Nick Efstathiadis

By Chris Berg

If deficits are not flushed out early, they fester. Photo: If deficits are not flushed out early, they fester. (AAP: Tracey Nearmy)

Temporary deficits have a tendency to become entrenched - just ask the US. If Tony Abbott fails to return the budget to surplus quickly, Australia could face the same fate, writes Chris Berg.

Tony Abbott promised the Liberal Party faithful last week that "By the end of a Coalition government's first term, the budget will be on track to a believable surplus."

Got that? Not in surplus. On track to surplus.

Given the Coalition's near-certain victory, Abbott's surplus expectations management may be the most significant promise of the whole campaign.

Significant not just for this government or the next, but for Australian governments far into the future.

First, the obvious. This is quite a backtrack. As recently as January, Joe Hockey was promising a budget surplus in the first year of government. By April, the promise had been downgraded into a surplus in the first term.

Here's the new promise: "Within a decade, the budget surplus will be 1 per cent of GDP." The Coalition is only willing to guarantee a budget surplus by 2023.

Abbott fudged it a few days later by saying "the Government is proposing to bring us back to surplus in 2016/17 and we will do at least as well as the Government". But there's a catch. Abbott doesn't think the government is able to achieve a surplus in 2016-17.

OK, sometimes public finances change. Tax receipts are unpredictable. (Just ask Treasury.) And promises are easy to regret. (Just ask Julia Gillard.)

But the upshot of the revised promise is the Commonwealth budget will have been in deficit for 15 years - more than half of that time under a Coalition government.

This would be the longest stretch of deficits in Australian history. It would be twice the previous record of seven years, incurred after the Recession We Had To Have.

In their classic 1977 book, Democracy in Deficit: the Political Legacy of Lord Keynes, the Nobel laureate James Buchanan and his co-author Richard Wagner argued that democracy systemically favours deficits.

Politicians want to be loved. And voters love services and infrastructure and big bold plans for the future.

But all these things are costly. Politicians have just three unpleasant ways to increase expenditure. They can increase taxes, they can print more money, or they can borrow.

The first is unpopular. The second increases inflation, also unpopular, and hard to do now our central bank is independent. That leaves borrowing.

The great advantage of borrowing is that by the time debt has to be repaid, the government will have changed. The year 2023 would be the Coalition's fourth consecutive term of government. Even if the Coalition holds power, odds are Prime Minister Abbott and Treasurer Hockey will be on the book tour circuit by then.

Of course, temporary deficits are natural. In any economic downturn, the government's budget will go into the red. On one side, taxation revenues fall. On the other side, calls on the public dollar increase as workers drop onto unemployment rolls. It would take hasty, herculean cuts to avoid a deficit in those circumstances.

The Keynesian revolution convinced politicians that they should use the government's budget as a tool to manage the broader economy; that they ought to spend their way out of a recession by propping up aggregate demand.

Hence Kevin Rudd's stimulus packages of 2008 and 2009.

The adoption of Keynes' doctrine, Buchanan and Wagner argue, blew a hole through the classical belief that deficits are something to be ashamed of, and ought to be avoided.

To be fair, John Maynard Keynes himself believed that deficits, once incurred, must be quickly repaid. Preparing the British government's 1944 policy on full employment, Keynes wrote that "the ordinary budget should be balanced at all times".

Yet enticed by Keynes' spending recommendations, the norm that budgets need to be quickly returned to balance was thrown away.

In a way, we should be thankful the Coalition made such a song and dance about the deficit over the last few years. Budgets are only balanced when there is political pressure for them to do so.

That's what makes Tony Abbott's backtrack so concerning.

Demoralised and in opposition, Labor will hardly be able to criticise the Coalition for the deficit. And economics commentators have spent the last few years trying to convince us that debt is nothing to worry about. The surplus pressure will be off.

If the global economy stays slow for the next few years, as most indicators suggest it will, Joe Hockey won't be able to rely on growth alone to rebalance the budget.

And if the global economy takes a turn for the worse, a Coalition government is just as likely to try to spend its way out. It's often forgotten that the Coalition supported the first tranche of Kevin Rudd's stimulus package. It still supports Keynesian countercyclical spending.

If deficits are not flushed out early, they fester. When George W Bush dropped his government into deficit with tax cuts in 2001, his defenders said it was a temporary measure to simulate the economy. The US would be back into the black once the crisis was over.

Twelve years later and there's still no light at the end of the tunnel for the United States.

If the Coalition doesn't return to surplus soon, these may be the economic consequences of Mr Abbott.

Chris Berg is a Research Fellow with the Institute of Public Affairs. His most recent book is In Defence of Freedom of Speech: from Ancient Greece to Andrew Bolt. View his full profile here.

'On track' for a surplus? Not good enough - The Drum (Australian Broadcasting Corporation)

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