather than spending. It is not so long since governments and many economic analysts wanted to see this happening but now they are worried about the employment implications.

Some commentators have suggested that the government is just setting us up to expect a tough budget so that when it is handed down there will be relief that it was not worse. Others point out that floating possible cuts by inspired leaks is a way of judging the extent of public concern and hence the potential voting impact. The reaction to expected cuts to medical research could be seen as one example.

Leaving the politics and cynicism aside for the moment it is worth asking whether returning the budget to surplus quickly is an appropriate way to deal with the problems of a two-speed economy. Is cutting the deficit a blunt weapon in these circumstances? It can be argued that government borrowing should be reduced to avoid crowding out private investment in the west and north. That assumes, of course, that the Australian economy is the only source of funds for such investment. Now, as part of a global financial system, multi-national companies like BHP and Rio Tinto can move funds around within the organisation and borrow virtually where they wish. Overseas countries seeking access to Australia’s natural resources are often keener to invest than governments are to allow them to do so.

Cutting spending and programs in the manufacturing and service orientated areas of the country, on the other hand, risks pushing these parts of the economy into reverse. Reducing investment in research and development on the grounds that all parts of the system have to contribute, could easily be sacrificing long-term benefits for a very marginal short-term gain.

Australia’s public debt has grown significantly since global financial crisis, thanks largely to the stimulus package introduced to head off recession, but it still remains relatively low in international comparison. Governments cannot risk a loss of confidence in their ability to manage the economy but postponing the return to surplus until such time as the overall growth of the economy provides the revenue to do so would not be a heinous thing to do.