Having blown up the budget and created a scenario where government debt will hit $1.2 trillion in the next few years, the Federal Government needs to use the unfolding period of better economic times to address the decade and more of budget deficits it's currently forecasting.
Failure to tackle the budget deficit will see government debt escalate beyond $1.2 trillion.
This matters for many reasons, not least of which is that if the global rise in interest rates continues over the next few years - as seems likely - the cost of paying interest on this debt will escalate and deprive the government of ready funds to pay for additional education, health, roads and all the other things that are important in a well-managed economy.
It should be noted up front, that no one would seriously argue that the move to budget deficit, and a large one at that, was inappropriate during the COVID outbreak over the past two years.
Indeed, it could be argued more could have been done to help the university sector, the arts and hospitalities and those businesses and workers involved in the tourism industry.
From a budget-management perspective, that is an argument for economic historians.
With the economy strong, the reverse is now true.
No one should seriously argue that a move to lower the budget deficit and potentially to lock in a few surpluses is appropriate with the economy gathering momentum, the unemployment rate set to fall to a 40-year low and with wages and inflation accelerating.
At one level, the government should allow automatic stabilisers to help fix the budget.
This means ‘using’ the improving economic conditions, with no policy changes, to fuel a lift in tax and other revenue. This will coincide with a dampening of government spending, which will be unnecessary when the economy is strong.
It would be folly and economic vandalism to use this good fortune of a stronger economy to promise tax cuts or extra government spending without some offsets elsewhere in the budget.
This is a risk in the lead-in to the federal election, which must be held by May 2022.
Already, the Morrison Government has locked in a series of unnecessary and expensive income tax cuts in the budget forward estimates. Any further cuts when the budget is in such a parlous position is unnecessary and would be poor policy.
But these automatic stabilisers are unlikely to be enough to get the balance back to balance.
Updates on the budget deficit forecasts will be released in Treasury’s Mid-Year Economic and Fiscal Outlook, due for release in the middle of December.
The latest public forecasts were for massive budget deficits for the next few years:
$99 billion in 2022-23
$80 billion in 2023-24
$57 billion in 2024-25
And these forecasts were based on a period of unbroken solid economic growth so, even with some upgrades to the outlook, the deficits will not go away.
Fresh COVID concerns
With the Omicron variant of the COVID virus emerging, there is considerable uncertainty about the effects on the economy. This or some other variant could upend it.
This will remain an issue to have in the back of mind when looking at policy settings butshould not distract policy makers from looking to repair the budget with a range of discretionary policy measures.
With the COVID pandemic showing just how important the government sector is in society, cuts in government spending will be difficult, although getting rid of some wasteful spending and tax breaks would help the process.
Revenue measures may be preferable, particularly those linked to multinational company tax and policies currently in place that distort so many markets, including housing and superannuation.
A genuine tightening in fiscal policy would also take some pressure off the RBA, which is unsure when and by how much interest rates will need to rise.
If there is a meaningful strategy to repair the budget, fewer interest rate hikes will be needed to meet the inflation and unemployment goals of policy makers.
'Good economics is good politics'
The looming election campaign should see economic policy alternatives come to the fore.
Various opinion polls show voters generally support sound government finances – smaller deficits and lower debt, in other words.
The side able to show how it plans to repair the budget will likely get a boost and improve its chances of winning.
It is not clear who said it, but the adage, “good economics is good politics” is true today.
Get set for a few years of a tightening in the budget and, with a bit of luck and bold policy, balanced budgets in the not-too-distant future.