Milne's First Foray

Christine Milne has quickly dipped her toes into the already thriving business of blaming Tony Abbott for everything that ails the Labor government.

New Greens leader Christine Milne says Opposition Leader Tony Abbott is to blame for creating an environment where Labor feels it is locked into delivering a budget surplus in the May budget even though economic circumstances have changed.

Have the Liberals been keen to highlight the government's fiscal excesses over the last four years? Yes. That is the opposition's job, after all.

But the reason that Julia Gillard and Wayne Swan are so politically wedded to the delivery of a budget surplus in May is very simple. They promised it. Over and over again.

When the government's fiscal credibility was thrown into jeopardy by billions of wasted stimulus dollars, Labor told the electorate that it would prove itself.  The budget would be returned to surplus in 2012-13, and that would put the government's economic credentials beyond doubt.

The government will be judged by the measure of performance that Wayne Swan himself has repeatedly laid out. Tony Abbott did not promise the Australian people that Labor would deliver this surplus. Labor did.

Swan's Surplus

Wayne Swan has been more prominent in the media lately, as he has begun to lay the rhetorical groundwork for his fifth budget, to be delivered on May 8.  The Treasurer is talking a tough game:

Yesterday, Treasurer Wayne Swan told a Sydney business breakfast that Australia should expect a tough budget in the face of lower-than-expected tax revenues and the need to reach a surplus.

"We will need to cut and cancel existing programs if we are to meet our targets and we'll need to redirect some spending to where it is needed most," he said.

This all seems a little too familiar to me.  Every year, Mr. Swan spends the month in the lead-up to his budget emphasising the need to engage in fiscal restraint.  In the past he has inevitably failed to cut spending in any truly significant way - and any cuts at all in recent years have been entirely neutralised by new expenditures.

The 'lower-than-expected tax revenues' to which Mr. Swan referred yesterday are also a recurring theme, and there is a very simple explanation as to why.  The government has staked so much of its economic credibility on a 2012-13 budget surplus that it has been forced, each year, to manipulate Treasury's forecasts in order to make the promise seem attainable.

Thus we saw some ridiculous assumptions in last year's budget.  Mr. Swan then promised that 500,000 new jobs would be created by mid-2013, yet in the last twelve months we have witnessed the Australian economy add just 10,000 net jobs.

Last year's rosy prediction of GDP growth reaching 4% over 2011-12 has been replaced by actual growth of just 2.5%.

The forecast 2011-12 budget deficit of $22.6 billion has already ballooned out to nearly $40 billion.

Mr. Swan last year predicted that the unemployment rate would drop to under 5% during 2012, and fall further in the following year, but it remains above 5% and is assuming an upward trajectory.

And of course, last year's budget predicted that tax revenue would shoot through the roof just in time to deliver a 2012-13 surplus.

The Treasurer can use 'lower-than-expected tax revenues' as an excuse if he likes, but he and his department must have known, even at the time, that last year's assumptions were wholly unrealistic.

Mr. Swan now finds himself facing a monumental task - a required turnaround of roughly $40 billion in the nation's fiscal condition within a twelve month period.

This is a problem of the Treasurer's own creation - he has consistently put off the tough decisions, choosing instead to manipulate the figures and hope for an unrealistically optimistic scenario.

When he hands down his fifth budget, Mr. Swan will undoubtedly again find a way to predict a razor-thin surplus for the coming financial year.  New taxes, with surprisingly high revenue streams, will be implemented to boost the bottom line.  Revenues will be moved into 2012-13, and expenditures shifted into the forward estimates.  Certain spending will remain off the books - the NBN being the most prominent example - and some programs will need to be cut, if belatedly.

Of course, we can also expect to see one or two overly optimistic assumptions.  The final fiscal outcome for 2012-13 may not be revealed until after the next election - so Mr. Swan's true day of reckoning may never come.