Putting the Australian Budget in a Global Context

There will be a lot of people tuning into Wayne Swan’s budget speech on Tuesday night, and not just from within Australia. Provided that the Treasurer delivers a much-hyped budget surplus (despite a softening in tax revenues due to the global slowdown), he will be able to claim that Australia is one of the first developed economies around the world to emerge from the threat of the Global Financial Crisis.

In addition to Australia’s low unemployment rate, steady economic growth and within-target inflation, it gives Swan much bragging power when he ventures overseas to meet with his counterparts from around the world.

Stripping away the hyperbole from both sides about the state of the budget and the economy, more generally, it is remarkable how Australia has managed to weather the effects of the worst global downturn since the Great Depression, especially in a fiscal context.

When we look at the historical trend of the Federal Budget balance, whilst it doesn’t make for pleasant viewing in the last few years (with the budget deficit in 2009/10 the largest in the last 30 years at over 4% of nominal GDP), it does show us that governments work very studiously to scale down recession-induced deficits as soon as possible – an indication of the political impact that the budget now has on the fate of an incumbent government when facing re-election. This may offer us some explanation as to why Swan has been so aggressive in advocating the ‘return to surplus in 2012-13’ mantra in recent months.

But when we compare Australia’s position with other economies, especially those with similar fundamentals as ours, we see that Australia is at the head of the pack, something that Swan, and the government may hope to draw on come the next election campaign.

 This table represents the budget balances for a selection of OECD economies from 2008-2011, with the figures representing the budget surplus/deficit as a percentage of GDP.

The above table, shows how Australia’s budget balance, despite contracting sharply during the years of the GFC, pales in comparison to the experiences (both past and current) of big-name economies like the United Kingdom and the United States and well below the OECD as a whole.

What Australia has in its advantage, compared to most of the economies listed above, is the lack of structural budgetary problems. Despite Australia being one of the many countries beginning to face the challenges of the aging population, we do not have an American-style Social Security program that permits retirees to claim payments from the government upon exiting the workforce.

Furthermore, there’s been a recent trend in Australia towards efficiency in the public service, which was a hallmark of the Howard-Costello era and something Kevin Rudd perpetuated with the Lindsay Tanner-led ‘razor gang’. When contrasted with stories about the bureaucracies of the Euro-zone economies, with their regulations on employment-for-life, it’s no wonder why Australia’s fundamental fiscal position is one of the best in the world.

However, we must understand one thing that Australia’s fiscal position has had in its favour, irrespective of the government’s policies. The Mining Boom has provided our tax base extensive support, through sustained increases in tax revenues that have helped to offset the cyclical increase in unemployment that came with the GFC in 2008. The Boom itself was sustained by the rapid Chinese recovery in 2009. Put together it helped keep our revenues in a steady position as expenditure increased markedly with the stimulus programs throughout 2008-9.

This commentary hasn’t sought to pass judgement on the specific fiscal policies of the government, rather it merely sought to show that despite the oft-banal discussion about Australian public policy; compared to the rest of the world, we are doing pretty well.

And if Swan manages to deliver a surplus on Tuesday night (be it through spending cuts or re-arranged spending processes), it will be another feather in the cap for the Australian economy. As George Megolagenis said on Insiders this morning, those working in Treasury departments around the world would be pretty envious of our position right now.

Irrespective of your political views, it’s a good time to be an Australian.

You can follow me on Twitter at @CRJWeinberg.

WORKS CITED

Organisation for Economic Co-operation and Development, (2011). Government deficit. Retrieved from OECD iLibrary website: http://www.oecd-ilibrary.org/economics/government-deficit_gov-dfct-table-en;jsessionid=yvrt53bgl6rd.delta

Reserve Bank of Australia, (2012). Chart pack: Government. Retrieved from Reserve Bank of Australia website: http://www.rba.gov.au/chart-pack/government.html