A surplus in name only
Today is federal Budget day, which means I’d be remiss if I didn’t write something about it; after all, everything from the $14 billion in ‘cost of living relief’ to the first surplus in 15 years has already been leaked to the media.
Don’t let the word ‘surplus’ lead you astray; this Budget will be as big spending as any of the previous 15 years' worth of debt-building deficits. The trick used to weasel out a tiny $4 billion surplus (<0.4% of total expenditure) will come from the combination of unprecedented revenue growth flowing from inflation and an overcooked labour market, and the practice of shovelling as many big-spending election promises ‘off balance sheet’ as possible.
They do this by claiming that the $20 billion Rewiring the Nation Corporation, $15 billion National Reconstruction Fund and yet-to-be-approved $10 billion Housing Australia Future Fund will earn a commercial rate of return. Determining what qualifies is discretionary; none of those projects are subject to anything as basic as a cost-benefit analysis, and most will end up failing to earn any returns (hello, National Broadband Network).
It isn’t just a Labor thing, either. Moving so much spending ‘below the line’ has become commonplace over the past decade or two (it’s a great way for politicians to avoid fiscal accountability), but it’s also a dishonest practice that the IMF cautioned should be “avoided”.
So when the Budget is released tonight, ignore the underlying cash balance and instead check out the headline cash balance, which includes all spending. Only that will reveal the true burden this government is inflicting on future Australians.
The government’s revenue – which is what caused the surplus, not spending restraint – has risen by so much for two main reasons. The first is Australia’s lucky position as a major commodity exporter. Global demand for our resources has been strong, greatly increasing company tax receipts (at 30%, Australia has one of the highest corporate tax rates in the world).
The second is higher income and other tax receipts stemming from domestic demand: Nominal Gross Domestic Product (NGDP) in Australia has quite literally been off the charts since the pandemic, a result of the Coalition’s (and the States') reckless, debt-financed spending which the Reserve Bank of Australia (RBA) failed to adequately offset.
There’s your inflation!
This Budget appears certain to pour more fuel on the ongoing fiscal fire, adding to inflationary pressures in a capacity-constrained economy with full employment. Don’t be fooled by the government’s claims that the ‘cost of living relief’ will decrease inflation; to the extent that occurs, it will only be through a decline in measured inflation: the Consumer Price Index (CPI) will be artificially suppressed for a quarter or two when the policy drops, but will bounce right back up a year later.
I, and I am sure many others, had hoped this government had learned from the Coalition’s many mistakes. But alas, it seems fiscal conservatism in Australia remains dead and buried; under this government, expenditure as a share of the economy is unlikely to fall much, if at all, from its present record-highs. When we should be using this fortuitous revenue bonanza to pay off debt and save for a rainy day, our governments are instead spending like we’re in the midst of the Great Depression.
That spending means the RBA will have to raise interest rates by more than it otherwise would, further stressing households (especially those ineligible for the handouts) while also increasing the risk of a hard landing in the future.