On the Road to Federal Budget Repair

Not that you’d know it from the commentary, but the Federal Budget could easily be in surplus in a couple of years. And that is without there being much in the way of spending cuts or tax hikes to get there.

There are a few very important issues in the budget figuring that confirm the Budget is already on the road to repair, and that any efforts to speed up the time to return to surplus would risk hurting the economy as well as pushing the unemployment rate higher.

It is difficult to work out why anyone interested in striving for faster economic growth and more jobs would want to fast-track the return to budget surplus. Given the economy is muddling along with economic growth currently a little below trend – with wages growth running at record lows and inflation decelerating to be well below the RBA target range – a budget deficit now is appropriate.

So too is a slightly extended path to budget surplus. Only if the economy was stronger would it be economically responsible to have policies framed towards a more rapid surplus objective. But the economy is fragile, ebbing between an assessment of a glass half-full and a glass half-empty. Any decision from the government to cut spending and/or hike taxes in the name of budget repair would dampen the economy arguably when it needs a bit more of a boost from the policy makers.

Certainly the RBA is of that view having recently cut official interest rates to a record low of 1.5 percent. The budget numbers will be updated in November or December with the Mid-Year Economic and Fiscal Outlook. As things stand, the budget deficit in 2019-20 is estimated by Treasury to be a tiny $6 billion. It is tiny because in 2019-20, Australia’s annual GDP will be around $2 trillion which means that the budget deficit will be just 0.3 percent of GDP. Even the 2018- 19 deficit forecast is small at just 0.8 percent of GDP. And recall, these are just estimates or forecasts.

They might (will) be wrong and if a little economic good luck goes Australia’s way from an unexpected lift in global economic activity or Australian businesses and consumers take advantage of the low interest rate climate, a strong rate of expansion could easily see the budget return to surplus in two years. A weaker economy, of course, would see a wider deficit, but as noted, this would be a good thing.

In any event, the critical issue for policy makers and economists is not so much the size of the budget deficit, nor really the level of government spending and taxing as a share of GDP – it is how efficient the government is, including a consideration of where the revenue is being raised and how the government’s spending plans are impacting on the efficiency and growth.

On that score, the signs are again mixed. There is a growing need for government-sourced infrastructure spending, aimed at building a world-best broadband network, improving the efficiency of public sector urban transport, educating the population to their full potential and providing international transport hubs to boost trade.

Such spending, at a federal and state level, is hovering near record lows. Debt aversion at the political level risks leaving our children with a sub-standard infrastructure network in the decades to come, all because the government is reluctant to add to debt to fund infrastructure projects.

It is to be hoped that in the new parliament, there is a re-think about the true state of the budget and how the growth rate of the economy can be enhanced with some well-targeted infrastructure projects. Any further failure to do this risks holding back productivity not only now, but in the years ahead.

It would be a bitter disappointment, and our fault, if our children look back in 20 years’ time and ask why the previous generation – that is, us – didn’t borrow money to build world-class broadband, roads, ports and airports to ensure all Australians reached our maximum skill-level through affordable, high-class education and training.

Stephen Koukoulas is the General Manager of Market Economics thekouk.com @TheKouk

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