We'll huff, we'll puff, we'll blow the budget into surplus
Bill Clinton famously said, "It's the economy, stupid". So it is. Unsuccessful politicians might be inclined to argue, "It's the stupid economy". Either way the economy is important.
Both political parties want to argue about the economy this year. The Government believe they have a good story to tell; to which Tony Abbott said "Make my day". Policy wonks will be in heaven - the general public not so much.
The fact is, with politicians arguing at each other over the economy, both parties have good stories to tell. Australia has enjoyed a long period of good economic performance with either party in government. That is unsurprising - despite what they say, the prime minister does not run the country or the economy.
So while we can expect to see a blizzard of facts and figures it remains that it is the future and not the past that voters most want to hear about. End goal rhetoric is remarkably similar. Both parties want to balance the budget and run modest surpluses. Good. Both parties want to boost productivity - whatever that means. The difficulty is in how that rhetoric will be realised.
The problem facing government - any government - is debt and deficit. Sure we can argue that government debt is small compared to other OECD economies and short periods of deficit were necessary during the global financial crisis. But that argument isn't as comforting as we'd like.
In an intriguing analysis of Australian exceptionalism Possum found that some countries, like Ireland, had done well over long periods of time. They also quickly became economic basket cases. When things go wrong, they have a habit of going wrong quickly.
The first priority of government is to get the budget into surplus, then to start paying down debt, and cutting taxes. The challenge here is that both parties like to spend. As much as politicians would like economic growth to drive budget surpluses, they will have to cut spending. Tinkering at the margins won't be enough.
That brings us to debt. Here we're seeing all sorts of argument over net debt, gross debt, public debt, private debt... the jargon never ends. First thing to note is that private debt doesn't matter for public policy purposes. As long as politicians resist the temptation to nationalise private debt during a crisis and let troubled firms fail, we should never worry about private debt.
We shouldn't confuse public debt and private debt either. A corporation with little debt can be characterised as having a lazy balance sheet. That is not a criticism of government. At the same time, however, government should have some debt.
People tend to think about debt only as a form of finance. But it also has other characteristics. Trade in government debt creates what is known as the risk-free rate in financial markets. This price is very important in asset pricing and capital budgeting and is widely used in practice.
In the early noughties the Howard government had a team of Treasury officials canvas the notion of entirely shutting down the Australian government bond market. At that time Treasury was forecasting strong budget surpluses and net debt was expected to be negative. If the government didn't need to borrow money then Australia didn't need a government bond market.
Many academics, and even some market practitioners, agreed with the logic. A common argument was that private instruments could be used to 'back-out' a risk-free rate equivalent to that generated by government bond markets. I argued then, and still believe now, that market prices can't be faked. Further, the empirical financial economics literature points to the importance of deep and liquid bond markets in promoting efficiency in the real economy.
So zero gross debt isn't good economic policy. That isn't to say, however, that our current position is any good. Right now government is borrowing because it needs the money; because spending is too high. Ironically the best time to issue public debt is when government does not need the money.
In the area of taxation we do see some substantial differences between the Government and Opposition. The Government has introduced (or plans to introduce) new taxes or increase existing taxes. Mind you the carbon tax will cost more in the initial years than it raises in revenue and I doubt the mining tax will raise much revenue at all. The Opposition proposes abolishing those taxes and cutting existing taxes when the budget is in surplus.
Of course, all that presupposes the budget will return to surplus sooner rather than later. Here the pressure is on Treasurer Wayne Swan. He promised, come hell or high water, that the 2012/13 budget would be in surplus. In May he will have to deliver a credible projected surplus and by December we'll have a good idea as to whether he has actually delivered.
Julia Gillard and Wayne Swan can huff and puff as much as they like about the Coalition's economic plans being vague, they, however, are in government and actually have to perform. The pressure in 2012 is on them.