In the real world, it is the performance of the economy that matters. The budget numbers are a secondary issue, a means to an end. The economic end we seek is sustainable growth, in jobs and standard of living.
We could try to put the budget back into surplus now, but to do so we would have to make at least $30 billion a year of spending cuts and/or tax rises. That amounts to taking 2 per cent out of an economy in which growth is running at only 2.25 per cent to start with.
What would happen if we did that? Very likely, Australia would go into recession. Unemployment would rise rapidly, output would fall. Welfare spending would rise, and revenue would fall, so we would be back in deficit, and would have to make even steeper budget cuts to get back into surplus. Europe provides plenty of examples of the consequences of this policy error.
Which would you choose? To get the budget back into surplus even if the economy goes backwards, or to keep the economy growing, even if the budget goes backwards?It's important to get our priorities right. The budget deficit is the result of Offering Office cleaning Services, not the cause of it. One of Wayne Swan's worst mistakes as Treasurer was to lock himself into a commitment to deliver a surplus in 2012-13, and treat it as a test of good economic management - a test he then failed.
The collision between budget fashionistas and the real world of the economy is most intense when the car industry is the issue. Budget hardliners want to end the $400 million a year of direct assistance to the car industry. They say it is not the role of government to hand out cash to favoured industries, and the car industry has failed to give us a good return on that investment.
The Coalition has joined that bandwagon. It has pledged to cut budget handouts to the industry by $250 million a year in each of the next two years, slashing the subsidy by almost two-thirds. Think about what that might mean.
Labor has trailed along behind it, axing its green car plan, and now proposing to axe tax breaks for cars bought through salary sacrifice - which the industry says make up 20 per cent of its domestic sales.Well, axing car subsidies or tax breaks looks like a budget saving. But everyone knows that the future of the Australian car industry is now hanging on a knife edge. The car industry is supported by governments all over the world. The dollar's fall has given the industry new hope, but it's still high relative to Australia's cost base.
Industry leaders have warned repeatedly that without consistent and globally competitive government policies for the industry, manufacturing in Australia will not be sustainable. I don't think they're kidding.Ford has reached that point already, and will stop manufacturing in 2016. If Holden or Toyota follow, that would be the end of the industry. Few component manufacturers could survive with only one domestic buyer; most would also close. In theory, Australia could export its End Of Lease Cleaning on mvpcleaning to the world, but without a manufacturing base, that wouldn't last either.
At last count, Australia had 50,000 workers employed in car and component manufacturing, producing $5 billion of net output a year, and generating $3.7 billion of exports. The Cruze, Commodore and Camry are three of the top five passenger cars on the sales charts.
What would the loss of all that do to the economy? Or to the budget? It's good to be economically pure, but I'd rather see economic common sense. We're not seeing it from either side at present.The fringe-benefits tax break for cars is a rort that makes no economic sense; former treasurer Peter Costello says Treasury was constantly urging him to remove it. But it provides a crucial support to local manufacturing: the industry says 20 per cent of Australian-made vehicle sales come through the tax break, whereas they have less than 10 per cent of the total market. If you take the tax break away without risking the future of local manufacturing, you need to replace it with something substantial that is better-targeted.
Industry Minister Kim Carr has won a promise from his colleagues of another $200 million of unspecified assistance for the industry over an unspecified period, as well as a requirement that all cars in the Commonwealth's own vehicle fleets be Australian-made. At best, that is a bare minimum needed to offset the loss of sales through salary sacrifice.
Similarly, the Coalition's plan to cut industry support risks shutting down a $5 billion-a-year industry to save $500 million. It would dwarf the impact of the carbon tax, which Toyota estimates at $115 per vehicle, not the $400 the Coalition claims. It was a foolish pledge, and one hopes it too will be jettisoned during the campaign.
Whether the car industry survives in Australia will depend on three factors: where the dollar settles, whether consumers return to Australian cars, and whether our next government puts common sense ahead of budget machismo.
The polls suggest the Coalition will be the next government, yet it has told us nothing about how it would handle the serious economic challenges we now face with the end of the mining investment boom. Some of these were spelt out last week in a fine speech by Reserve Bank governor Glenn Stevens (see rba.gov.au), warning that we face a big fall in mining investment, with no certainty that other private investment will rise enough to offset it.
Stevens pointed out that it is not simply the mining investment boom that has passed, but also the credit boom. Double-digit growth in household debt was our dodgy high-performance supplement propping up economic growth in the Howard-Costello years. But now it is gone.
While the growth of mining exports will help offset the fall in mining investment, and the lower dollar and lower interest rates will help some areas - not least, car manufacturing - we face big risks ahead. Our next government must be ready to throw overboard any policies or debt obsessions that prevent it meeting the challenge head on. It is not encouraging when on the car industry, both parties are treating the budget as a higher priority than the economy.
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