Fiscal discipline as a victim of political disruption

It is often said that Australians have become complacent about what is needed to maintain the foundations for solid growth in the economy – jobs, real wages and living standards – and that we are taking prosperity for granted.

One dimension of this is our attitude to budget deficits and public debt. Just as Scott Morrison proudly announces the first budget surplus in 12 years — never mind it is an updated estimate for a year that doesn’t even start until next July — the response from a public that once valued budget surpluses may be little more than a yawn.

Voters will still punish a government that badly mismanages the public finances. But it is not at all clear they will reward a display of fiscal prudence; particularly if it means they are deprived of public expenditure goodies such as ‘infrastructure’, education and health care.

Election results are too complex and messy to be attributed to single causes, but there is prima facie evidence of increased tolerance for deficits and debt in this year’s Victorian and Queensland state elections.

In other countries, political disruption is undermining fiscal discipline.

In the US, after inching down after the GFC, the federal deficit is again soaring back to 5% of GDP – unprecedented at a time of such economic strength. (If Australia ran a federal deficit of that magnitude, it would approach $100 billion.) This is the dark side of the otherwise welcome Trump tax cuts, but there is little sign anyone cares beyond the small community of fiscal policy wonks.

In Italy, the left-right coalition government is challenging the EU’s fiscal rules — which euro-sceptics may cheer; but Italy is playing with fire by enlarging a deficit that adds to an already unsustainable debt burden.

In the United Kingdom, the weak minority government called a premature end to ‘austerity’ (aka fiscal discipline) because it perceived the voters had had enough.

There is a thread running through these examples: political disruption, fragmentation, populism and the allure of instant gratification at the expense of fiscal sustainability. There is nothing new about deficit spending, but perhaps something new and pernicious in what is giving it a new push.

Back home, given what Morrison and Frydenberg have said, their credibility now hinges on bringing down a surplus budget for 2019-20, and Shorten-Bowen will match it (with a different expenditure and revenue composition).

But from a government that has been very much disrupted, watch out for vote-buying promises that wear the surplus down to a bare minimum and back-load the costs into the distant future.