Friday, December 21, 2012

Labor Treasurer's promise now surplus to requirements

Can you imagine if John F. Kennedy had announced that the US would send a man to the moon, and then leave him there?

Bringing him home would be too hard, too difficult, not really worth the expenditure.  Well that scenario is what Wayne Swan has delivered.  He sent our budget into deficit and never brought it back to surplus.

This government came to power in November 2007 promising that the reckless spending must stop.  But it never did.  The global financial crisis can only explain so much.

This is a government that has never really committed to the kind of fiscal discipline necessary to keep our fiscal affairs in order.

Swan deserves credit for maintaining the faith for so long.  While I have never believed that he would actually succeed in returning the budget to surplus I have always wished him well in his efforts, and hoped he would succeed.

There are an infinite number of demands on the public purse and so many expenditures that could make the world a better place.  Yet the public dollar is extracted from the private economy at great cost and should be used sparingly.  Swan understands that.  At least, he claims to understand that.

This government had hoped to reduce the rate of growth in public spending and then drive the budget into surplus as the economy grew.

With a bit of smoke, mirrors, fiscal illusion and accounting tricks, that strategy might have worked.  To be fair, lots of other economies are trying the same thing and this sort of strategy has worked in the past.

But it seems there was no plan B.

Here is the thing.  In 2007-08 government spending was nearing $272 billion.  This year it is budgeted at $363bn.  That's down from $371bn last year, but next year expenditure is budgeted to be $388bn.  So in five years, expenditure is up about $100bn.

What has happened to the revenue side of things?  In 2007-08 government revenue was $295bn.  This year it is forecast to be $367bn.  That is a $72bn increase.  About $30bn less than the increase in spending over the same period.  That is before we start to consider any forecast errors.

While we know that forecasting is difficult it seems Treasury has become particularly bad at it in recent years.

In the Howard era Treasury seemed to underestimate revenue while under Swan, it seems to overestimate revenue.

This is especially the case for the corporate income tax.  In a recent article published in Agenda:  A Journal of Policy Analysis and Reform I argue that this is due to Treasury's forecast methodology.

To my mind Treasury (and therefore the government) doesn't really understand the corporate income tax base.  If companies made massive losses in 2008-09 that means they won't be paying much tax until the loss carry-forwards are exhausted.  If mining companies are making massive investments that means they won't be paying much because of depreciation, and so on.

Taxable income has not been growing rapidly at all.  The government seems surprised by this fact.  Yet this should have been a warning that all was not well with the economy.

Rather than cutting spending the government has looked to cutting tax expenditures (that is increasing taxes) and means testing some benefits, while proposing new taxes or increasing existing taxes.

The argument seems to be that there is something wrong with our tax system, that it cannot generate the revenue government would like to have for expenditure.

At some level that is true, the tax system will never generate the revenue this government would like to spend, but that is because the spending is unsustainable.

The economy simply cannot afford to divert more resources into government.

Swan is talking now about allowing the automatic stabilisers to drive the budget into deficit.  To be blunt he should have done that in 2008-09.

Rather, the government chose to drive the budget into deficit through massive spending increases financed by debt.  We face a weakened global economy with continuous deficits, massive debts by Australian standards and no credible economic strategy to return to surplus and pay down debt.

Swan can point to the Europeans and Americans and compare us favourably to them.  Yet returning to surplus was the challenge he set himself for himself.  This is not just a ''political'' surplus unrelated to the economy.

The management of public finance cannot be dismissed as mere politics.  When the single largest entity in the economy — the federal government — cannot manage its own budget, then we can expect problems across the economy.

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