The surplus that never comes

Back in April last year, when the national budget was fresh to the presses, I made a few comments about what I perceived at the time was a misunderstanding by Treasury boffins as to what exactly was happenning in the Australian economy:

The government seems to have done a fairly good job of predicting most of the macro economic influences on the budget. Exports, imports, inflation, Terms of Trade and employment are all in-line with predictions. However, they have stumbled significantly with private debt dynamics. They certainly did not predict the very large influence that a change in private sector credit issuance and associated spending patterns would have on the budget. Although members of MacroBusiness has been warning about this for some time I am not really surprised by the failure of the government to notice the issue. This is the same thing that side-swiped many other comparable economies over the last few years. Dr Bernanke has been made famous by his complete disregard for private sector debt dynamics while the US economy imploded around him.

From Mr Swan’s speech today, I detect that he doesn’t quite understand what the problem is, and I see little evidence that the government is about to launch into another stimulus program to kick start credit. In fact, the reverse is clearly true. As I said in my analysis of Forecast 6, this lack of new stimulus will have significant flow-on effects to downstream economic participants.

So long as the government’s ignorance of the effects of disleveraging continue, they will be at risk of severe embarrassment as the economy continues to under perform.

Throughout the year at MacroBusiness we have re-emphasised that there was something going wrong with the modelling at the Treasury because they appeared to have over estimated the fiscal on-flow from the mining boom, as well as ignoring the deflationary forces at work in the rest of the economy. This from H&H in late November:

And so it comes to pass with another $8 billion hole, just six months later.

Anyways, Australian austerity going strong. An extra $7 billion in cuts for next year is another 0.5% or so of GDP up in smoke. As I’ve said before, there isn’t much choice given the now pressing need for a strong Budget to backstop the bank’s offshore liabilities.

But, given the slow growth that I expect next year, say 2.5%, these cuts are pretty nasty. Sectoral balances tell us that when government cuts spending like this, there are only two options to offset to the blow to GDP, either increased growth in the external sector or increased borrowing in the wider private sector.

We’ve certainly got the former but will the rate of growth increase to fill the austerity gap next year when the world is rapidly slowing? A diminishing growth rate seems more likely to me, although a falling dollar will help.

So I guess it is of little surprise today that we once agian see Wayne Swan fronting the media to explain that his plans for the Australian economy have not lived up to expectations, again:

Much weaker than expected company tax collections have forced the government to embark on a new round of budget cuts, prompting the Treasurer, Wayne Swan, to declare this year’s budget will be “in some ways the hardest of them all”.

The warning came as the Treasury boss, Martin Parkinson, told a business audience tax collections had fallen 4 percentage points since the global financial crisis and were not expected to recover “for many years to come”.

“Indeed, for both levels of government surpluses are likely to remain at best razor-thin without deliberate efforts,” he told the Australia-Israel Chamber of Commerce in Sydney yesterday.

Mining companies were paying much less tax than expected, providing one-fifth of all company profits but paying just one-tenth of all company tax, primarily because of depreciation deductions flowing from the investment boom.

Mr Swan committed himself to announce a budget surplus on budget night no matter how weak the revenue, saying a surplus would send a “very clear message to the world that Australia is in good nick”.

Yesterday’s national accounts showed company tax revenue up 4.5 per cent over the first six months of the financial year. The May budget had forecast an increase of 29 per cent over the entire year, revised down in November to an increase of 21 per cent.

Mr Swan said company tax collections were increasing, but “not consistent with where we expected them to be increasing to”.


The government’s expenditure review committee, unofficially known as the razor gang, has already started looking for cuts. One unknown is the extent of the damage on the economy caused by the floods. Parts of NSW and Victoria are still under water.

Mr Parkinson said capital gains tax collections had been “hit hard” following the financial crisis. GST collections were suffering from more cautious household spending, and non-mining tax collections were suffering at the hands of the high dollar.


  1. Mr Swan committed himself to announce a budget surplus on budget night no matter how weak the revenue, saying a surplus would send a “very clear message to the world that Australia is in good nick”.

    Wow. Will be fascinating to see how they juggle the numbers to reach that headline surplus number.

    • And Finance & Treasury will juggle those numbers – robbing Paul to pay Peter and some wonderful financial Howard Potter wizardry! It will be hilarious – we cannot have Federal politicians telling porkies!

    • Yeah, Swannie has really painted himself in to a corner with all these comments. Perhaps he truly does believe that the Australian economy is the envy of the world? I heard the Irish once truly believed in the Celtic Tiger story too…

  2. I don’t get it, he is telling a big enough lie, he’s been saying it for long enough. But nobody believes him. Something is not going right for him.

    Maybe he’s trying to be funny, in which case his face beat him to it. Sorry DE, I tried to play the ball but when it comes to Wayne Goose just can’t help playing the “man”.

    • I don’t get it, he is telling a big enough lie, he’s been saying it for long enough. But nobody believes him. Something is not going right for him.

      well actually the familiarity bias is powerful to dupe majority mass, however, Swan has a few big problems to ensure success like dictator regimes telling lies in the past i.e. total control of media outlets and total control of expert(s) voices in the country.

      If he get the above, I’m sure many more Australians feel that they’re living in near-perfect situation.

      And don’t forget a bit bias here also, the fact that most MB readers may not “believe” Swan’s message, does not mean that average Australians on the street does not believe him either. I know some totally have full confidence on his good-time message and keep spending like we’re in permanently booming time.

  3. Jumping jack flash

    So, slash and burn Australia, but at the end of it we have a surplus?

    Why doesn’t The Greatest Treasurer on Earth(tm) simply say what is going on?

    “We as a nation are now held hostage and are at the mercy of the world’s banks and the rating agencies, because of the reckless overseas borrowing, then lending, of our “4 pillars”…

    more likely “4 anvils”
    (he could angrily mutter this bit)

    … and the government’s rushing to support them with guarrantees so they wouldn’t fail, because, you know, they’re too big to fail.”

  4. I don’t know how Labor expected to produce a surplus.

    The revenue side of the budget is weak because The Howard/Costello tax cuts gutted the budget. Rudd continued the tax cut/bribe approach at the 2007 election and Swan refused to abandon the cuts.

    Realistically, Labor ministers are never going to agree to large spending cuts. Couple this with a mining tax which doesn’t come close to offsetting the lost revenue from all the personal income tax cuts, and there is no way the budget will be in surplus (absent extremely creative accounting).

    • Do you think that, given the Carbon “tax” and MRRT, Labor has any scope for an increase in income tax to wind back the Howard/Costello/Rudd cuts? Annihilation already awaits at the ballot box.

      • No – Of course they don’t.

        But they didn’t need to go to the 2007 election recklessly promising tax cuts. And they didn’t need to support tax cuts at every Costello budget. And they didn’t/don’t need to support the flawed Costello thesis that the best way to manage a mining boom is to cut taxes and raise interest rates.

        • Rudd promised tighter fiscal management than Howard in 2007.

          Howard and Costello presided over the largest increase in non-productive private debt and asset inflation in eons.

          Given we see the pain of private sector deleveraging, balance sheet recession and bursting of housing bubbles all around the world, Swan should simply deficit finance public infrastructure as hard as he can go now and let the Libs enforce the austerity and get voted out for their trouble.

          His constituency would benefit from carefully selected enhanced public infrastructure.

          • His constituency would benefit from carefully selected enhanced public infrastructure.

            The problem is that projects take some time to kick off, and there’s little doubt a spate of cancelled projects would follow the change at election time, so you’d be missing out on the benefits, Labor would be tarnished as “economic manager” and Libs would claim a bigger dividend on the budget.

            It’s a bit of a hopeless situation all round, essentially.

    • “Realistically, Labor ministers are never going to agree to large spending cuts. Couple this with a mining tax which doesn’t come close to offsetting the lost revenue from all the personal income tax cuts, and there is no way the budget will be in surplus (absent extremely creative accounting).”

      Agree 100%. For all Gillard talks about the “hard decisions” her government has made, it’s been at least a decade or two since I can remember that a government actually made any.

      • Jumping jack flash

        “it’s been at least a decade or two since I can remember that a government actually made any”

        In my opinion the reason they haven’t is because all their “decisions” have been made for them by the lobbyists in this time.

        Neither government could think up a good policy if it snuck up behind them and bit them on the arse.

        They rely on the lobbies to do their thinking for them because 1) the government is completely out of touch with reality and getting worse. 2) they can pass it off as their idea that is helping the country in some way, (which lobby group would propose ideas that would harm them?), and 3) they get donations for doing it.

        It’s win, win, win!

    • If I am remembering things correctly, which I probably won’t, the budget cuts for those last two elections were each of the order of $30 billion. It may have been over the 3 years or some such, or longer, but isn’t that still comparable with the current deficit?

      That is, if those tax cuts had instead been saved, even with all the GFC mark 1 stimulus, we would be in surplus already? Of course I suspect they may well have just spent that much more in the stimulus, and would perhaps be gearing up to do it again now, so in a way the tax cuts have stopped more stimulus being able to be made currently.

      • Alex Heyworth

        You have to take account of bracket creep in assessing the effects of so-called “tax cuts”. Once you do that I suspect the much discussed Howard-Costello cuts fade into insignificance.

  5. According to the 2011-12 MYEFO, govt expenses in 2011-12 is projected at $371.1bn and for 2012-13 is projected at $379.9bn – an increase of 2.2%.

    How and when did an INCREASE in govt spending get defined as ‘austerity’?

    • GDP is quoted in real dollars. So that sort of nominal growth in spending is at best zero real growth but probably slightly negative.

    • There are two sides to the governments balance sheet in this respect. Spending and taxation. A rise of 2.2% in spending is still ‘austerity’ if there is a larger corresponding rise in taxation.

      Surplus budgetting means one thing by definition. That the government is aiming to tax more than it spends.

      However, due to their failed models of how the economy is actually performing at the moment they are failing to receive the “estimated” taxation take.

      Also given the last 2 budget updates it would appear the harder they push to get there, the further away they get.

      • “A rise of 2.2% in spending is still ‘austerity’ if there is a larger corresponding rise in taxation. Surplus budgetting means one thing by definition.”

        Sorry, don’t buy it. Only in an Orwellian dystopia can an increase in spending be considered austere. Austerity can only mean one thing, and one thing only, a reduction in spending.

        • Sorry, don’t buy it.

          If this year the government paid you $100K and taxed you $40K you have $60K to spend. 60K is what the government spent on me minus what they took back in taxes.

          Next year if the government paid you $102K and taxed you $44K you have $58K to spend.

          Alternatively next year if the government paid you $102K and taxed you $40K you have $62K to spend but if inflation is running above say 3.3% you have less in real terms than the year before.

          Now for “government paid you” substitute “government spent into the private sector” and for “taxed you” substitute “taxed the private sector”.

          Hence austerity — money is being removed from you (the private sector).

          • Set aside the private sector for a moment. The claim is that the government is engaging in austere fiscal policies. It isn’t. An austere government is one that is spending less in one year than the previous year. Even better, an austere government is one that spends less than it earns.

            In your example, the government spent $100k in year 1, then $102k in year two. It financed this by running a deficit of $60k in year 1, and a deficit of $58k in year 2, thus accumulating debt of $118k over 2 years.

            I still fail to see how this is fiscal ‘austerity’.

          • geez I’m trying to find everyday examples/parallels to try and illustrate. Don’t take it 100% literal.

            But if you want to focus solely on spending then note that spending growth will not exceed the inflation rate therefore in real terms it is a contraction.

            Even better, an austere government is one that spends less than it earns.

            that is the definition of a government surplus.

  6. Ronin8317MEMBER

    Forget about the economics, a surplus is a political necessity for Labor. The coming budget should see a lot of new taxes and spending cuts. As there is a 50 billion gap to be filled, I simply don’t see how it’s possible unless :

    1) They raid the Future Fund
    2) They sell off the NBN (even before it’s built) to Goldman Sach similar to how Greece sold off it’s national lottery.
    3) The government install poker machines at hospitals, and give patients the choice to gamble away their medical cost in lieu of having medical operations.
    4) The Treasurer finds a 50 billion dollar gold nuggets in a rubbish bin outside parliament house.

    I think 1) is the most likely outcome.

    • Hahaha I like option 3. They could also apply option 3 to aged care. ie. cut funding in lieu of a gaming license for all nursing homes.

    • darklydrawlMEMBER

      Option 3 is a cracker of an idea. Shouldn’t laugh – it could happen if things get weird enough.

      I can recall when plenty of places had a ‘never ever’ pokie ban. And now they can’t stop. Addicted to the revenue.

    • The issue of the surplus whilst it is attractive politically it is more about supporting the banking system by seen to be having a budget surplus and hence our debt having some worth in world full of debased currencies

    • Jumping jack flash

      option 3 is called private health insurance.

      well that was the original idea, I’m sure.

  7. I welcome the forced austerity that this surplus hankering will entail:

    1. As long as they take this opportunity to roll back John Howard’s middle class speculator welfare – FHOG, 50% capital gains tax on IPs, baby bonus, quarantine on NG – plenty of fat there to cut and additional sources of revenue.

    2. As long as they don’t use the strength of the budget to create future deficits to bail out the banks.

    3. As long as they don’t cut the automatic stabilisers when the economy and employment grows weak.

    And finally, since we can’t have a sovereign wealth fund when we have a CAD, how about we roll back Peter Costello’s so-called SWF, Future Fund, back into the budget?

  8. Diogenes the CynicMEMBER

    Labor have failed to get a handle on the budget since they came to power in late 2007. Their surplus target just retreats into the distance and frankly is just not believable, given the structural changes now underway.

    Government spending has to fall! A rise of 2.2% is a joke.

    Cost measures that could help (top of head):
    (1) Cut Pollies/public sector super entitlements anyone on defined benefits is now switched to defined contributions…ensure that existing generous packages are changed to the new system.
    (2) Defence – the JSF is an obvious dog. Ditch it, this could save billions. We could also forget about building more submarines, the Collins have been an expensive waste. Buy less big ships that do little and more patrol boats and small subs (complete package from offshore) and require tiny crews. A sub with a 10 man crew will spend a lot more time in the water than subs requiring 50+ man crews but can never go to sea as they are short crewed.
    (3) Suspend the NBN – it is going to cost $100bn+ we cannot afford this boondoggle. OF course this is currently off balance sheet but it will still impact future spending.

    There are revenue measures they could pursue:
    (1) Cut negative gearing $5bn there pa.
    (2) Get rid of the CGT discount another $5bn pa.
    (3) Change the mining tax to a simple surcharge on company tax ie 5% extra if you are in mining, simple and requires 2 extra guys in the ATO to monitor it.
    (4) Consider a land tax to swap out the 100+ taxes that collect almost no money (no more stamp duty, payroll tax, duty on insurance etc). It would also increase productivity. Apply it to all property including homes.
    (5) Raise GST on food. Makes it simpler to administer and would bring in some more money. Personally this GST should be higher say 15% and income taxes lower.

    We should also reform the banks but that is another whole basket of worms.

    • You’ve got my vote. I’m an NBN supported but would be more than happy to compromise in return for all the other promises.

      • darklydrawlMEMBER

        Wow… With a platform like that I would vote for you. Like AB, I am pro-NBN, but would drop it if we could do all of the above with it.

        Especially the Subs. Why on earth are we even considering building them from scratch when you can pick up proven and operational subs dirt cheap from numerous Navies right now??!! Pure madness.

        • Possibly the main reason we are looking at building subs is because of votes in mainly labor constituencies.

    • I read the other day Indonesia picked up East Germanies entire defence force for 4 billion.

      We should keep an eye open for European firesales, particularly the Greeks and Spaniards. The Greeks have very fine German equipment including over 100 Leopard 2’s

    • DTC I’m impressed, and this would go a long way to resolving things.

      I’d add (6)putting a limit on government borrowing; x% of GDP…don’t have a number.

      I saw in the Australian at the coffee shop that Swan spinning low growth as a good thing, then turned a few pages on and saw that Nuc Subs are on the table.

      Also caught my eye an non insider to head the Future Fund that apparently hacked of the FF chaps.

      • Smaller government is needed I agree, but I also believe a government owned trading bank is required. No home loans but its used to refinance existing government debt, starve the private banks and foreign banks of our government bonds and inadvertenly adjust the our dollar.
        It would also make existing Australian government debt more valuable if no new debt was being sold on the market.
        I suppose a model based on the original commonwealth bank is what I am thinking.

    • Likewise, you have my vote. Seriously, flesh out your policies a bit more with some stuff on education health etc, and you would have more policies than both major parties combined.

      I in principle support the NBN, but feel that at the moment it is not the best time to be doing major nation building reforms. Perhaps back 5-10 years would have been a better time financially. Then again the technology was not as developed back then, so maybe a delay will be good for the quality of the final product, if they update the plans after a delay.

    • Raise gst and lower income tax? So someone who earns little and pays a proportionately larger share of their income on essentials ends up worse off than someone who earns more? No thanks.

  9. A surplus on budget night will send a very clear message to the world that Australian will not be in good nick for much longer.

    Can they retract the Best Treasurer on Earth award several years hence?

  10. Alex Heyworth

    DE, this post underlines what a poor measure of prosperity GDP actually is. You mention the possibility of more stimulus by the government to offset private deleveraging. But what did the last stimulus actually lead to that improved the nation’s prosperity? We got a very large number of almost certainly grossly underutilized school halls, some homes that were more comfortable to live in in summer and cheaper to heat in winter, and a temporary boost to the fire services. Oh, and a handout to buy a new plasma TV. Not much to show for $50b.

    The reality is that a lot of government spending, and particularly government spending that is done in a hurry and ill thought out, boosts GDP but does little or nothing to boost our actual welfare.

    Consequently I am all in favour of Swan’s vow to balance the budget. Sure, it will restrict GDP growth in the short term, but in the long term it will be better for the nation’s real prosperity.

  11. Charles Ponzi

    Agree. Balancing the budget is more important than providing viagra to stimulate the economy. We all know viagra doesn’t last.

  12. This brings a Keensian debt theory into play that for Australia to having positive GDP, overall credit growth needs to be at 6%.

  13. And no one has even mentioned the Carbon Tax, this (with regards to comparing given government figures and actual figure after being introduced) will add another 15% tax to us all and then we will tighten our belts by around 20% and what increase will this add to houses and dirt? ohhh we are deep in the ship arnt we.