No urgency in the budget emergency

Australia has just recorded the most contractionary year for fiscal policy ever seen.

In releasing the budget outcome for 2012-13, Treasurer Joe Hockey and Finance Minister Mathias Cormann have revealed a range of very interesting records on the budget and fiscal policy not just for 2012-13, but going back to 1970-71.

One of the first things to note is the fact that the budget deficit fell to 1.2 per cent of GDP in 2012-13, 1.7 per cent of GDP lower than the 2011-12 deficit. This is the largest year-to-year fall in the budget deficit ever recorded. This massive reduction in the deficit was driven mainly by a fall in government spending – it fell 1 per cent in nominal terms – something that has never happened before in Australia – and it dropped by a record 3.2 per cent in real terms.

As a share of GDP, government spending fell to 24.3 per cent n 2012-13, from 25.2 per cent in 2011-12 to be well down from the recent peak of 26.1 per cent in 2009-10. For comparison, the average level of government spending to GDP was 25 per cent over the last 30 years and it averaged 24.1 per cent under the Howard government.

The final budget outcome also confirmed a few other interesting factual snippets.

Contrary to conventional wisdom, Coalition governments have never once delivered a year where there was a cut in real government spending. Not the Howard government, not the Fraser government, not the McMahan or Gorton governments have delivered a real spending cut.

In contrast, in the last four decades, Labor governments have had five budgets, including in 2012-13, where real spending growth has been cut.

This makes no judgment on whether real cuts in government spending are necessarily good or bad – that is a discussion for another column. The point is that the Coalition parties in office tend to recycle their spending cuts on individual programs into their pet projects and hence never deliver real cuts in government spending.

In terms of the tax take, the final budget outcome for 2012-13 showed that it rose by 0.6 per cent of GDP to 21.6 per cent on the back of a slight upturn in economic growth through the year. This is a staggering 2.6 per cent of GDP, or $40 billion per year, below the peak level in 2004-05 and 2005-06 and some 1.8 per cent of GDP ($27 billion in 2012-13 dollar terms) below the average tax take of the Howard government, which looks like holding onto the record for the highest taxing government in Australia’s history for a while longer.

In simple terms, the 2012-13 budget outcome for the Gillard government reveals record spending cuts, a low tax take and a wafer thin budget deficit. It is easy to see why the economy recorded less than robust growth during the year. It was not simply the high Australian dollar or the fall in the terms of trade that chipped away at GDP, but the significant fiscal contraction was also a dampener on growth.

The level of net government debt rose by just 0.1 per cent of GDP in 2012-13, to reach 10.1 per cent of GDP. This remains one of the lowest levels of government net debt in the world, with the aggregative change in the debt level from 2007-08 amounting to less than 14 per cent of GDP, which is again one of the smallest increases in debt in the world over that timeframe.

It is easy to see why the credit ratings agencies have no hesitation assigning a triple-A rating to Australia’s government finances and why global investors remain enthusiastic about holding Australian assets.

When releasing the budget outcome last week, Treasurer Hockey made the outlandish claim that the 2013-14 budget would be a legacy of the Labor Party. This is outlandish because the Abbott government is obviously making decisions right now that are impacting on the budget bottom line and what’s more, Hockey as treasurer is in control of budget policy right now, today, with nine full months of the financial year remaining, whether he likes it or not.

If he wishes, Hockey can cut spending tomorrow, alter tax scales or undertake a myriad of things to address what he calls a “budget emergency” or fiscal “crisis”. He can alter the bottom line of the budget for 2013-14 by billions of dollars, something that he no doubt will do. The lack of urgency on the budget emergency is no doubt a reflection of the fact that Hockey inherited some of the best budget and government debt circumstances in the world.

Stephen Koukoulas was senior economic policy advisor to Prime Minister Julia Gillard between September 2010 and July 2011.