Prove your humanity

Four months ago, during the May budget, the Coalition government announced that the 2018 financial year  deficit was expected to be just over $18 billion, a significant drop from the previous fiscal year deficit of $33.2 billion.

But the Coalition appears to have surpassed those expectations, recently delivering an even smaller budget deficit of $10.1 billion—almost a third of the original forecast (a measly $29.4 billion).

Newly appointed Treasurer Josh Frydenberg and Finance Minister Mathias Cormann said that the underlying cash deficit—just 0.6 per cent of gross domestic product—is the smallest it has been in ten years.

Former Treasurer and newly appointed PM Scott Morrison has put this down to the Coalition’s disciplined approach to managing finances.

Where did the money come from?

Driven by stronger economic and employment growth, increases in personal income tax and corporate tax receipts are partly responsible for the deficit reduction.

Corporate tax receipts alone were responsible for a third of the $19 billion improvement, aided by higher commodity prices boosting corporate profits.

The Coalition also made less payments than anticipated—$6.9 billion less, to be exact.

Chris Bowen, Shadow Treasurer, said the final budget outcome is a reflection of the Coalition’s huge cuts to schools, hospitals and the pension ($2.2 billion university funding cuts sound familiar?).

Despite the result being partly driven by a surge of growth, the government is not ruling out an (earlier than anticipated) return to surplus, with Frydenberg confirming that the budget was “on the path to balance in 2019–2020”.

Why are the Liberal party hell-bent on returning to a surplus?

The Liberal party prides itself on being the better economic manager of the two major political parties, and have long preached about how it’s bad to run a government at a deficit.

In 2014 the National Commission of Audit—a commission formed by the Liberal Abbott Government to review and report on the performance, functions and roles of the Commonwealth government— released a two-part report entitled “Towards Responsible Government”.

The report stated that:

“For governments, as with companies, a strong balance sheet is important. Repairing poor balance sheets typically requires higher burdens on taxpayers and reductions in government services. Liabilities on the balance sheet (including government debt) also have to be serviced and repaid, which reduces the government’s capacity to fund other services. Where governments have a strong balance sheet, they are able to use it to support the national interest.”

In short: taxpayers suffer when the government cuts funding in order to minimise a deficit. But I doubt the concern of taxpayers is the main motivation.

Debt is not deficit

Government debt and budget deficit are not the same thing.

A budget deficit occurs when expenses exceed revenue, whereas government debt is the amount owed by the government.

According to the May Budget, net debt—which is gross debt adjusted for some of the assets that the government owes and earns interest on—for the 2018–19 financial year was expected to be $349.9 billion, which is 18.4 per cent of GDP.

So, while the budget deficit is at $10.1 billion, the government is in 34 times as much debt.

Is government debt bad?

Government debt is not like household debt (which is definitely bad).

When finance is cheap, governments should be borrowing money to invest in things (like infrastructure), especially if they will provide a good return.

What really matters is the affordability of debt, and whether it is sustainable.

Former treasurer Peter Costello believes that most of us will be dead before Australia pays off its national debt.

After the May Budget was revealed, he told ABC’s 7.30 that the problem would take decades to fix. When he came on as Treasurer of the Howard Government in 1996, national debt as a proportion was around 19 per cent—the same as it is now—and it took ten surplus budgets to pay it off.

Surplus or deficit?

It depends on where the nation is in the business cycle.

When things go bad, it is good to have a surplus to rely on. The surplus provided by the Howard-Costello Government gave Prime Minister Kevin Rudd the tools to fight the 2008 recession.

But when the economy is doing well, it’s a good time to borrow money to invest in infrastructure.

Of course, that requires some pretty hefty forward thinking—and perhaps a crystal ball.

What to take from away from this

The government is always going to deliver information in a way that makes them look good, especially around election time.

While the Coalition has reduced the deficit, they have partially done so by cutting funding for things that the taxpayer needs. They have also failed to address the issue of our large national debt.

It’s also important to consider that the reduced deficit was also aided by revenue from the personal income tax, which they will now receive less of thanks to tax cuts—how will this impact their “return to balance”? If plans to cut corporate tax cuts reappear in parliament, this is also bound to have an effect on reducing national debt.

These things affect you, so don’t take them at face value.

Think of the bigger picture, and try to delve beyond the politics of politicians.