If economic growth accelerates and the unemployment rate falls over the next couple of years, the surplus target should be revised up. This is the good news from the recent run of good economic news. Solid economic conditions will see the growth in gross debt slow and net debt fall.
This matters because without such action of locking in the surplus when times are good, there would be a growing risk down the track of a formal credit rating downgrade which would spill over to higher borrowing and therefore debt servicing costs for the government.
Interestingly, the looming Federal election will see fiscal looseness from the Coalition government pitted against a fiscal tightening from the Labor opposition.As we saw in the budget in May and from the hints Prime Minister Scott Morrison has given on income tax cuts, the Coalition seems willing to give up at least some of the windfall revenue that is currently flowing into Treasury coffers via the unexpectedly high price being paid for Australian iron ore and coal.
Labor, on the other hand, have signaled a range of tax policy changes that will see the budget bottom line improve – changes to negative gearing, dividend imputation refunds and capital gains tax concessions which will collectively raise close to $200 billion over the next decade.
To be sure, some of this revenue to Labor will be recycled back into Labor’s preferred projects during the course of the election campaign, but shadow Finance Minister Jim Chalmers has indicated that the budget bottom line will be better in every year in the forward estimates and out years with new spending to be less than the revenue derived from the proposed tax changes. Suffice to say, the good news is that with even luck and trend growth in the economy, the budget deficit will soon to disappear and the debate will soon turn to the appropriate size of the surplus.
This should ensure the triple-A credit rating is retained which will be good news for whichever side wins the upcoming election and the economy as a whole.