Federal Budget 2019: Surplus pledge may prove difficult

The current Treasurer is promising a return to surplus, but delivering on the pledge might prove tricky, as one of his predecessors found, writes Steven Wardill.

AUSTRALIA will finally tighten its belt a notch or two after an unprecedented credit binge with gross debt forecast to fall by $144 billion over the next decade.

Trimming the nation’s burgeoning debt bill, which will hit $560 billion in 2019-20, will be financed by the first surpluses seen on the nation’s books since the Howard government’s final economic blueprint in 2007.

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Treasurer Josh Frydenberg insisted the Federal Government was echoing the fiscal success of the Howard/Costello year by paying down debt raked up by its political opponents.

“John Howard and Peter Costello paid off Labor’s debt,” he said.

“And tonight the Morrison Government sets a path to do it again, without increasing taxes.

“This matters because over the last year the interest bill on the national debt was $18 billion.

“And this was in a low interest rate environment.

“This is money that could have built 500 schools or a world-class hospital in each state and territory.

“We are reducing the debt and this interest bill, not through higher taxes but by responsible budget management and by growing the economy.”

The Budget forecast net debt, the Government’s assets minus its liabilities, would be eliminated by 2029-30.

Tackling the gross debt bill, however, probably should have begun during the current financial year as payments to the Government leapt by $30 billion or 7.4 per cent.

This was fuelled by bracket creep among individual taxpayers and a large increase in company tax receipts as Australia’s key commodities of coal and iron ore continued to fetch historically high prices.

However, spending by the Federal Government jumped almost 5 per cent during 2018-19, effectively preventing a return to surplus in the year that former treasurer Joe Hockey first forecast that it would occur.

Former treasurer Wayne Swan promised a surplus in 2008-09 and then surpluses across the forward estimates from 2012-13 Budget, but they failed to materialise as spending constantly overshot estimates.

“The four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies,” Mr Swan said in 2012.

At the time, the No.1 movie in Australia was Marvel’s Avengers featuring the character Iron Man. Coincidentally, Iron Man was the top movie in the country when Mr Swan made his first Budget speech promising a surplus.

Mr Frydenberg is promising $45 billion in surpluses over the next four years, but each one will rely heavily on keeping a tight rein on spending rather than large leaps in revenue.

The Government’s income is expected to remain steady at around 25 per cent of the economy over the next four years.

This comes as economic growth is predicted to enter a subdued phase, increasing by less than 3 per cent over the next two years as Australia’s major trading partners slow.

However Treasury is still predicting the labour market to remain strong which should eventually put upward pressure on wages.

While the nation’s unemployment rate is forecast to remain locked at 5 per cent for the next four years, participation remains at near record highs.

“As growth in the economy picks up and spare capacity in the labour market continues to be reduced, wage growth and inflation are expected to rise,” Budget papers said.