For another thing, it’s reasonable to expect that strong economies and strong budgets go together, as do weak economies and weak budgets. The state of economy determines the state of the budget balance.
Not this time. As Deloitte Access Economics’ Chris Richardson has observed, “the economy is getting worse, but the budget is getting better”. Let’s start with the budget.
Politically, this budget is built on a fiction: that its centrepiece, a further round of tax cuts (and possibly one-off cash grants to pensioners) on top of last year’s three-stage, seven-year tax cuts costing $144 billion over 10 years, is the fruit of the government’s success in returning the budget to surplus, not a sign of its political desperation.
In truth, the government’s budgetary record is hardly anything to boast about, particularly when you remember the confident promises it made while in opposition about how quickly and easily it could eliminate “debt and deficit”.
The deficit may be gone, but there’s still a lot of debt — which the Coalition seems in no hurry to pay back.
We know the government will budget for a decent surplus in the coming financial year, but it’s so close to balance in the present year that it would take only minor creative accounting to produce a “surprise” surplus a year earlier than promised.
When you remember how close to balance Labor’s Wayne Swan got in 2012-13, however, it’s surprising it’s taken the Coalition all of two terms to get us to where we now are.
You can blame this on lack of political will, but it’s now more apparent than it has been that the delay is a product of the economy’s slowness to recover from the Great Recession we supposedly didn’t have.
Even since Swan’s day, the econocrats – including the Reserve Bank – have each year been forecasting an early return to strong economic growth and a greatly improved budget balance.
And, each year, their forecasts have proved way too optimistic, particularly for a return to strong wage growth. A return to economic business as usual has repeatedly eluded us.
It’s not the econocrats’ fault, it’s the slowness of all of us to realise that the “secular stagnation” that’s dogged the United States and the other advanced economies is also dogging us. But with the economy’s unexpected slowing to growth of just 2.3 per cent over 2018 – or 0.7 per cent when you subtract population growth – it’s now a lot harder not to realise.
Few remember that Tony Abbott’s ill-fated first budget in 2014 was carefully designed to do little to reduce the budget deficit for the first three years because the economy was still too weak withstand a move to contractionary fiscal policy.
The surprising fact is, little has changed in all the years since then. This is the macro-economic justification for Tuesday’s purely politically motivated announcement of further tax cuts. The economy’s still too weak to withstand contractionary fiscal policy as the budget heads into surplusland.
But, in that case, how have we finally got back to surplus? Partly, through surprisingly limited real growth in government spending. But, mainly, through years of bracket creep, the exhaustion of companies’ prior tax losses, more effective anti-avoidance measures and, above all, the good luck of a (probably temporary) recovery in coal and iron ore prices and, thus, mining company profits.
Treasurer Josh Frydenberg will be hoping to convince us the budget improvement is lasting, but the weak economy is temporary. It’s more likely to be the other way round.
Ross Gittins is the Herald’s economics editor.
Ross Gittins is the Economics Editor of The Sydney Morning Herald.