Swan must show belated fiscal restraint

Swan must

WHAT explains the size of recent budget deficits? Is it the global financial crisis, as Wayne Swan asserts?

Or is it economic mismanagement and wasteful spending, as the opposition claims? Neither answer is accurate or adequate.

Labor may have wasted money during its first term in power, but that isn't the reason it can't balance the books now. And while the GFC certainly punched a hole in Swan's budget when it struck, that's no excuse for the ongoing failure to cut spending below revenue since that time.

The final four years of John Howard saw a 28 per cent jump in government spending, fortunately outstripped by a huge 33 per cent jump in government revenue, hence there were surpluses right throughout that period. Labor's four years in office have resulted in an almost unbelievable 39 per cent jump in spending, which dwarfs its more modest 15 per cent jump in revenue courtesy of the mining boom mark I winding down. Hence it has been deficits all the way. These are Treasury's own figures.

Labor hasn't been able to balance the budget because it hasn't had the courage to cut into government spending, which has ballooned since it won office. Spending cuts should have dominated Labor's first budget when it took control of a budget already in structural deficit. Cuts should have followed budgets after the GFC, at which point the size of the structural deficit has widened dramatically.

The 2 per cent spending cap in place now is welcome fiscal austerity, but it's too late and it applies only to the post-GFC spend-a-thon figures. In other words, Labor blew the budget battling the GFC -- rightly or wrongly -- yet now pats itself on the back for limiting growth on that surge in spending. Limiting growth? Admirably weak, perhaps. Cutting spending would have been courageously bold.

A detailing of the money the government receives from taxes against what it spends on all manner of government programs cuts through the deliberate gobbledegook thrown at journalists and the public that's designed to confuse us into intellectual submission when we try to form an independent view about the budget's woes.

In the Coalition's last full budget, delivered for the 2006-07 financial year, it received $273 billion in revenue. It spent $253bn. Four years later and the budget projections for the 2010-11 financial year are expected to reap $313bn in revenue, but the Labor government will spend $352bn. That's a 15 per cent growth in revenue under Labor at the same time spending jumped by 39 per cent.

Compare that with the final four years the Coalition was in power. From the 2002-03 financial year to that of 2006-07, Coalition government revenue went up from $205bn to $273bn, a 33 per cent increase. Those numbers reflect the rivers of gold Swan now talks about. Peter Costello's budget spending increased during the same period from $197bn to $253bn, a 28 per cent increase.

Revenue during Labor's time in office has grown at less than half the rate that it did during the Coalition's final four years. (OK, life isn't fair.) But spending by Labor has been nearly 40 per cent higher during that time than it was in the Coalition's profligate final four years. That, in a nutshell, is Labor's failure.

It is not good enough for Swan to lean on the GFC to explain such a large growth in spending. These are figures based on this financial year, not what was spent during and immediately after the GFC.

We can argue about whether the Australian economy needs cash injections. We have low government debt by world standards as well as declining infrastructure, so some economists would advocate short-term debt to improve productivity to enhance long-term growth. We can argue about the extent to which inflation has driven increases in government spending, but inflation has been constant through the figures for the Coalition's last four years and Labor's first four.

Labor's problem is that it didn't cut into the over-the-top spending by the Howard government during its final years in office that was aimed at electoral success. It was the sort of spending Costello complained about when I interviewed him for Howard's biography. Middle-class welfare was built into the budget on the back of revenue that was unsustainable.

But new governments have the political capital to cut into such mismanagement, which is exactly what Howard and Costello did in their 1996 budget after winning office from Paul Keating. Kevin Rudd and Swan chose instead to stay popular, shirked tough decision-making that would have realigned the budget and cut out excessive middle-class welfare, and they failed to cut the bloated public service and make government programs more efficient to save money.

Couple this with a failure to reduce budget spending post the GFC and it is plainly evident that the budget deficits Labor offers up are a consequence of its inability, unwillingness or lack of guts to reduce spending. I happen to believe we shouldn't be afraid to run deficits to fund needed infrastructure to sustain future productivity, given our low debt by world standards. But that's another debate that goes to the quality of the spend when running deficits, and Labor doesn't exactly look good on that score either.

We live in an age of political spin. But when the government tells you the GFC gutted revenue you need to realise it did so only in the short term, which doesn't justify too much spending today.

When Labor tells you it is working hard to find savings in the budget, you need to be cynical because in the four years it has been in office government spending has increased by 39 per cent; not a great deal of savings there.

However, when the opposition slams Labor for each of the above, don't forget it handed over a budget already in structural deficit with recurrent spending based on revenue projections that weren't going to last.

Swan didn't have the guts to insist to Rudd that budget cuts in 2008 were necessary even if they would hurt Rudd's popularity. He also didn't have the guts to make unpopular cuts post the GFC, again because Rudd wanted to stay popular with voters. Now Rudd is gone and Labor is languishing in the polls.

Does anyone seriously think a weakened Labor government will have the courage to do what it failed to do when it had popularity on its side? We will find out in May.

Peter van Onselen is a Winthrop professor at the University of Western Australia.