Yesterday we had some headlines from Peter Costello following a speech he gave to the Minerals Council. The former treasurer took the chance to once again burnish his credentials when it comes to budget management and, in particular, how to cut spending to get to a surplus:
I can’t leave this chapter without some observations about the Australian Government’s financial position during this period. Back in 2000 when the iron ore price was below USD $13.00, the Budget was in surplus. We were not running up debt, we were paying it off. Let me repeat, when the iron ore price was below USD $13.00 a tonne the Budget was in surplus. I keep hearing journalists and ignorant politicians claim that we only balanced Budgets because of the mining boom. That is an effort to re-write history, usually to justify subsequent fiscal failure. We first balanced the Budget in 1998 when mining was at a cyclical low. By the time Australia’s terms of trade began to lift in 2005, we had already completed seven Budget surpluses and nearly cleared all Government debt. We were in surplus at the low point of the mining cycle. It was at the height of the boom that we were running deficits. From 2008 massive spending increases which the Government said were needed to stimulate the economy took place. As a result the Budget went in to deficit. We were still stimulating the economy as the mining boom re-gathered, and peaked in 2011 – the greatest Terms of Trade boom in Australian history. The tragedy of Australia’s fiscal policy was that the fiscal stimulus was over-done and then never withdrawn. Our Budget position significantly declined from 2008 and the great tragedy is that it continued to decline during our most favourable trading conditions in a Century. Successive generations will not forgive that.
I’ve gone to the trouble of looking at how much Peter Costello cut spending from 1996 to 2002 and then applied the same level of austerity to the Budget today to see what kind of outcomes that would deliver. Between June 1996 and June 2002, public demand didn’t shrink at all to attain a budget surplus. It actually grew 19.5% but domestic demand was so strong that it did all of the work for the government, growing a much faster 28%.
