Australia’s new austerity champion, Shadow Finance Minister Andrew Robb, is ramping up his rhetoric on severe budget cuts. From the AFR:
Mr Robb told The Australian Financial Review on Thursday that an assessment of the underlying structural position of the budget “will inform how we plan our medium term fiscal strategy”. The structural budget position seeks to estimate whether the budget is in surplus or deficit, beyond the swings created by the economic cycle.
Assessments by private and public sector analysts put the structural budget deficit in a deep hole of around $56 to $66 billion in the last couple of years and at around $15 billion 2012-13.
The structural position of the budget – as opposed to the cash headline figure for the deficit or surplus announced on May 14 – is likely to play a big role in the political debate in the lead up to the September 14 election, with the Parliamentary Budget Office due to release an assessment of the structural budget position between May 14 and June 30.
Mr Robb’s comments imply a Coalition government would run a much tougher fiscal policy which would involve continuing cuts to government spending both during periods of economic upswing and downturn until government debt was eliminated.
…Mr Robb said the structural budget position had to be addressed, because continuing deficits were adding to debt levels that risked becoming unsustainable if the current high terms of trade fell to more normal levels. If this fall did occur, he said, budget deficits could balloon to $30 to $40 billion a year, quickly threatening the country’s credit rating.
I don’t dispute that this is the case. The Howard government did not save enough of the mining boom. The subsequent Labor governments have been hit by the GFC, failed to establish a tax regime that could have saved more of the boom and committed to future expenditure anyway. As for $30 billion deficits threatening the credit rating, yes, that is likely within a year or two.
But it is no good looking at the budget deficit in isolation. In the post GFC world we have to ask what will a drive to return the budget to a structural surplus do to the economy and, in turn, government receipts? If Australia’s terms of trade don’t fall at all from this point then Robb’s project will mean perhaps manageable additional government cuts of around 1% of GDP. Consensus sees growth in the 2.5% range for the next year so that’s a fair whack but might be manageable. He might elect to do it over several years to ease to hit. It would likely increase interest rate cut prospects so that may offset the drag a little through higher private debt growth (if it appears, which is a big “if”).
If, however, Robb intends to return the budget to structural surplus as the terms of trade falls (which he seems to be implying) then that is a different calculation. The nominal economy is already barely growing. Another decent fall in iron ore, say back to $100 as most now forecast, will send the nominal economy into virtual reverse. Corporate profits will take another steep hit as will corporate taxes. Unemployment will also rise more quickly towards 6% boosting government outlays. Interest rates will fall further, yes, but again, is that likely to generate greater borrowing as a slowing China suppresses confidence? The one upside is that the dollar would likely fall below parity but the bounce back will be minimal given we’ve got little to sell any more beyond dirt.
The base case for growth in this scenario is probably closer to 1.5%. Given Robb would have to find probably another $5 billion in savings from his widening deficit, suddenly he has to cut 1.3% of GDP to get near his goal. At this point it’s surely becoming obvious that Mr Robb is in danger of chasing his tail into a European-style negative spiral.
Readers may well argue that this is just pre-polling bluster. From Tony Abbott and Joe Hockey I might believe it. In Robb I see Teutonic ideology.
