IF SURPLUS IS WIPED OUT, COALITION COULD GO THE SAME WAY
Edge in economic management is an advantage the PM can’t afford to lose
The government was kicked up the backside by the proverbial rainbow ahead of the mid-year economic and fiscal outlook, with improved economic growth outcomes boosting revenue such that a projected surplus finally appeared tangible. Certainly more tangible than the multiple budget surpluses Wayne Swan announced in 2010 before delivering multiple record-setting deficits.
However, good luck can run out. This week economists at Fitch Solutions predicted that a global slowdown in growth might cost the government its politically needed surplus later this year, and even might require greater spending to help the national economy. Subsequently, other economists echoed the sentiments.
To improve its political position, the government wants to campaign on returning the budget to surplus and containing spending after blowouts during the Labor years. It is the Coalition’s best chance of creating a contrast between the major parties, even if national debt has doubled on this government’s watch.
If voters focus on the government’s internal divisions or the cultural decay among conservatives in terms of leadership stability or representing women, the Coalition faces a wipeout.
But a focus that contrasts the record of Labor and the government at managing the budget — even something as simple as crow- ing about a return to surplus — just may keep the Coalition in the electoral hunt.
Good politics and good economics don’t always come together, however. If the conservative Fitch Solutions is right — remembering it has been wrong before — Scott Morrison would want to call an early election and get to the polls before having to watch Josh Frydenberg hand down a budget with a worse-than-expected set of numbers.
There is no contrast in budget management if the Coalition hands down another deficit after promising otherwise.
This government can’t really rush to the polls anyway, unless it wants to act like a turkey voting for an early Christmas. Since the change of prime minister the Coalition hasn’t looked even remotely competitive in the polls. The most recent two Newspolls show it trailing Labor 45-55 per cent on the two-party vote. The Prime Minister would need to see evidence of improvements over the summer to gamble on a highrisk early election. Otherwise, he needs the extra time and a good budget to build a viable campaign around.
It also would be passing strange to call a snap election having already announced the intention to bring the budget forward from May to April. That was done to facilitate a May election without delaying the budget. To subsequently go early would therefore reek of panic, playing into Labor’s hands in the process. Besides, the pre-election economic and fiscal outlook would do its own update of MYEFO ahead of polling day, exposing the deterioration in the forecasts anyway.
And PEFO is written by the Treasury without the government looking over its shoulder. In other words, it is more independent than the budget or MYEFO. Treasury might be inclined to break from the tradition of the modern bureaucracy and offer the sort of frank and fearless advice of years gone by. Even if Labor is cynical about the politicisation of Treasury, especially since Morrison and Peter Costello’s former chief of staff was appointed to head up the department.
The economy may need an injection of government spending to help it overcome any slowdown in private sector spending, but the Coalition has built a narrative around its low spending growth since being elected. To shift from that mantra could be politically damaging, especially given that on this score the contrast with Labor couldn’t be greater.
Fighting a difficult election campaign at the same time as breaking from that approach would not only be inconsistent, it could put the planned tax cuts on hold. MYEFO included $9 billion set aside for what are expected to be income tax cuts, to try to lure voters back into the Coalition fold.
Without such tax cuts there isn’t much on offer for the Coalition to campaign on, certainly not without a contrast in budget management. All that would be left in effect is a solid scare campaign on everything from energy prices to housing policy. But at this point in the electoral cycle such shouting from a government in trouble probably becomes little more than white noise.
To not use the $9bn set aside for tax cuts for spending instead, if the economy starts to sag, leaves only two options: don’t spend and risk recessionary consequences, or spend from elsewhere in the budget, putting the much vaunted surplus for 2019-20 at risk.
While the government would argue income tax cuts — putting more money in people’s pockets — will have its own stimulatory effect, the speed of the injection is incremental and untargeted. And in the current economic climate people might be inclined to use the extra money to pay down personal debt or create savings. While both represent good personal financial decisions, they don’t help stimulate a sagging national economy.
The government is desperate to fight the next election on economic management, believing that it has a significant edge over Labor on such issues. Polls do show that voters believe the Coalition is a better economic manager, whether or not such perceptions are based on reality. And Labor has policy baggage, politically speaking, such as the negative gearing reforms and capital gains tax increases, which seem badly timed in the context of the ongoing nationwide housing downturn.
To effectively exploit Labor’s political weaknesses attached to its economic policy scripts for the looming election, the Coalition simply must hold on to its promised surplus. Without that, it loses the credibility needed to attack Labor and for its message to be heeded. It already may be missing, courtesy of all the internal divisions. But there is at least a chance of prosecuting such a case if the surplus is retained.
It’s much easier to retain credibility than to win it back, particularly at this late stage. If the surplus becomes a deficit, the Coalition risks losing sizeable amounts of economic credibility. It risks doing to itself what Swan did when he forecast all those surpluses without delivering them. It ceased to matter that Swan steered a course through the global financial crisis and went on to be adjudged the world’s best treasurer. Back home he was just the guy who said one thing, only to deliver something entirely different.
Which is why it’s always better to under-promise and over-deliver, rather than do things the other way around.