Who knew that back in black would become the defining mantra of Australian economic policy?
ACDC would be stoked.
The current budget has put us in a $4 billion surplus, the first of its kind in 15 years. It is the holy grail of Treasury and in this case, a remarkable turnaround. The number crunchers had pencilled in a $32B shortfall just a few months ago.
But why do we put so much emphasis on a surplus? And what does it mean to be back in black?
Being in a budget surplus is contractionary.
When the government is in a fiscal surplus, revenue exceeds spending.
AKA money is being withdrawn from the economy at an enormous scale. We are talking multiple billions of dollars at a time. This puts the brakes on the economy and slows down price inflation. This is especially true for goods the government purchases, like materials and industrial goods, but it also diffuses into the broader economy through public sector employees.
Every year following the GFC we have posted a deficit, as government spending surged to compensate for graveyard private investment. This set the scene for the inflation ogre we faced this year and allowed us to move through Covid relatively unscathed.
As we move into a surplus, we begin to return to pre-GFC politics and budget policy.
You can almost hear Wayne Swan in the background, informing Chalmers like a Jedi force ghost.
‘Use the force… and know that a budget surplus is contractionary and contractionary fiscal policy is deflationary. ‘
Okay Obi Wan, lots of long words there.
But put simply this means that fiscal surplus can reduce cost of living pressures, lower inflation, and put a slight downward pressure on interest rates.
The logic here is sound. The government is the largest player in the economy, being the government. It spends billions on healthcare, infrastructure projects, welfare and utilities among many other sectors. So when it pulls back we all feel it.
The 2023 budget is a bit of an interesting case.
While spending is restrained in this budget, most of the surplus funds aren’t coming from dire cuts to public services. In fact, hospitals, welfare, and essential services have all received a healthy lift. On the contrary, most of the surplus is coming from ‘other parameters’ and revised forecasts.
Mmmmmm. Who would they be?
Namely high commodity prices, hilariously large company tax receipts from commodity companies, and record income tax receipts thanks to high employment figures.
This has created a windfall worth tens of billions of dollars. Every beard stroking budget watcher has their eye on the number.
Furthermore the government is banking on revised NDIS growth forecasts which will save a staggering $74 billion over the next decade. Bill Shorten is restructuring the outfit to target a growth rate of 8%, down from an unsustainable 13.8%. He will be getting tough on compliance, stamping out rorts, and allocating funds to those who need it the most.
These are precise changes, budget surgery with the best instruments.
But unfortunately here is where the good things end.
Though we are back in black today and the sun is shining, there are some menacing dark clouds ahead.
The most alarming cumulonimbus is the expected rise in unemployment. Using calculations from Okun’s Law, which equates real GDP growth with labour force and productivity movements, the picture is a little dire. We need a GDP growth rate of 3.5% this year and 3.2% for the consecutive two to maintain our current unemployment rate. With the outlook so grim on the world economy we might undershoot our GDP targets and end up with surging unemployment. On the other hand, a return to working in person might cause labour productivity to rise, which in turn increases the GDP rate we need to maintain unemployment.
Scary stuff.
The budget also doesn’t do enough to fix the big structural problems.
While it has upped its GST compliance to collect billions more, the increase in the petroleum rent resource tax actually just moves collection dates forward and still earns us peanuts from an industry of cashed up titans. We actually stand to earn more from a tobacco excise, which is crazy.
Overall the talk of back in black is like a buying a really expensive cake for your wedding and then immediately dropping it all on the floor during the setup.
It might be exciting now, but that feeling won’t last. On the bright side or budget deficit for 2023-24 will be smaller than expected. One silver lining. But don’t get used to being back in black any time soon.
