Ideas@TheCentre
A deficit of stability and predictability
What started as an admirable economic goal has become an obsession. Treasurer Wayne Swan is once again hinting at tweaking the dials of fiscal policy to remain on track for a 2012/13 budget surplus.
He was right to insist on this in the budget just four months ago, although it must be added that the ‘surplus’ he tabled then was so slender that it was for all intents and purposes a balanced budget. Governments routinely behave as though they can steer the budget to whatever bottom line result they choose, but the reality is that once budget policies are determined the bottom line is hostage to unforeseen shifts in what are termed ‘parameters’ in budget-speak – variables such as commodity export prices and aggregate employment that help determine revenue. In the last four months, parameter shifts have made a budget surplus harder to achieve.
One lesson for the Gillard government is that if it wanted a high probability of achieving a surplus, it needed to aim much higher in the May budget. The surplus then budgeted, at a mere $1.5 billion, made the actual achievement of a surplus a 50/50 prospect at best, given the range of possible parameter outcomes. As parameter shifts appear to have been adverse, the question Swan faces is whether to tweak the policy dials again to restore a tiny surplus in the mid-year budget review due in November.
The narrow macroeconomic assessment of that question is one thing, and is complex in itself. Whatever the macroeconomic answer is, policymakers must appreciate that within a broader framework the budget is much more than its bottom line result. It is a maze of tax and expenditure policies, the quality of which – within reason – trumps the bottom line in economic importance. Poor quality tax and expenditure policies will do much more harm than a small deficit. The end does not justify the means. The goal of achieving a surplus does not justify every budget measure that goes in that direction.
One aspect of quality is the stability, predictability and sustainability of policies. Tinkering with tax policies has been elevated to new heights in recent years. The company tax rate, for example, was to be cut by 2%, then by 1%, then not at all, and then maybe but only if a committee could find a way for the business sector to pay for it by relinquishing existing concessions. Another example is provided by the farcical changeability of superannuation tax policy, which has become Swan’s first port of call for extra revenue to add to his tally of ‘savings’ every six months. In the arena of carbon pricing and taxing, the policy backflips are well known.
Some tax policies were damaging in their first iteration, but the chopping and changing has added another layer of hurt to confidence and stability. Economic life is full of uncertainty, but there is unavoidable and avoidable uncertainty. Proper application of the rule of law takes away the avoidable uncertainty. A stable, predictable tax regime is more important than whether the budget is a few billion in surplus or deficit. It would be a good thing if this government and its predecessors had devoted more energy to making existing spending more effective, rolling out fewer new spending initiatives, and managing overall spending to a level that can be sustained with an efficient, stable and predictable tax system. Past failures of this test are water under the bridge, but it is a test that should be applied in the future. In making a wafer-thin budget surplus in 2012/13 a symbol of the government’s economic management credibility, Swan is obsessed with the wrong thing.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
