The government is hellbent on delivering a surplus — but it’s a huge mistake. Picture: Supplied
The government is hellbent on delivering a surplus — but it’s a huge mistake. Picture: Supplied

‘Insane’ mistake ruining the economy

COMMENT

Australia's economy is in a spot of bother. Let us count the ways:

• A trade war threatening the economies of our two biggest trading partners.

Monstrous levels of household debt combined with pitiful wages growth.

Unemployment and underemployment stuck too high to generate wages growth.

• A Reserve Bank slashing interest rates to record lows and talking about bringing in quantitative easing.

What we need from the government is a bit of oomph. A spending push to keep the cycle of earning and spending going. Instead we're going to get … a surplus? How can that possibly be a good idea?

Australia has an absurd surplus obsession based on a misreading of what former Treasurer Peter Costello did in the 2000s. Costello was Treasurer during a time when money was coming in hand over fist. So much money that Treasury was continually surprised how much there was.

The economy was in amazing shape and the Treasurer was able to throw money at lots of things. He brought in a baby bonus, gave away huge tax cuts, made massive increases in defence spending, and was still able to run surpluses big enough to pay off the Government debt. Paying off the debt wasn't necessarily seen as a big priority back then. It was just something to do with all that money.

But of course after the debt was paid off, the Treasurer claimed his run of surpluses as an important achievement. A singular triumph of sheer discipline. (Scant discipline was required, money was going everywhere in those days.)

Lo and behold the idea stuck. Now apparently we have to aim to get back to surplus every year. As though the big problem facing the country was our government debt, not our household debt.

Peter Costello and his Prime Minister John Howard were not stupid. They did not run a surplus in the bad times. That would be insane. They ran a surplus because the times were bountiful. They presided over a giant and unforeseen run of economic good fortune.

'WORST SURPLUS EVER'

In the most recent Budget, though, Australia's Treasurer announced a surplus. The 2019-20 surplus is projected to be $7.1 billion, and with the recent high price of iron ore, it could be even more.

Let's just say it. This is the wrong time for a surplus. The wrong time for the government to be taking money out of the economy and using it to pay down debt. The economy needs all the money going around it can get. This is the worst surplus ever.

Australian Federal Treasurer Josh Frydenberg is surplus-obsessed. Picture: AAP Image/James Ross
Australian Federal Treasurer Josh Frydenberg is surplus-obsessed. Picture: AAP Image/James Ross

This is not to say the surplus is as fat as it might be. When I asked if this was the right time to be running a surplus, the Treasurer promptly pointed to all the spending the government has been doing.

"Conscious of the economic challenges we face, we set out in the Budget a pro-growth strategy with $158 billion of tax cuts, our $100 billion infrastructure plan and the creation of 80,000 apprenticeships," Mr Frydenberg said, acknowledging the importance of this kind of stimulus. But of course, the surplus is also part of the boast.

"This economic plan also includes restoring the nation's finances by returning the budget to the surplus for the first time in more than a decade."

HOW TO SPEND IT

There's two ways to feed a surplus back into the economy. Tax cuts or spending.

Spending is good. It can be used to set up a country for the future, for example by investing in infrastructure. The RBA has practically been begging the Government to announce a bit more infrastructure spending to both keep the economy going and set us up for the future. Anyone who has sat in traffic recently can probably think of some projects worth funding.

There's plenty of schools and hospitals that could use a funding boost too. But the current government might see a spending splurge as a bit of 'a Labor idea'. Luckily they have a good alternative. LMITO - the low and middle income tax offset.

Governor of the Australian Reserve Bank Philip Lowe. Picture: AAP Image/Lukas Coch
Governor of the Australian Reserve Bank Philip Lowe. Picture: AAP Image/Lukas Coch

That's the tax cut that gave most middle income earners $1080 back at the end of last financial year. (Despite the name, the LMITO doesn't do awfully much for low income earners. The full $1080 offset is only for people earning more than $48,000)

The Government announced the LMITO in the most recent Budget and the Reserve Bank, which has for some time felt like the only institution doing anything at all to juice up the economy of this country, fell on it with glee. The LMITO was likely to increased consumer disposable income by 0.6 per cent, the RBA said, which should flow into consumer spending.

The LMITO is a good idea. It takes money that could be going to the surplus and gives it back to people to spend. That's not to say it's better than investing for the future, or spending on solving social problems - two types of spending which would also prop up the economy - but it is an effective and non-controversial way to keep the economy ticking.

BUT IS IT ENOUGH?

The problem is the LMITO is only worth a few billion dollars a year. Probably not enough to jolt the economy out of the doldrums. If this government wanted to find a good and politically acceptable way to pump a bit more money back into the economy - at a time when the economy desperately needs it - they could crank up the LMITO. If things get bad, and they're worried stimulus cheques seem too much like a Kevin Rudd manoeuvre - they could possibly even send out stimulus cheques and just call them LMITO advances.

The Treasurer has said he is willing to take "the necessary actions" to keep the economy going, if needed. The question is whether he'd be willing to give up his surplus by taking those actions. He should. Because he will deserve very little credit for bringing down a surplus in an era of economic weakness.

Jason Murphy is an economist. He is the author of the new book Incentivology. Continue the conversation @jasemurphy