Budget (almost) balanced; now comes vote buying

This week’s final budget outcome report for 2017-18 is the best a federal treasurer has been able to present in 10 years, but the success story is qualified.

The government can point to a deficit that’s only a third of the estimate made when the budget was tabled in May 2017. It is the smallest of the long stream of deficits that started in 2008-09. In a budget of $450 billion the deficit of $10 billion is small enough to be characterised as close to balance.

Last year is likely to have been the year of peak debt, with net debt at 18.6 percent of GDP — similar to the previous peak in 1996 — although gross debt is higher, and the highest in 47 years of budget results. This gross debt burden stands as the stark legacy of an era of fiscal laxity.

The budget is close to balance, but it has taken too long to reach this point. Eight years have passed since the peak deficit, compared with the five years it took to reach a similar point in the 1990s episode.

The slow unwinding of the deficit in this episode has been due largely to spending remaining well above the pre-GFC level (even though it shrank as a share of GDP in 2017-18). Not only have governments failed to pursue budget correction vigorously through expenditure savings, there has also been a lot of spending on new programs.

Although tax revenue is still lower than before the GFC, it is lower by a smaller extent than spending is higher. The surprise narrowing of the deficit in 2017-18 owed much to a surge in tax revenue.

Looking ahead, although the budget is likely to improve further, we may have seen most of the improvement already. New spending on programs such as the NDIS and ‘Gonski’ school funding is largely ahead of us. In the shorter term, fiscal discipline is hostage to the political imperatives of vote-buying in the run-up to the election.

All this suggests that if the budget goes into surplus this year or (as planned) next year, it will struggle to remain there.