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Expert reviews Swan's mid-year Budget

30 Nov 2011

Most economists know that a budget surplus or deficit for any one year is an accounting residual of no real economic importance. But as these things go, in order to prove his and Labor's economic credentials Wayne Swan has elevated the achievement of a Budget surplus into a political campaign, and a major test of Labor's economic management.

The trimmed down global growth forecasts mean revenues from income and corporate taxes will be down, and expenditure on things like unemployment benefits will go up. That makes the surplus target tougher to achieve.

The mid-year review has a few revenue measures, addressing tax concessions, and expenditure measures, addressing benefit levels and tests. It also signals some cuts in future public sector numbers, which raises issues about the government's capacity to deliver services.

Appropriately enough, however, the mid-year review does most of its work by playing with the budgetary accounting conventions that produce the net position.

How is this done? Well the review brings some revenues into the current year making this year's deficit bigger. It also pushes some expenditure back or forward a year. Net result is the very small surplus forecast of $1.5 billion for 2012/2013.

Should we be concerned at what looks like tricky behaviour to achieve next year's surplus?

If the fiscal residual was meaningful, perhaps we could support the Opposition's expected indignation at Labor's creative accounting. But it simply isn't that important, except that both parties have elevated it to such political prominence. Elevated or sunk to new levels of political populism?

The biggest problem is both political parties know that one year's surplus or deficit is not a very good ways of assessing economic management. But both have dug such big holes in honour of the budget surplus that even the idea of stopping digging bigger ones is hard to accept.

If you want to know what the political parties really think about the Budget and this mid-year review, look for the politicians without the shovels.