Hard road back to a Budget surplus

In December 2019, the Federal Government announced in its mid-year economic and fiscal outlook that Australia would record a budget surplus of $5 billion this financial year.

That was destined to be Australia’s first budget surplus for 12 years. Until the outbreak of the coronavirus pandemic in January. 

Now, after announcing $259 billion in emergency rescue packages, the Federal Government is looking at years of budget deficits as the nation slips into and then emerges from, a looming economic recession.

It won’t be an easy task to deliver the next budget surplus, as previous recoveries have shown. Governments typically spend up big to reverse, or avert, an economic slowdown.

Budget papers from the Department of Finance underline the hard slog required in returning to a budget surplus after a recession.

Back to 1990-91 

Australia’s last recession occurred in 1990-91, as the economy stalled after a period of strong domestic growth.

In fact, the then Federal Treasurer John Kerin reported in his 1991 Budget papers that Australia had recorded a budget surplus of almost $1.9 billion (on $96 billion of budget outlays) in the 1990-91 financial year. 

But the budget outcomes went south after that, with a deficit of $9.3 billion for 1991-92, rising to a deficit of $10.3 billion for the 1995-96 year, by which time annual budget expenditure had soared to more than $131 billion.

After the incoming Howard Government took the axe to spending programs, the budget finally returned to the black in 1998-99, with a surplus of $3.9 billion.

Final budget surplus

By 2007-8, the budget surplus was $19.7 billion – the last budget surplus to be realised in Australia, although by then budget expenditure had risen to $280 billion.

In 2008, the Global Financial Crisis wreaked havoc with the world’s economy, and also with Australia’s budget positions.

As a result, in 2008-09 the Federal budget plunged into a $27.1 billion deficit, as annual budget expenditure jumped to $324 billion. Despite numerous pledges to return it to surplus and recent fiscal progress, the budget has remained in deficit since.

Australia’s booming mineral exports, coupled with rising corporate taxation revenues and expenditure cuts, helped to restore and maintain the Federal budget surplus in the late 1990s and early 2000s.

It’s different this time. 

Population growth slump

For starters, net population growth will grind to a near-halt as immigration levels fall, while taxation revenues will decline sharply as corporate profits slump and unemployment rises.

There’s little public and political appetite for major tax reforms to lift revenues, such as widening the GST base or increasing its rate.

In the meantime, the Morrison Government has flagged major productivity reforms, such as slashing the time for the approval of major infrastructure projects and identifying targets for deregulation.

The Federal Government has also brought forwarded or provided additional funding of more than $6 billion for road infrastructure projects across Australia. 

But it’s a long haul ahead.

We’ll know a little more about the Government’s plans when Federal Treasurer Josh Frydenberg provides a fiscal and economic update on July 23, ahead of the Federal Budget to be delivered in early October. 

Ends.