A Christmas “I told you so”

Dumbing down budget policy

As a temporary member of the press gallery I had my ‘gotcha’ question ready for Wayne Swan, but alas didn’t join the shouting match to get my question in. But I can share it with you gentle reader – a little esprit de l’escalier a few hours later.

Treasurer, do you support the Budget’s Paper’s call for the Budget to retain “the necessary flexibility for the budget position to vary in line with economic conditions to support macroeconomic stability” or your Prime Minister’s commitment to return the budget to surplus in 2012-13 come what may.

That promise is the best of promises – and the worst of promises.

Electorates like spending but hate the taxation to pay for it. Thus while it’s not the most rational approach, the obsessive concern with getting back to surplus has been a healthy counterweight to the drift towards endless deficits and mounting government debt.

Where the average government debt to GDP of the G-7 countries is just shy of 75 per cent. Australia’s will peak at less than a tenth of this. And Keynesianism isn’t a perennial spendathon. If you plan to increase spending to fight recession you should use booms in the way the years of feast are used in the Book of Genesis – to replenish the fiscal larder.

This government has not proven itself particularly courageous in taking on middle class welfare, but wearing the hair shirt of returning to surplus come what may, is nevertheless delivering impressive constraints in outlays.

But the rigid timetable for restoring surplus could become a huge handicap – economically and politically. Announced in the haste of her very first press conference as Prime Minister and so literally the prototype for many other misjudgements of similar provenance, it looks decisive and statesmanlike – but not after a moment’s thought about what could go wrong.

First, the macroeconomic success of the Government’s stimulus in saving over a hundred thousand jobs is testimony to the importance of playing the short term exigencies of the economy on their merits not as you planned three years before. Locking in the pace of returning to surplus is at odds with the logic of the stimulus. Much worse, renders the government hostage to fortune.

If the economy remains strong, returning to surplus will be both straightforward and salutary – indeed we should be heading there more vigorously. This Budget revises down tax receipts by a whopping $16.3 billion over two years from the Government’s late 2010 Mid-Year Economic and Fiscal Outlook published just six months ago. That’s before counting the near $6 billion cost of 2010’s national disasters.

So that delicately poised 2012-13 $3.5 billion dollar surplus could easily slip from the Government’s grasp. We don’t need any dramatics for the surplus to evaporate. Indeed quite minor parameter changes send it into the red (See “Welcome our new, more fragile budget”). Heaven help the government if the Chinese (bubble?) economy took a serious hit. Returning to surplus by the due date would not only require a politically suicidal fiscal contraction, but also one which simply inflict more economic damage.

Second, making the return to surplus the touchstone of economic responsibility exemplifies Labor’s loss of nerve – its concession of the narrative to the Opposition. In fact – as the ALP had argued with increasing justification as its time in government drew nearer – its opponents had slipped into a fiscal torpor shovelling out the proceeds of the mining boom to fund a string of lame, improvised vote buying exercises. But Labor couldn’t cut through from opposition, because Howard kept running healthy (looking) surpluses.

So forming government was a moment of truth – an opportunity to reconstruct the way things work and so the way they’re thought about. The new Government might have done so by unhooking the Future Fund from its ostensible purpose of funding commonwealth superannuation and transforming it into a proper sovereign wealth fund and by building institutions to deliver more independent disciplines on fiscal policy.

One could make fiscal policy more independent by establishing an independent agency to provide regular public advice to government on its fiscal stance in the way the Productivity Commission does with industry assistance. In the interim one could seek the same advice from the Reserve Bank via its regular publications.

Had the Government done so, (it could still do so now) it could expel the demons of fiscal laxity without booby trapping its own future should things turn out worse than expected. It could commit to following its independent fiscal advisor’s advice to publicly advise it on managing the return to surplus, or more timidly, could commit to its current course with an escape clause allowing it to delay the return to surplus if so advised.

Alas the change of government came to look more like a quick backstage costume swap. Now it’s the new Coalition Opposition arguing – quite rightly – for higher surpluses so that we don’t squander the dividend of the resources boom (as they did when they were in Government).

Likewise the ALP in opposition attacked the consequence of the push to minimise debt at all costs – the Howard Government’s neglect of infrastructure investment – while ALP State governments were doing much the same thing. Ask John Brumby, Kristina Keneally and Anna Bligh how that’s all going.

All this from accepting, and so reinforcing, one’s opponents’ framing of the issues.

Crikey, May 10th, 2011. A more recent column making similar points here.

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37 Responses to A Christmas “I told you so”

  1. nottrampis says:

    This is the best comment i have read on this topic.

    Well done Nick

  2. Chris Grealy says:

    So as usual Labor is doing the right thing for the country and as usual the right whingers are attacking them for it. Infuriated by the mad monk’s impotence, “Let’s wreck the joint”, they howl.

    • Nicholas Gruen says:

      Thanks Chris,

      Call me old fashioned but I don’t call promising something that you didn’t have to promise and then reneging on it “doing the right thing”. It’s bad in every respect. It’s bad ethically, it’s bad government and it’s bad politically.

      It’s a pity you can’t admit it.

      • Chris Grealy says:

        Like, for example, Abbott promising to facilitate a full term parliament, then repudiating it as “only a gentleman’s agreement”? That’s pretty shocking, aint it? What I don’t accept is this strange mindset that changing circumstances must never ever lead to changing outcomes, and that a party which promised to price carbon is vilified when they enact party policy. Nor can I accept that the conservatives have any economic cred at all when they opposed the wise measures enacted by Labor, which guided us through the GFC and made our economy the envy of the world as a result.

    • We’ve a Labor govt. There’ll never by anything but a deficit.

  3. Tel says:

    Four years, and $200 billion dollars of additional Commonwealth debt, that’s $50 billion per year — almost a straight line if you graph it.

    Back in 2011 they predicted they were just about to turn it around, any minute now.


    To very few people’s surprise it didn’t turn around, and I’m willing to make a bold prediction that we will see additional $50 billion in Com-debt this time next year. Every year they predict an expected windfall boost to revenue, every year it doesn’t happen. It really has got beyond a matter of “if things turn out worse than expected” because every year they turn out worse than expected.

    Likewise the ALP in opposition attacked the consequence of the push to minimise debt at all costs – the Howard Government’s neglect of infrastructure investment – while ALP State governments were doing much the same thing. Ask John Brumby, Kristina Keneally and Anna Bligh how that’s all going.

    Hang on a moment. The M7? The City Tunnel that made people Cross? The M2? The Lane Cove tunnel that made the houses sink? That’s why he got called “Bob the Builder” because he hardly built anything. Keneally inherited Bob’s projects and all of them got completed, the major Windsor Road upgrade happened on her watch, there’s been a cascade of M5 upgrades (still going), also Macquarie University got a new railway station (and a whole extra rail link to go with that).

    The ALP in NSW built heaps of stuff, building was never a problem for them, running out of money was a problem, shenanigans were a problem, losing the trust of the public was a problem, but Keneally was never in a position to fix any of those things.

    • Nicholas Gruen says:

      Hi Tel,

      I’d be very happy to have a bet with you if you’d care to formalise your claim “I’m willing to make a bold prediction that we will see additional $50 billion in Com-debt this time next year.” Are you saying that the budget deficit for 2012-13 will be $50 bil?

      • Tel says:


        Total Commonwealth Government Securities
        on Issue – $261,786m

        That’s the money the Australian people need to pay back, and four years ago it was $60 billion. My estimate is that it will crack $300 billion before the end of November next year, probably about the same time the election comes along. I don’t have a large amount of money to put at stake, I could promise to donate $250 to that diabetes charity that you were plugging a while back, is that OK?

        • Nicholas Gruen says:

          Thanks for the clarification Tel.

          I asked you if you were predicting a $50 bil deficit this financial year, and I take it your answer was ‘no’. So it looks like we don’t have a bet. Though perhaps we could both agree to give some money to charity. I’m not sure what diabetes charity you’re referring to.

          My charity du jour is TACSI.

        • Tel says:


          In 2011-12, the Australian Government general government sector recorded an underlying cash deficit of $43.7 billion (3.0 per cent of gross domestic product (GDP)). The fiscal balance was in deficit by $44.5 billion (3.0 per cent of GDP).

          In cash terms, the Final Budget Outcome for 2011-12 was a $661 million improvement compared with the underlying cash deficit estimated at the 2012-13 Budget, with total cash receipts (excluding Future Fund earnings) $356 million higher than expected and total cash payments $305 million lower than expected.

          So maybe $50 billion was a bit of an overenthusiastic prediction, but not out of the ballpark. May I ask if you are expecting the equivalent FBO in the 2012-13 budget to be bigger or smaller than the FBO from 2011-12 ?

          I read some of the TACSI reports, they are a bit too complicated for me to properly evaluate, but it kind of makes me thing of a secular/scientific approach to doing the work of a church. Nothing wrong with competition, I’ll put them on my list.

          Here’s a plug for facaaus.org who are not anywhere near as scientific as TACSI. There you go, takes all kinds.

    • Ken Parish says:

      Moreover, just about all the NSW projects Tel mentions are/were PPPs and thus specifically designed NOT to hit the budget bottom line (albeit on reasoning that has never made much sense to me).

      Turning to Nicholas’s point about the fate of Brumby, Keneally and Bligh, no doubt timidity on public infrastructure funding and development (especially public transport) over a long period was a factor in their demise, but as far as one can see the epic corruption in NSW and Bligh’s ill-advised attempted backflip on flogging Qld power infrastructure were more central reasons. However a plausible case can be made that Brumby at least would have survived with just a bit more attention to appropriate capital works especially transport infrastructure.

      • Nicholas Gruen says:

        Ken, Bligh’s rail sale was a product of the kind of mindset I’m critiquing. As for NSW – yes, it was too far gone. Nice to see some of it being cleaned up.

      • Tel says:

        When Nick complains about “neglect of infrastructure investment” is the objective to get things built, or is the objective to create a big hole in the budget? Do you think the typical voter is saying, “Yeah I love driving on this road, but I hate the way the government didn’t run themselves deeper into debt.” Maybe a Keynesian Economist would say that… but not your average motorist.

        Anyways, in the case of the M5 they offered toll refunds (but not GST refunds) so the state did pay a chunky share of that one (but there’s a bit of an advantage in having it spread out over years).

        • Marks says:

          NSW Labor Governments have a history of public transport blunders – from the destruction of the tramways (that were more extensive than Melbourne’s) in the fifties, to the failure to make the train system run properly in the nineties and beyond, the NSW Labor Party was simply inept in this regard.

          However, it was worse than cluelessness, it is the smartypants spin that gets up people’s noses. For example, they ‘fixed’ the late running of trains by making the schedules slower, rather than actually investing in infrastructure to make the trains run to the times that they used to run to with much older rolling stock previously. Yet, this admission of defeat was trumpeted as decisive action to overcome public transport problems. It fooled nobody.

          In other words, they made promises that they couldn’t keep (because they didn’t know how to basically), and then they tried to spin their way out of the situation. The problem is, that for infrastructure, unlike many areas of politics that can be argued endlessly, the spin lasts only as long as it takes for the punters to get enraged the next day as they commute to work. When you add this every day experience to the mix of failed-to-be-kept promises, followed by spin so thin it is an insult to one’s intelligence, it is not hard to see why the ALP has lost a lot of public trust.

  4. Chris Grealy says:

    Hmmm, blocked for “unacceptable conversation. Lol

  5. john r walker says:

    “promising something [‘something’ that was always unlikely] that you didn’t have to promise and then reneging on it” is also pretty stupid.

    Curious .. how much of the expenditure side of the deficit is things like refugee camps, cyclical stuff like increased welfare and/or infrastructure spending and how much is down to increased recurrent spending. I have read that the NSW budget problems are due to increased recurrent costs , not infrastructure costs.

    PS A banker acquaintance who was very prescient about the GFC long before it hit , reckons that the next 6 months is a good time to fix your mortgage.

    • Chris Grealy says:

      The coalition also promised to return the budget to surplus. In fact Hockey said this week in his lovable, boofheaded sort of way, that HE woulda dunnit ages ago. You gotta love his naivity.

    • Tel says:

      A banker acquaintance who was very prescient about the GFC long before it hit , reckons that the next 6 months is a good time to fix your mortgage.

      That’s a very interesting suggestion, I can’t help feeling the same. I’m expecting that the latest burst of QE in the USA just has to boost inflation, and we all know about inflation in China. So surely some of that inflation will wash over to Australia. However, after a quick check of websites, some banks (e.g. St George, ANZ) list their “comparison rate” on 3 to 5 year fixed interest as lower than “comparison rate” on standard variable interest, others (e.g. CBA, AMP) are pointing the other way.

      All of the 10 year fixed rates (where they are offered) are much higher. Obviously they aren’t willing to stick their neck out too far.

      • john r walker says:

        The banker thinks things will improve in time for the next government… time will tell.

        “Predictions , especially predictions about the future, are hard to do.”

        Merry Christmas to you all.

  6. Tyler says:

    One thing i’ve been curious to see more analysis of is why Federal revenues have recovered so sluggishly post GFC. Spending growth has been very well constrained by the labor government but we’re still seeing significant deficits despite avoiding a recession and high unemployment.

    Which revenue areas have lagged behind since 2008? Is it all down to lower corporate receipts or are we seeing lower than expected income tax revenues as well. Were policy decisions made in 07-08 like the superannuation tax concessions and income tax cuts unsustainable?

  7. nottrampis says:


    you are confusing gross debt with the deficit. gross debt has increased quite a bit because of our Basel 111 obligations.

    This always goes over the head of Catallaxians.

    Tyler go to Mark the graph and you wil lsee for yourself.

    • Ken Parish says:

      I’ve just noticed that Nottrampis is you Homer. I’d intended to remove you from the sin bin you some time ago, but forgot about it. Fortunately you’ve pre-empted me and snuck back under your own steam. Welcome back and happy Xmas!

    • Tyler says:

      Cheers, looks interesting. Another blog i’ll have to keep track of!

    • Tel says:

      Each year, the fiscal balance deficit should give you something quite close to the increase in gross debt for that year, otherwise basic arithmetic has broken down, and operating accounting without arithmetic is problematic. I’m too lazy to check this is still working, so knock yourself silly toting up budget papers.

      There’s no such thing a Basal One Hundred and Eleven. There is a Basal Three (Roman Numerals) often abbreviated to “Basal III” but this regulation applies to banks, not to government accounts. There is a note in the 2012-13 budget papers about this:

      The Government will ensure that on commencement of the Basel III capital reforms on 1 January 2013, certain capital instruments issued by authorised deposit taking institutions (ADIs) can be treated as debt for income tax purposes. This measure is estimated to have an unquantifiable but small revenue impact over the forward estimates period.

      This change will apply to certain Tier 2 regulatory capital instruments issued by ADIs and certain other related entities regulated by the Australian Prudential Regulation Authority (APRA).

      Under the Basel III capital reforms such instruments will have to be written?off or converted into ordinary shares if APRA decides that the ADI would otherwise become non?viable. If the current tax law applied to the instruments, they would likely be treated as equity for income tax purposes, and their funding costs would not be tax deductible.

      You might want to note the key words here “small revenue impact” and also I feel it is fair to point out that 1 January 2013 has not happened yet (unless those Xmas drinks turned out stronger than I was expecting).

  8. nottrampis says:

    I do not hold grudges, indeed I have recommended one of your articles quite recently.

    A bit hard to sneak back when the blog is under my name!!

    Merry Christmas to you and all the gang.

  9. nottrampis says:

    Tel, can you guess what it meant for gross debt?

    I will answer the question.No you can not as you clearly do not understand the implications of Basel111.
    Read the kouk please.

    • Tel says:

      I don’t guess the gross debt I can look it up, it is updated weekly. As the Commonwealth issues more securities the number gets added to the gross debt, it’s a damn simple concept.

      Stephen Koukoulas says:

      Gross debt (which is predominantly the amount of Commonwealth Government Securities (CGS) on issue) rose as the Budget went into deficit due to the GFC. It is around $215 billion at the moment and is likely to rise to $240 billion in the next year or so. Whomever forms government, it is likely to rise to around $350 billion in the early 2020s.

      So he predicted $240 billion but reality hit $260 billion, making him wrong by $20 billion in the space of a year. That’s probably enough to discount anything else he says but after reading a bit more I see he believes that government needs to create debt because the world financial system can only operate with a constantly increasing base of debt. OK, so Koukoulas is an MMT’er along with Warren Mosler and Bill Mitchell. I’m well aware of their arguments, and seeing Koukoulas sprout similar arguments puts him into negative credibility IMHO. Now I have two reasons to discount everything he says.

      Finally he comes up with:

      PS: I haven’t covered the Basel III matters which if adhered to in Australia would see gross debt exceed $500 billion. Well done to the Government for negotiating away from this nightmare.

      Egats! You have linked to an authority who not only isn’t interested in providing any details covering the topic that you referenced to him for, he also gives a one line explanation that says the exact opposite of what you cited him for. There must be some prize in honour of someone on offer here.

  10. nottrampis says:

    err no the Kouk isn’t an MMTer ( not even close) and clearly this topic is above your fighting weight.
    No point in continuing this any longer

  11. nottrampis says:

    two questions,

    Why do you think the RBA is behind the curve on interest rates?

    When rates get to low levels can they offset tighter fiscal policy as Swan was clearly hoping for?

  12. nottrampis says:

    It is pretty simple.

    For some time we have had above average real GDP growth BUT below average nominal GDP growth. The reason why this happened is disinflation.

    It is nominal GDP growth which is the most important ingredient here.

    Whilst it is at the point it is no government of any persuasion will get the budget into the black.

    now if commodity prices rise thus giving GDI a large boost then things will change.

  13. Tel says:

    I’m just revisiting my prediction from above, looks like I’m better off for not betting :-)

    Total Commonwealth Government Securities
    on Issue – $258,186m

    Surprisingly the number has gone down in the last month. Might not make it to $300 billion after all. Well anything is possible with an election on the horizon, maybe they really are getting spending under control… or they found somewhere else to borrow from?

  14. nottrampis says:


    You are not looking at the budget/MEYFO numbers at all. you are falling for spin.

    Just a hint as the automatic stabilisers come in this does nor mean they are spending like crazy.

    In fact taking into account this budget over the last three years spending has not increased at all in real times.

    • Tel says:

      Debt is debt and future taxpayers will need to pay it back. Simple as that. I don’t buy the “automatic stabilizers” line anyhow, this is Wayne Swan’s speech in 2011:

      Our two-stage strategy was to support jobs, then lay down a framework to bring the budget back to surplus as the economy recovered.

      Tonight I am proud to announce this strategy is working, ensuring our economy has far outperformed the rest of the developed world.

      Advanced economies contracted by over 3 per cent in 2009, while Australia grew 1.4 per cent. Without stimulus, we would have gone backwards 0.7 per cent that year.

      Mr Speaker, last Budget we expected our economy to contract in 2009-10 by half a per cent. Instead it will grow by around 2 per cent.

      Last Budget the unemployment rate was rising and forecast to peak at 8½ per cent. Instead it peaked at 5.8 per cent and is now on its way down to 4¾ per cent.

      Last Budget projected a return to surplus in 2015-16. We now expect a surplus in three years, three years ahead of schedule.

      Not “automatic stabilizers” at all, but a very deliberate application of Keynesian policy, in the belief that stimulus would create its own momentum and the economy would bounce back. This is nothing more than a short term gain, in exchange for long term pain. The stimulus created jobs only in areas directly connected to stimulus, while disrupting other industries who suddenly need to develope strategies to deal with government competition. As Turnbull explains the simple economics of crowding out (re NBN in greenfields estates):

      The solution is what we proposed some time ago when the legislation was passed, which is not to stamp out competition from the private sector suppliers. In fact OptiComm which is just one of the private sector private deployment companies has in fact connected thousands of residents — but of course it’s very hard for it to compete with the NBN Co. which is going out to developers and saying we’ll put the fibre in for you for nothing, for free. And of course a lot of developers sign up to that and then the NBN Co. simply doesn’t turn up.

      The better approach, which is what we proposed, is for developers to be encouraged to use the private sector suppliers and if they put in a network which fits the technical specifications of the NBN Co. the NBN Co. should acquire it. Unless the private sector deployment companies are allowed to get back into business and to compete on a level playing field, we’re going to be seeing a bigger and bigger telecommunications black-hole with no Wi-Line telecommunications in these greenfield housing estates.

      So as a consequence of government infrastructure investment, greenfields are actually getting less infrastructure! Some of them even fell back to Telstra as a last resort and rolled out new copper infrastructure.

      Getting back to the matter of debt:

      Total Commonwealth Government Securities
      on Issue – $268,836m

      So it is back to growing again, but only about $7 billion of new debt this year (approx 3 months). Also, above I guessed that the election would be in November, actually it is coming a bit earlier than that so we have only a bout 6 months to go. OK, it won’t get to $300 billion before the election, probably $280 billion.

      And FWIW, yes I understand some of this represents assets (such as the NBN is an asset) and yes these assets can be sold to pay back the debt. However, governments tend not to make good entrapeneurial speculators, and they have not been using “Mark to Market” accounting so the real value of these assets is anyone’s guess. If they had been using proper government accounting (which is highly conservative) the NBN would show up as a paper loss, because no way could they sell it now for what they paid. That’s why floating shares on the stock market is a much better way of estimating the value of speculative corporate assets.

  15. nottrampis says:


    look at the nominal GDP figures. ( Grog’s Gamut has them. you can get it by using my Around the traps!)

    If you do not believe that then ask you how is the government detracting from growth if it is deliberately increasing spending!

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