Plenty of irony in Labor's rush to cut the deficit

WAYNE Swan is right about one thing: it certainly will be a "modest" budget surplus (if he actually achieves it).

Wayne Swan

WAYNE Swan is right about one thing: it certainly will be a "modest" budget surplus (if he actually achieves it). The surplus projection for 2012-13 has been downgraded from $3.5 billion to $1.5bn: the kind of number that can fade in an instant when cost blowouts inevitably occur.

Recent budget deficits have blown out each time the forward estimates make a prediction. The latest is the 2011-12 budget, which instead of coming in next year at $22.6bn (as predicted earlier this year) is now expected to be $37bn: a 64 per cent blowout!

It's not entirely the government's fault, of course. The opposition has blocked cost-cutting measures, the global economy has not held up as well as the forecasts anticipated and state governments have been less than friendly with some policy manoeuvres.

The slippage, nonetheless, highlights the fragility of forecasting a return to surplus as slim as $1.5bn in 2012-13.

A large part of the newly enlarged deficit for 2011-12 comes about because of Swan pushing forward spending initiatives previously slated for 2012-13.

He can't allow those commitments to be included in the 2012-13 budget any more because revenue downgrades mean they would push it into deficit.

Never mind that the timing of the spending of some of that pushed-forward money is linked to state co-sponsorship of projects that won't start until the next year.

If that's not clever accounting (or cooking the books), what is?

The targeted return to surplus has long been justified by the government on economic rather than political grounds, which is rubbish. The government plans to hit its mark (no matter what) because it worries that if it doesn't get there it will be eaten alive politically by an opposition that has long predicted this government will never preside over a budget surplus.

Never mind that the opposition will have even more trouble hitting its promised surplus target, such is its magic-pudding approach to financial management.

It continues to get away with quoting Peter Costello's track record as treasurer, even though, privately, Costello has little regard for those now managing the books for the opposition.

Achieving a budget surplus in 2012-13 is Labor's last chance before the next election to prove the Coalition wrong in its prediction the government will never deliver a surplus. If Labor can't do that, the worry among government strategists is that its economic credibility (or what's left of it) will fade from view entirely.

That is not something the world's greatest treasurer wants to see happen. But there is an irony in Swan's single-minded focus on a return to surplus, irrespective of the global economic conditions.

Former prime minister Paul Keating said last week that the looming challenges in the global economy are the worst he has seen during his lifetime. In other words, worse than those the world (and Australia) faced in 2008, when the government's response was stimulus, not fiscal restraint.

Here we are almost four years later and the approach is a polar opposite of what Labor told us had to be done last time. How does that compute?

We are being told now that a tight fiscal approach is the key to the Reserve Bank being in a position to cut interest rates.

But that is what the Coalition gave as its reason not to embark on the second round of stimulus spending in 2008. It's hard to keep up with the policy inconsistencies.

The explanation for the varied approaches of 2008 and today lies in the political differences between then and now.

Then, Australia had no net debt and the new government was riding high on political capital.

Today, its debt, while low by global standards, is significant in the context of how it has grown in consecutive budget deficits.

Shortly after the last election, a senior minister sat down over coffee and told me that achieving the surplus was a political imperative.

"If we don't get there, the government falls," he said.

Since then, from Julia Gillard down, the spin has been that the reason for sticking to the surplus target is economic, not political.

I'll let you judge which version sounds more accurate.