Abbott abandons surplus

From the AFR this morning:

Ahead of Tuesday’s release of the Mid-Year Economic and Fiscal Outlook, Prime Minister Tony Abbott indicated a 2016-17 surplus was unrealistic.

“We said we would return the budget back to surplus at least as quickly as Labor had proposed. What we are discovering the more we dive deeply into the budget is the extent of Labor’s fiscal disaster,’’ he said.

Mr Abbott last pledged a 2016-17 ­surplus in late October, six weeks after the election, when he said: “We will get back to surplus at least as quickly as the former government claimed that it would get back to ­surplus.”

The final budget figures under the Labor government forecast a small surplus of $4.2 billion in 2016-17.

As first reported by The Australian Financial Review, MYEFO is expected to disclose a budget deficit for this financial year of about $50 billion and ­predict debt to exceed $500 billion beyond the four-year budget forecasts.

Farewell surplus, we knew you only too fleetingly. This is sensible enough from the Abbott Government. The return to surplus forecast by Labor was always highly dubious. The Abbott Government finessed its position on any surplus before the election, shifting from a hard target to “better than Labor”. Now it can argue with its discovery of the “black hole” (whocouldanode!) that it will still be more swift than Labor, which would have broken its commitment anyway.

If something does come along for the economy, which is quite unlikely, then the Coalition will be able to claim an early surplus as its political jewel.

More probable, 2014 and 2015 nominal growth will undershoot forecasts (2016 could be better as government projects kick) as national income falls with the terms of trade, and the Budget bleeding will go on. But as David Uren described last week, the Coalition has refilled the Budget’s hollow logs so it can absorb some undershooting on the revenue side.

Is this good economic management? One might argue that it’s better for confidence to meet a dour forecast than miss an aggressive one. And in today’s circumstances, when the private sector is going to struggle to deliver trend growth for three years, it makes sense to have Budget flexibility to fill the growth gap. So on those two scores, yes, it is. As for any longer term goal of stabilising a sinking ship with structural changes to budget drains like superannuation and middle class welfare, no, it is not.

On the detail of the Budget, The Australian has more:

…The Abbott government will also add to its spending commitments when it releases the midyear budget papers, after buckling to pressure on major road projects costing $1bn across four states.

…The government will announce today that it will go ahead with major projects including the Great Northern Highway and North West Coastal Highway in Western Australia, the Cape York regional roads in Queensland, four regional roads in NSW and roads near the Stuart Highway in South Australia.

All were promised by Labor under the regional infrastructure fund meant to be financed by the mining tax, which raised a fraction of the revenue claimed and put the road funding at risk.

The cabinet outcome on road funding takes the value of government tax and spending decisions since the election to almost $20bn, including the controversial move to replenish the Reserve Bank’s capital at a cost of $8.8bn.

Other decisions within that total include dumping unfinished tax measures at a cost of $3.1bn, adding $1.2bn to school spending to honour an election promise and deferring $5.2bn in savings from a public-service freeze. The government is still finalising cuts to offset some of these spending decisions, including up to $400 million that is to be recouped by cancelling further work on trades training centres and finding similar savings in education. Some of the cuts to the public service may go ahead, subject to the review of the public-service freeze.

Those Nats will be happy! Productivity? Not so much.