Budget surplus

Bowen’s promise of a surplus will be hard to fudge

In Australian politics, handing down a budget surplus has become the acid test of a government’s economic management credentials. The Liberal Party often draws a contrast between the ALP, which has not run a budget surplus since 1989, and the Coalition which, under John Howard, piled up surpluses in the early 2000s. The centrepiece of Treasurer Josh Frydenberg’s budget in April was that he was promising a surplus next year and would keep the budget ‘‘back in black’’ forever.

As shadow treasurer Chris Bowen handed down the costings of ALP policies yesterday with lots of very big numbers, that issue was clearly on his mind. He fired back with a fundamental pledge that he can deliver bigger surpluses than the Liberals.

He is pledging $60 billion of surpluses over the next four years while the Coalition is promising only $41 billion. It is a game of ‘‘my surplus is bigger than yours’’.

Bean counters will quibble over the decimal points but at least, on paper, the ALP has a $20-odd billion advantage because it will raise about $45 billion more in revenue than the Coalition, but only spend about half of it on election pledges such as childcare, health and education.

The extra revenue will either come from closing what Mr Bowen calls tax loopholes, such as franking credit refunds and tax-advantaged distributions from family trusts, or else from reversing the tax cuts for middle- and upper- income earners promised by the Coalition.

Yet Mr Bowen will be haunted by the spectre of his ALP predecessor treasurer Wayne Swan who promised a surplus in his 2012 budget and then failed to deliver.

There is one obvious risk. If Mr Bowen is to avoid Mr Swan’s fate he will have to work out what happens if he cannot pass all his revenue raising measures through the Senate. While he might be able to smuggle some of the measures through in budget supply bills, he will need the support of crossbenchers for most of them and that will sorely test his negotiating skills.

On most projections of the election result, the Senate crossbench will probably not share Mr Bowen’s view that the ALP tax changes only target ‘‘unfair and unsustainable tax loopholes and handouts that go to the top end of town’’.

The Coalition when it came to power counted on spending cuts to help it reach a surplus but the Senate knocked them back. Similarly, Mr Bowen could take years to win passage of the tax changes and in battling to pass them through the Senate he may have to water them down.

Mr Bowen is thus likely to be forced into a choice between his surplus and his populist election commitments. He will come under pressure from the ALP left wing to deliver on the spending promises straight away, even before the revenue measures are in the bag.

Voters must decide whether they trust Mr Bowen, a policy wonk who served as treasurer for three months under Kevin Rudd in 2013, to deliver on his pledge of fiscal conservatism.

Mr Bowen could help build trust by promising that if he fails to pass the tax changes in full and quickly he will put the surplus first and put some of the spending pledges on ice. In that calculation, he should err on the side of caution and ensure that he has a surplus big enough to be robust to any Senate impasses.

The federal government’s pursuit of a surplus should not become a fetish, however, and if there is a serious downturn the government can make things worse by cutting back at the wrong time. But, in the normal course, Mr Bowen should plan to repay debt which has grown over the past decade.

Which points to the other crucial uncertainty that applies equally to both sides of politics: the risk that Treasury’s economic forecasts will prove too optimistic or that an economic shock appears out of nowhere.

Given this inherent uncertainty, it is silly that the ALP has followed the Coalition in the new practice of offering costings of policies going out for a decade. Indeed, Mr Bowen claims boldly that he will deliver budget surpluses between now and 2029-30 that are $87 billion bigger than the Coalition.

This is dreaming. No one knows what the economy will be like in 2029-30 and it is dangerous to use these projections to build up unrealistic expectations.

The ALP has at least taken a more cautious line than the Coalition, which has promised major tax cuts from 2022-23. The ALP has dismissed these as ‘‘never never’’ tax cuts and refrained from spelling out what it plans to do two elections away which is way beyond the range of even the best economic forecaster’s telescope.

Article originally appeared in the SMH 11th May 2019

Chris Bowen - Franking credits

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