Australia is deluding itself

Not really. Apparently the government coffers are filling up with an unexpected surge of tax, described in one publication as “humungous”.

Treasurer Scott Morrison is like a 10-year-old kid that finds 10 bucks. Yes, he’s excited, and sure, it’s the most money he’s ever had in his hands, but he’s far from loaded.

This year looks a lot better than last. It’s also shaping up to be better than any of the eight years that came before it. But nobody with a long memory is impressed. We still haven’t fully recovered from the global financial crisis, as the next graph shows.

Sure, we’re not as far in the red, but we are still in the red.

Sure, we’re not as far in the red, but we are still in the red.Source:Supplied

Compared to the good old days, the forecast improvement in national finances is pitiful. So if you want a surplus, it is too soon to go on a splurge.

Remember, our economy is still a bit dicey. Unemployment fell for a while but is now stuck at an uncomfortably high level; wages growth is about as strong as a used tea bag; and businesses are still not investing in the future. Meanwhile house prices have the wobbles. Anyone saying we are back in gravy is getting way ahead of themselves.

SO CAN WE AFFORD INDIVIDUAL TAX CUTS?

With an election in the offing, things that were previously impossible suddenly seem affordable. The government knows people vote a lot more on whether they’ve got dollars in their pocket than whether the government has to issue more bonds.

When you’re the government, you can always afford anything — you just spend more than you take in taxes and borrow the rest. That’s what makes those red bars in the graph above.

Our government has got quite comfortable issuing bonds to fund itself. You can see how much the Australian government has borrowed in this chart. It is the orange line that shoots up incredibly steeply.

The government has become pretty comfy with its borrowing.

The government has become pretty comfy with its borrowing.Source:Supplied

The yield or interest rate on those bonds is highly likely to be rising in the next few years, meaning the country will have to pay even more interest on any extra money we borrow from now on.

So cutting taxes doesn’t make much sense if Mr Turnbull and Mr Morrison want to hit a surplus ASAP.

But, if they want to get re-elected, personal income tax cuts might make more sense than anything else.

WHAT ABOUT THE ARGUMENTS FOR A COMPANY TAX CUT?

There is some theory that says company tax cuts are a good idea — sort of.

If you need economic growth to fix unemployment, and if you reckon company tax cuts can help economic growth, in particular by attracting foreign investment, they could be helpful.

There’s even an economic model, produced by Treasury a few years back, that says a one percentage point cut in company tax cuts will “increase the level of GDP by between 0.15 and 0.35 per cent in the long run”.

But that upside is hilariously small, and economic models will tell you all sorts of things that turn out not to be true.

Yes, Treasurer. You might not have quite as much money as you thought. Picture: Kym Smith

Yes, Treasurer. You might not have quite as much money as you thought. Picture: Kym SmithSource:News Corp Australia

Meanwhile the cost of company tax cuts is both large and certain — we have to find billions in revenue from somewhere else. Someone has to pay tax around here. Big companies are already helping themselves to (legal) tax minimisation. It’s not clear they need any more help.

IS A BALANCED BUDGET MORE IMPORTANT THAN TAX CUTS?

Newspolls show that Aussies care more about at balanced budget than individual tax cuts. Are we right? How important is a balanced budget?

It’s actually quite a difficult question to answer. Would you pay off your mortgage if you were immortal? That’s the kind of question a country faces when it decides to pay off debt.

Because a country never gets old and retires, it has no particular rush to pay back any debts. Some countries run deficits non-stop. America has run a deficit in 44 of the last 48 years, constantly adding to the national debt. Inflation and economic growth help keep the total seeming at least somewhat reasonable.

So a balanced budget is less important for a country than it is for a family. But of course if we spend too much now, we just send the interest bill on to our kids, or our kids’ kids. Which is not fair.

So a budget surplus in any one year doesn’t matter too much, but you wouldn’t want to let your debt get crazy high, either. (Remember the orange line in the graph earlier? It’s a lot lower than the equivalent line in America, but we don’t want to copy them.)

The main reason to run a balanced budget is as insurance. You want some room to manoeuvre. If the global economy goes to hell in a handbasket thanks to a big crash in America or China, a war or an epidemic, we’ll be more comfortable if the government has lots of spare cash on hand.

Jason Murphy is an economist. He publishes the blog Thomas The Think Engine.

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