The Unhealthy Surplus Obsession

The Unhealthy Surplus Obsession

Dean Pagonis
fiscal policyGDPbudget surplus
January 29, 2012

One of Australia’s prominent business commentators, Alan Kohler, summed it up perfectly in his contribution to today’s Business Spectator:

As everyone in business knows, a forecast is just a forecast. In times like these, it’s not even that; it’s a guess that you hope won’t look too stupid.

The chances that Wayne Swan, dubbed the ‘World’s Greatest Treasurer’ by Euromoney magazine (which in these times means very little given the fiscal mess in both Europe and America), is caught looking stupid is quite high given his ridiculously ambitious forecasts for growth and tax revenue in the latest MYEFO (Mid-Year Economic and Fiscal Outlook) Update – forecasts that allow him to claim that he will deliver a surplus in 2012/13. The mid-year budget papers indicate that Australia will have GDP growth of 3.25% in the next two fiscal years, which has already been revised down since the May budget by 19% – despite this, tax revenue have only been revised down by 1.7% in 2011/12, and just 1% in 2012/13.

Furthermore, this growth forecast relies on no major recession in both Europe and America, very little pull back in growth from China, and terms of trade remaining at 140-year highs. Given the uncertainty surrounding these major economic centres, these predictions seem fanciful at best.

I’ll start in the US: just last week, the Budget ‘Super’ Committee for Deficit Reduction failed to come to bipartisan agreement  on cutting trillions from America’s federal deficit. This failure automatically triggers the end of the Bush-era tax cuts on 1st January 2012, which basically is a tax hike when the American economy is currently flirting with recession. Furthermore, it indicates how bipartisan American politics is at the moment, which was further illustrated by the Republicans blocking the President’s jobs bill in the House, and the recent political fiasco surrounding the US debt ceiling which nearly caused the government to default on its obligations. With the federal election scheduled for the end of next year, this political gridlock will continue to hurt the American economy over the next 12 months, at a time of anaemic growth and high unemployment.

In Europe, the debt crisis has many economists already claiming that Europe is in a mild recession, with substantial downside risks to growth over the next two years. European economies have been living beyond their means for far too long, racking up too much debt that now must be repaid. The problems are further exacerbated by the fiscal austerity measures required to cut the enormous debt – these measures have suffocated Europe’s weakest economies:  Greece, Spain and Italy are now in recession, killing business profits and causing joblessness to rise over 10% (over 25% in Spain). This has further reduced tax revenues in these nations, and made the fiscal task even harder. These economic problems have been exacerbated by a lack of political leadership – the last few months have been filled with European leadership meetings that have been all rhetoric and no substance.

These issues have left the global economy in paralysis – many economists have already predicted that the years 2006-2016 will be known as the ‘forgotten decade’. Chinese growth has slowed in recent months, with weaker housing numbers and manufacturing data illustrating that even China is not immune to these global forces. The Chinese government is well aware of this, as its central bank cut its RRR by 50bps this week (China’s equivalent to monetary easing). Given Australia’s reliance on Chinese growth to fuel our mining boom, any blip in its growth story will impact mining profits, and hence the budget through tax revenues.

Under this backdrop of uncertainty, Swan still has the nerve to promise a surplus in next year’s budget – and he will get his surplus. Why? His political career is on the line, given that the promised surplus coincides with the next election in 2013. What worries me is how much he will hurt our economy just to achieve this meaningless target.