The AFR has a respectable take on the growing structural deficit of the Federal Budget today:
Future governments may need to raise $120 billion – or almost $20,000 for the average four-person family – by the end of the decade to pay for Labor’s spending commitments.
…These include the National Disability Insurance Scheme, which is expected to require an extra $10.5 billion a year within six years, a $4 billion dental care scheme, announced on Wednesday, as well as $5 billion a year for education recommended by the Gonski schools review.
“The politicians just don’t get it yet,” said Deloitte Access Economics partner Chris Richardson, one of the nation’s leading independent budget experts.
“Both sides are operating on a rule of thumb that worked for a decade, which is that China paid for all sorts of things, and that’s just not true any more,” Mr Richardson said.
…Modelling firm Macroeconomics said that without further spending cuts, Mr Swan’s 2012-13 budget would be in deficit by as much as $15 billion.
It’s all very well to worry about a Budget deficit. But there is nothing wrong with a deficit intrinsically if economic circumstances dictate it is good policy and the kind of spending outlined here is equivalent to adding well under 2% to the deficit per annum in 2014 and then declining to under 1% over subsequent years. That’s not going to kill anyone. Though it might certainly be better spent on productivity enhancement.
The real point of the article is what will the effect of the end of the commodities boom be? Much, MUCH, bigger. And there are a range of questions on this front that, as usual, are not being asked or are being masked by political platitude. They are:
- rating agencies have declared that Australia must be able to reach a surplus across the cycle to have a Budget worthy of a AAA rating. What will they do if that surplus is unattainable? They’ve said it’s fine to increase the deficit in the event of Keynesian cyclical stimulus. But what if, for instance, commodities fall permanently (even if they remain high) but do so because of a supply response and China rebalancing, which is what is coming? Structural shifts in other words?
- cutting interest rates will not be enough to offset the impact of this on the economy. In such a circumstance, household deleveraging is likely to accelerate as the writing will be on the wall for local assets. Public spending over a long period will be needed to give households time to repair balance sheets.
- aiming for a surplus in these circumstances is economic suicide, as Europe has illustrated time and again.
- yet, the Budget’s implicit guarantee of the banks, which gives a 2 notch rating uplift according to rating agencies, requires a surplus, lest everything be downgraded.
So what are we going to do as this situation develops? What the economy needs? Or what the ratings agencies need? This is the trap for the Australian Budget, not some immutable truth about surpluses being good.
David Uren at The Australian makes some effort:
Neither side of politics is prepared to countenance the need to raise taxes, nor to pare back the support that government provides to the community. There is no debate on the appropriate limits to government. To the contrary, every new policy must pass the threshold test of creating no losers. Both sides have lists of entirely unfunded long-term spending commitments that assume revenue continues to flow.
But the problem is bigger still. No matter who is in power, there is rising risk that we will not see a Federal Budget surplus for so long that it might as well be forever. Perhaps we should think about what that means.
To get things started, try this on. It probably doesn’t occur to most but addressing the question of how best to manage the inevitable future deficits should be dealt with in any new Wallis Inquiry into the banking system. Driven by vested interests, most of the discussion to date around any inquiry has been how to bring back competition and make offshore borrowing easier. In other words, return ourselves to the system that indebted households, ruined our banking architecture and created the public balance sheet dependence in the first instance.
What it should be about, rather, is how to remove the financial system from the public teat. This will benefit both competition (in the real sense of banks being able to fail – eventually!) and enable the Budget to run deficits unimpeded as private sector deleveraging transpires. For instance, we might create some equivalent to the US Federal Deposit Insurance Corporation (FDIC). A government corporation whose sole responsibility is to guarantee a mix of deposits and other liabilities in the banking system. It might be kicked off with a dollop of public cash and henceforth the insurance pool would be funded through premiums charged to the banks.
The charge needn’t be onerous. The big four banks alone make roughly $25 billion in profits. Take 3% of that per year, add some conservative gearing, and you’ve got one hell of a mechanism in the medium term. Of course, it also lowers borrowing costs over the long term so actually may cost nothing.
Meanwhile, the Budget is freed over time to support the economy through deficits as households deleverage.
There’ll be problems with this of course. But this is the discussion we’re going to need. Not the current reflexive reversion to a public surplus that is part and parcel with a Howard/Costello growth model that is already dead.
