Fiscal alarm bells should be ringing. At the Federal level, Treasurer Peter Costello, finds himself with a much larger surplus than predicted at Budget time six months ago. The surplus is now predicted to be $4.3 billion, up from $2.8 billion at Budget time. At the local level, ACT Chief Minister Gary Humphries finds himself with a surplus of $31 million, up from the predicted surplus of just $4.2 million. The most alarming thing is that both Governments are due to go to the polls in about a year’s time. The temptation will be strong for them to buy votes.
Already Prime Minister John Howard has indicated that some money will be spent on rural and regional roads. That suggestion came after a fortnight of persistent refusal to give some relief on petrol tax, in particular, not to apply the usual consumer-price-index rise next February because a large part of that rise can be put down to a CPI spike generated by the GST. The Government had promised that petrol would not go up as a result of the GST, it gave plenty of ammunition to the Labor Opposition to argue for petrol tax relief. Mr Howard was right to hold firm, however. It would be better to repay debt and for the Government to take money out of the economy at this stage of the business cycle. That would, as Mr Howard acknowledged, reduce the pressure on interest rates.
So, why the change in tune now. The surplus is slightly bigger, but the fiscal principle should be the same. In the boom part of the cycle, Governments should be running surpluses, to slow the boom and even out the effects of the cycle. It also enables the Government to have money up its sleeve when conditions worsen so it can stimulate the economy. There is no guarantee that Government action on its own can even the business cycle, but it can help if done responsibly. However, in the past three decades, Governments have been too fond of spending without commensurate saving in good years. Moreover, it keeps expanding its role as the economy grows.
If the Government feels the surplus should not reduce debt, it should hand it back to taxpayers in the form of a general tax cut, rather than engage in more government activity by spending the money on roads or other vote-buying schemes. If money were to be spent on roads it should have been budgeted for and not handed out in an unstructured way according to the Government’s electoral need to build up its support in the bush against the threat of One Nation or other third-party candidates.
It is the same for Mr Humphries. Whereas the Federal Government’s term for vote-buying is “”regional road program” Mr Humphries term is “”social capital”.
These mid-financial-year spendings smack of irresponsibility. They are spending just because the money is there and there are elections around the corner.
On the Federal level, the Government should at least wait until after the first three-monthly GST results are in. Again, if the revenue is higher that budgeted, the money should come back as general tax relief or to pay off debt so the Government is in a better position if the economy changes.
These larger than anticipated surpluses, however, are an indication that business activity is running hotter than predicted at Budget time. That is not an occasion to increase the size of government in the economy or to spend the money on attracting votes. Rather it is an occasion to pay debt and reduce the chances of inflation running away. There will be little joy in new roads or extra social capital if higher inflation results in higher interest rates with extra strain on family incomes and jobs.