Moments into his Federal Budget speech to the House of Representatives, Wayne Swan said that “budgets are about choices”. It was one of the few statements in his speech on which there would be universal agreement.
In a literal sense, for a nation, a budget is set of choices about how to raise revenue (and how much to raise), and how to allocate that revenue (and how much to allocate). However, the budget reveals more than just the choices found in the accounting minutiae. It reveals the choices that the politicians who drafted the budget have made about the future path of the economy and our nation. It highlights their beliefs in this regard. A similar set of choices and beliefs is revealed in the opinions of political opponents to the budget. What does all of this tell us?
For every word of economic legislation there is a thousand words of analysis, and at least for me, it is difficult to determine the signal from the noise. Where does politics end and reality begin? When is a spending cut a spending cut, instead of a slowdown in the growth of spending, or a downgrade in a growth estimate, or a manipulation of accrual figures?
As you can imagine, this means I’m not an authority on the details. If you’re interested in the nitty gritty, the Financial Review has some great graphics on their website that illustrate the revenue and expenditure positions, and some summaries of the big changes. If you’re brave enough, you can read the legislation yourself.
What I think is not mentioned enough is the bigger picture, the macroeconomic implications of this budget and what it says about how our budget debates are framed.
What is most striking about the budget debate in Australia is that it is not centred on if we should return to surplus, but rather how rapidly we should. The position of the Labour government is “soon.” The position of the Coalition is “sooner.”
The Labour government was so captured by this debate that it made the promise to achieve surplus by this fiscal year literally hundreds of times. While this promise has been broken, due to what the Treasurer described as “significant” revenue write-downs, he asserted in his budget speech that the government remains committed to its goal. Notably, the Treasurer did not have any partisan ‘big-spending’ provisions in his bill to try to garner cheap votes, since the NBN is financed off budget and the NDIS is bipartisan legislation fully funded by the Medicare levy increase. It seems the current government really is committed to the spending cuts it has planned (or perhaps is just resigned to losing the next election, and didn’t bother with the usual election year pork-barrel spending).
Nevertheless, as is typical in politics, the opposition does not want you to be reassured by these measures. Shadow Treasurer Joe Hockey claimed immediately after Swan’s speech that Australia is faced with a dire budget crisis. This claim is probably hyperbole, and so a more reasonable reading of the Coalition position might be that the Labour party has not properly balanced the budget over the cycle, and that since we are close to potential output (and have been for some time) we should be much closer to surplus today. On this point, reasonable people can disagree, but it is nevertheless remarkable that the budget debate is constrained to such a small set of outcomes.
We don’t have politicians arguing about how much spending is too much; we have politicians arguing over in what areas our spending should be reduced, and how fast. More importantly, we have politicians who genuinely intend to achieve these goal, and have credible plans to do so. In my mind, Swan would be very likely to return the budget to surplus if the government was re-elected, if only just to regain his credibility. If he isn’t re-elected, Abbot and Hockey have specifically stated that they are likely to keep in place the cuts that Swan has proposed, and probably enact more. Either way, government surplus is on the horizon.
I think this is a good thing. The quality of the debate has been far higher than similar debates I have followed, in the US in particular. I hold the opinion that any reasonable cuts in government spending can be offset by a forward looking, inflation targeting central bank, like the one that we have. I think that a small surplus is probably judicious, although I have seen it convincingly argued that running a deficit smaller than the rate of growth is essentially a free lunch.
Of course, this isn’t to say that details of the budget don’t matter. While the level of spending both parties propose may be similar, in the details they certainly differ. Perhaps the biggest two differences are the NBN and Climate Change policy, but those are topics for other posts. We could also talk about the proper role for deficit financing, optimal taxation methods and levels, the role of monetary policy, demographic issues… the list goes on (and hopefully so will the blog posts!).
But, like I said above, this isn’t a post about details. Sometimes I think it is worth taking a step back, and remembering that at the macro level, our budget debate is constrained to how soon we should begin repaying government debt. I think, for that reason, we should count ourselves lucky.