Opinion & Commentary
Put budget surplus to good use
The Howard government’s fiscal strategy, as reiterated in the 2007-08 budget papers, has been to keep the budget in balance on average over the economic cycle, while keeping the forward estimates in surplus as long as the economic outlook is strong.
This approach has been broadly accepted as a suitably robust medium-term fiscal framework. To the extent it has been questioned, the critics have seen it as being too tight; they favour balancing the recurrent budget while borrowing to cover capital expenditure (the “golden rule”, as applied in Britain).
It is odd, therefore, that the Prime Minister in a recent speech raised the fiscal policy bar, committing his government to “maintaining, as appropriate, budget surpluses of at least 1 per cent of GDP in future years”.
Unless “as appropriate” is to be interpreted cynically as an all purpose escape clause, the Prime Minister appears subtly to have recast the long-standing fiscal strategy by shifting the benchmark from a balanced budget to a surplus on average over the cycle.
The opposition, not to be outdone, has been quick to declare that “we want to keep the budget in surplus on average over the cycle”, in Wayne Swan’s words.
Running a surplus on average over the cycle means running a structural surplus - one that occurs when the economy is in balance, neither too hot nor too cold. It does not rely upon unsustainable revenues. It may disappear in a recession but will reappear when the economy returns to balance.
There is no explanation for the outbreak of surplus-mania, apart from the eagerness of both government and opposition to compete for the fiscal strongman championship in the run-up to the election.
The playing field is already tilted far enough in favour of big government without additional help from a structural surplus. It is a formula for a permanently bloated tax burden and for government financial assets piling up for no legitimate purpose.
What about the Future Fund, you might ask. The government has said that after topping it up from the 2006-07 surplus, it will not need to make further contributions. The Fund will have enough assets to achieve its objective of fully funding public service superannuation liabilities.
Future surpluses are to go into other funds bearing “infrastructure”, “higher education” and “medical equipment” labels. But such priorities are not dependent upon the government accumulating special funds to generate earnings in order to finance them. If there is a sound case for such expenditures, they can be accommodated without resort to accounting gimmicks.
If the Prime Minister had simply restated the case for a cyclical surplus in boom conditions there would be nothing to quibble with. The actual budget result must be expected to fluctuate widely around its structural benchmark if fiscal policy is to perform its automatic stabilizing role. It is hardly surprising that there is a surplus in current economic conditions.
There is a question as to how much of the surplus is cyclical and how much, if any, is structural. It is notoriously difficult for treasuries to separate the cyclical and structural components, especially looking forward. There is as much art as science involved.
It is possible that the present surplus is all cyclical and not structural at all. We should not be mesmerized by a $17 billion surplus. It represents around 1 1/2 per cent of GDP, which was matched or even exceeded in the booms of the late 1980s and early 1970s. On each occasion, the budget swung rapidly and heavily into deficit when the economy soured, and that pattern will certainly be repeated whenever the next downturn arrives.
But the outcome surpluses in recent years would have been much larger had the government not been so active in disgorging surplus revenue. The government’s systematic and substantial underestimation of revenue has led to a pattern of revenue surprises followed by ad hoc expenditure and revenue measures to manage the surplus down. In the process, a great opportunity for genuine tax reform has been missed.
Rather than planning for structural surpluses, both government and opposition would be doing the Australian economy a bigger favour by seizing the opportunity that the budget’s underlying strength offers for genuine, strategic tax reform.
Robert Carling is a Senior Fellow at The Centre for Independent Studies
