For years now I’ve argued that the Australian budget will never again return to surplus. This is not a political statement, it is an economic one. We simply can’t do it. As public sector spending is cut, the amount of private sector borrowing required to support the economic growth needed to boost public receipts is no longer possible. The boom in the external sector has so far helped and will keep doing so after 2015 when LNG exports kick in. But all attempts to return to surplus will still end end up in chasing one’s tail down an austerity drainpipe so long as the private sector balance sheet is constrained by existing leverage and we run current account deficits. It’s simple accounting.
This is not always a bad thing. Counter-cyclical spending is useful at the appropriate time, which is now. But longer term we’re engaged in an exotic dance of surplus illusions. It hasn’t taken the Coalition long to hear the tune. From the AFR:
The Abbott government intends to include controversial recommendations from its Audit Commission in its first budget and avoid breaking its election commitments by promising to implement them after the next election.
The government’s first budget, due in May, will map a path to surplus that will require spending cuts not put to voters at this year’s election.
Senior sources said any new policy measures would be placed towards the end of the four-year, 2014-15 budget cycle, which ends in 2017-18, enabling Tony Abbott to seek a mandate for them at the next election, due in 2016.
Genius! Fresh from smashing Wayne Swan for six year for his pea and thimble budget tricks, the Coalition is going to claim a path to surplus that, if serious, is quite unlikely to get approval from the polity. Moreover, whatever that path is, it sure won’t involve increased taxation, reduced services or selling assets:
…The government has ruled out net spending cuts to health and education and, on Wednesday, Mr Abbott ruled out tax increases, even if they were recommended.
“It’s almost inconceivable that the Commission of Audit would be going down that path,” he said, but he added there was no way to return the budget to surplus without doing “some things people don’t like”.
While the terms of reference include recommending the privatisation of remaining federal government assets, Mr Abbott said other than Medibank Private, nothing else would be sold in the first term because he had no mandate. .
The Coalition hasn’t got a mandate to sell anything. The magic pudding it will be then. Some very large “efficiency dividends” no doubt.
What is going to happen is this. As the terms of trade continue to fall faster than the dollar, the budget will keep bleeding. Debt will accumulate and accumulate and suddenly, at some point in this Parliament or the next, ratings agencies are going to get fed up and downgrade the nation. That will downgrade the banks too and Australia’s growth straight jacket will tighten a little more. At that point everyone will throw up their arms in horror, declare whocouldanode?, and some kind of national crisis will ensue.
This is neither cynical nor political. Perhaps it isn’t even unwise. As those Treasury boffins like to say, “something will turn up”. You never know. In the mean time the dance of surplus illusions will continue to beguile and bewilder.
