Image by Scott Cresswell CC 2.0 via Flickr

It is imperative that the government shows real leadership – not “clever politics” – in the coming budget. To this point, there have been few areas of policy that have seen more “drift”.

Under governments of both persuasions, a budget surplus has been illusory since 2007-8 and is still only “assumed” to be achieved in 2020-21, after some 13 years. But the total deficits since the GFC have already significantly exceeded the accumulated deficits from each of the two previous recessions but, this time, we haven’t yet had a recession.

Governments have promised a return to surplus since the Swan budget of 2010-11. In that budget, a return to surplus was assumed for 2012-13, as it was again in the budgets of the next two years. This slipped out to 2015-16 in Swan’s last pre-election budget in 2013-14. It has since slipped again and again through the next three budgets to 2020-21.

But, it’s all assumed in that we have to endure the somewhat bizarre budget practice of Treasury only “forecasting” the first two years of the four-year budget period, then “predicting” the second two years in a way that assumes a rapid return to strong, above capacity, growth, with strong wages and employment, that gives them the desired path to surplus.

It beggars belief that the Treasury isn’t required to provide forecasts for the whole budget period, something that should be changed in the coming budget. The electorate is justifiably confused, indeed misled, by the current, semantic, but convenient, arrangements, especially when we are now sometimes being told of “10-year effects” of some budget promises/commitments.

Yet, while the deficit has languished around $40 billion in recent years, the political rhetoric has shifted from a “budget emergency” to a “best endeavours” exercise.  Is it any wonder that the credit rating agencies have us on notice, seeking demonstration of a clear and deliverable path to surplus, to avoid downgrading our AAA rating?

While their concern about the level of our gross debt to GDP is justifiably muted, its acceleration since the GFC, relative to that of most major economies, is of increasing concern, especially given that our household debt is more than 120 per cent of GDP, which makes us one of the highest in terms of the total debt challenge, increasingly being seen by many to be risking a “debt crisis”, perhaps housing driven.

Understanding the magnitude and significance of our budgetary challenge is also certainly not helped by some of the facile and misleading utterances by Treasurer Scott Morrison about how he intends to deal with the challenge.

For much of the time, he has argued that this is an expenditure, not a revenue, problem, and that he will achieve the desired surplus mostly by further expenditure restraint. However, on some occasions he has left the door open to possible revenue increases. At one point, he specifically argued strongly [for] the need to increase wages, presumably out of concern for personal tax revenues, yet when it came to the government’s submission on the minimum wage, he was for no change.

It is instructive to compare the present process of what economists call “fiscal consolidation” with that of the budget turnaround from the two previous, post-recession, deficits from 1983 to 1988 and 1992 to 1998.

In the 1980s, the fastest pace of consolidation was achieved by twice as much adjustment to revenues than to expenditures; in the 1990s, the adjustment was split evenly between expenditure cuts and tax increases; and to date the foreshadowed consolidation is about four times more by revenue increases than spending cuts.

So, clearly, don’t listen to what Morrison says, but watch what he does. And, he will need to do much more by way of tax increases in this budget if he is to have an acceptable – and deliverable – path to surplus.

It is essential that budgets begin with a realistic assessment of the state of our economy and its prospects. It will be most important this time that we are offered an open and honest assessment of the global economic and geo-political risks and the actual state of our economy at what is certainly the most uncertain environment in my working lifetime.

The balance of probabilities must surely be on the downside? While the Trump phenomenon, and its mimicking by our leaders, may promise a stronger global and national economy for a time, with favourable “Trump trades” in our stock markets, this is most unlikely to be sustainable and would be easily dislodged by anti-globalisation, anti-immigration, pro-protection initiatives, not to mention some dumb ignition of geo-political/military tensions.

The message is clear. Be realistic in assessments, and get our budgetary house in order as a matter of urgency, especially when our overall monetary and fiscal policy capability, and flexibility, is as limited as it is.

The government must clearly define a realistic and overarching narrative within which the electorate can accept the significance of the required changes to both taxes and expenditures.

First published at the Sydney Morning Herald on Thursday 20 April 2017. This article is republished with permission from the author.

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