Why the surplus fetish is not good economics

Tom Skladzien is AMWU National Economics Adviser.

For too long the Australian people have been told the main economic job of government is to ‘deliver a budget surplus’. It’s as if a budget surplus will solve all our economic challenges. This is far from the truth.

The elevation of a budget surplus to the pinnacle of government’s economic goals represents a ‘surplus fetish’. Not in the sense that everything is necessarily sacrificed on the altar of a surplus, but in the sense that the achievement of a surplus forms the core of a government’s economic narrative. Such a narrative misunderstands what a surplus is, what the role of government should be and what good economic management is. Yet it persists. The Right side of politics is its main proponent, but the ALP is not immune.

This persistence of a ‘surplus fetish’ narrative is understandable. Keenly propagated by some in the media, it provides a simple yardstick of success or failure by which governments can be praised or damned.

For politicians on the Right it diminishes the real economic and social role of government, while providing cover for a broader agenda of dismantling welfare and social justice systems.

It is also a narrative easily accepted by many ordinary Australians without the time or inclination to educate themselves on the finer points of economics. Slogans like ‘the government must live within its means just like households do’ send an easily understood and intuitive public message.

But the ‘surplus fetish’ narrative is complete nonsense.

The government is not like a household for many reasons, not least because a government can effectively decide its income (tax). A good government’s objective is not to enrich itself; it is to promote the wellbeing of all citizens.

The achievement of a budget surplus does not necessarily demonstrate good policy. A government constantly striving for a budget surplus is like a doctor who prescribes antibiotics regardless of the disease. Sure, sometimes it is the right medicine, but any prescription that ignores the diagnosis is not good medicine.

Likewise, striving for a budget surplus irrespective of economic context is not good economic management.

Fiscal prudence means maintaining solvency and the confidence of capital markets. It means maintaining control of public debt by keeping the debt-to-GDP ratio relatively stable and manageable. It does not mean eliminating public debt, cutting the size of government or achieving a budget surplus in a given time frame. Nor does it mean sticking below a particular tax-to-GDP ratio, as was the policy of the last ALP government.

Genuine good economic management will deliver surpluses, but only when the economy is performing above trend. A surplus should be the result of the combination of a strong economy and prudent fiscal settings. It is an outcome of good management coupled with a broad-based economic boom, not a goal to be aimed for on an arbitrary timeframe.

Economists have known this for a long time. In September 2014, 63 leading economists penned an open letter on the government’s misguided budget priorities. In it, people as distinguished as Bernie Fraser, John Quiggin, Craig Emerson, Frank Stilwell and Tim Harcourt stated:

‘The goal of fiscal policy is not simply to eliminate the deficit as quickly as possible, nor is it to generate surpluses (government is not, after all, a “profit-making business”).’

The domination of the ‘surplus fetish’ narrative and the current government’s use of it to justify their attack on our social wage and the public sector has prompted growing calls for an alternative.

One example is a call for an alternative progressive economic agenda by a coalition of unions, civil society groups and others, focusing on a set of principles including: ‘A budget surplus is not the measure of good policy, which should aim to fulfil the government’s role in a solvent way’.

A surplus can be a projection or a forecast but it should never be a political promise. No Treasurer knows the future. No Treasurer should promise results that depend more on factors out of their control than on factors within it. The ALP should never say ‘we are good economic managers because we promise to deliver a surplus’ or even ‘because we did deliver a surplus’.

Rather, we should say ‘we are good economic managers because Australians are employed in good jobs, the economy is growing, society is progressing and the government’s books are in good order’.

This is not to say that governments should be profligate or that deficits do not matter. We do need to make tough decisions to pay for the things that government must do. We cannot ignore inefficiency, inequity and waste in spending, when it occurs. A rejection of a ‘surplus fetish’ is not a rejection of sound fiscal policy. Indeed, it is a necessary step to achieving sound fiscal policy.

Australia does face significant fiscal challenges, especially over the longer term as the population ages. But these challenges do not justify the dismantling of our social wage or the abandonment of our values. Rather than serve as an excuse for going backwards as the LNP would like, they should serve as an impetus to improve the equity of that social contract, especially when it comes to our tax system.

The long march of progress is the story of the expansion not the erosion of our social contract.

Needs-based school funding, disability insurance, the NBN, a sovereign shipbuilding capacity, novel forms of innovation and industry promotion; these are just some of the priorities identified by the ALP that need to be funded. To these we should add others that are yet to gain as much support as they deserve; initiatives like universal dental care, a stronger social safety net and the proper resourcing of government agencies.

The fundamental question for any ALP Treasurer should not be: how can we get to a surplus as quickly and painlessly as possible? It should be: how can we best pay for the role of government that our values and the Australian people require?

The size of government and the size of tax revenues must be set to meet the role of government we believe Australia needs, rather than the role of government being predetermined by notions of what the size of government or tax revenues should be.

Whether it is superannuation tax, Capital Gains Tax, negative gearing, cracking down on tax avoidance or other measures; there are plenty of opportunities to both increase taxation revenue and reduce the systemic drivers of inequality that are rampant in our tax system. As well as being unjust and an affront to Labor values, these inequities grow inequality and the resulting heavy economic and social cost. Tackling them is good economics, good social policy and morally necessary. It should not be bad politics.

To remain true to our values, we need to define and implement a policy platform that reflects these values and is supported by a sound fiscal strategy, including politically difficult revenue reforms. But more than this we need to explain why the ‘surplus fetish’ narrative that is so pervasive is wrong and damaging, and how it sells Australians and their hopes short.

Australians want and deserve a government that invests in their future and grows the social and economic drivers of their wellbeing. To achieve that, we need to challenge and win an economic debate about the real goals and constraints of fiscal policy.

The Labor Left is ready and willing for that debate. It is time the rest of the ALP stepped up too.

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