Sometimes, things just keep coming back to haunt you.
That’s particularly the case in politics when even the most innocent remark continues to be thrown back in a pollie’s face.
As brutally honest as it was, former prime minister Paul Keating’s quip “the recession Australia had to have” is still bandied about almost three decades down the track.
Then there was treasurer Wayne Swan’s promise to deliver a surplus in 2012, a commitment blown away by collapsing tax receipts.
Economics is never the black and white parable our politicians love to trumpet. It’s varying shades of grey and no-one, regardless of political affiliation or economic ideology, has total control of the situation.
Decisions in Washington, London, Tokyo and increasingly, Beijing, have a bigger impact on our economy than anything that goes down in Canberra.
Having delighted in the travails that have beset previous governments in the recent past, however, Prime Minister Scott Morrison and Treasurer Josh Frydenberg will be facing an uphill battle if they attempt to blame forces outside their control for our current situation.
They’re facing trouble on both fronts.
It’s possible the promised budget surplus won’t eventuate. Not only that, it appears we are heading for, if not a recession, then at the very least a temporary downturn.
And here’s the conundrum: if they deliver a surplus this financial year and we do indeed tip into recession, they’ll forever be blamed for making a tough time worse.
But abandoning the surplus, regardless of whether that helps avoid a contraction, would hold them up to political ridicule, particularly since they’ve repeatedly claimed it’s already in the bank.
Which chalice to choose?
Do deficits matter?
If there’s one thing Donald Trump doesn’t fear, it’s a deficit.
The US budget deficit has blown out to around $US1 trillion ($1.3 trillion) right now, fuelled by massive tax cuts and increased spending. And despite all that harping during the Obama presidency about fiscal recklessness, Republicans these days strangely are quiet on the issue.
So why are we so hung up about it?
Compared to the rest of the developed world, our national finances are in relatively good shape. As the chart below shows, we’re in the safe zone when it comes to government debt — at around 60 per cent of GDP — compared with say Japan, which is pushing towards 250 per cent.
We come in around 22nd on the debt standings.
Where does that debt come from? It comes from running up deficits, from spending more than you raise in tax.
While there’s a school of thought that you can continually rack up deficits without worrying about it, most conventional economists reckon governments should aim to have a balanced budget in the medium to long term. The idea is that you should squirrel away reserves in good times so you can overspend when times get tough.
That’s where things get tricky for the Government. When Tony Abbott was elected prime minister in 2013, he and then-treasurer Joe Hockey were sounding the alarm bells on our national debt which had blown out after the global financial crisis.
They continually talked of a debt crisis when there wasn’t one and the “debt and deficit disaster”. To fix it, Mr Hockey promised a surplus in the Coalition’s first year in office and one every year after.
Despite the pledge, our budget has been in deficit each year since then, which means we have seen a steady increase in gross debt as the graph below indicates. It also shows the percentage of foreign investors in our government debt.
Accounting 101: Why the deficit has persisted
We rode through the worst of the global financial crisis partly thanks to government spending but also because China ramped up investment in infrastructure, which fuelled an incredible demand for our resources.
While we are now beginning to close the gap, we haven’t been able to get back into surplus. And a big reason is that we’ve had a structural deficit.
In the decade leading up to the GFC, as Chinese demand for our resources saw cash flood the economy, we restructured our tax system with a series of income tax cuts.
We made permanent changes to the tax laws on the basis of a temporary boom.
A couple of other factors weighed on our finances as well.
Before the 2013 election, Mr Abbott promised to abolish the mining tax and the carbon tax. He kept his word and now both are gone. But you don’t need to be a bean counter to figure out that cutting off revenue streams isn’t good for balancing the books.
The mining tax was on the cusp of delivering decent returns for Treasury because the massive investment write-offs in new mines and equipment were winding down.
The carbon tax was even more problematic because the Abbott government replaced the tax with a giant subsidy. It replaced income with an expense.
As one senior Liberal at the time explained to your columnist: “Julia [Gillard] was taking money from polluters and giving it to taxpayers. Tony is taking money from taxpayers and giving it to polluters.”
In 2014, the federal government committed $2.55 billion to its Emissions Reduction Fund. Last year, it committed another $2 billion via the Climate Solutions Fund.
A large portion of that money has been doled out to recipients for tree planting or to maintain existing trees.
We still don’t know how many of those trees were incinerated in the recent fires that tore through vast areas of rural Australia. Rather than soaking up carbon, our trees have been pouring it back into the atmosphere.
And now, the business community, including major miners like BHP, are pushing for the reintroduction of a carbon price as a means of meeting our emissions targets, which many in the Coalition openly oppose.
A slowing economy meets an external crisis
The biggest headache for Mr Morrison right now is the state of the economy.
If the bushfires that gathered global attention and sent government approval ratings plummeting weren’t bad enough, a virus sweeping through our biggest trading partner threatens to curb global growth.
Most of that pain will be felt here.
Add to the equation that Australian households hold the world record when it comes to debt, thanks to some of the globe’s most expensive real estate.
And then last week, the news no-one wanted to hear: headline unemployment jumped to 5.3 per cent, kilometres away from the 4.5 per cent the Reserve Bank has targeted.
But it’s not just the unemployed; there’s also the underemployed. Add them together and almost 14 per cent of the workforce either is out of work or not working enough to get by.
Not enough work means not enough pay
That’s the reason wages growth has been abysmal for five years and, once again, it is tapering off.
Australians aren’t simply unwilling to spend. They’re hocked to the eyeballs with little spare cash and minimal pay rises.
The crisis ricocheting through China, hard on the heels of the bushfires, is likely to tip our economy into the red in the March quarter.
That should spell the end for any chance of a budget surplus.