I have a suggestion for the European Union. For a few years the Euro song contest should be suspended. In its place there should be the “The biggest euro-loser”. Every year, each of the 17 countries in the Euro zone would send its finance minister to the competition headquarters, at the European Central Bank, for a “weigh-in”. The country that lost the biggest percentage of its 10 year cumulative budget deficits through budget cuts, tax increases and asset sales would be granted immunity from elimination. Then, after three years, the people of the Euro zone would vote for which one of the remaining bloated governments would be kicked out of the Euro currency. If every contestant had slimmed down enough, then no need for a vote. Otherwise, auf wiedersehen Greece, auf wiedersehen Ireland, auf wiedersehen Portugal, auf wiedersehen all you PIIGS.
Australia does not need to go in the competition. We are on a strict diet, and already looking pretty good. Our Prime Minister Julia Gillard and Treasurer Wayne Swan have promised over and over that Australia will return to a budget surplus in the fiscal year 2012/13. This public declaration is important because temptation is everywhere. The latest source of temptation is the two speed economy. The resource sector — iron ore, coal, natural gas, gold, copper, nickel and agricultural products — is growing rapidly. The other parts of the traded goods sector — especially, tourism, retailing, international education, manufacturing — are suffering under a high Australian dollar and low productivity growth.
As job losses in these sectors start to grow the Federal Labour Government will come under intense pressure from its union base, its coalition partner The Greens, and marginal electorates to lash out billions on supporting the sectors that are suffering. If not for the promise of return to surplus in 2012/13 it would be a few billion for the steel sector, a few billion to help tourism operators, a few billion for manufacturing, a few billion for farmers who are not suffering but will demand that their snouts go in the trough as well, a few billion for the international education sector which would be money well spent, and few billion here there and everywhere.
The Gillard Government has started to back slide a bit on the promise to return to a budget surplus. They seem to be testing the water to see how much push back there will be if they break their unequivocal promise to balance the budget. Well, I hope that push back will be furious. It is not uncommon to hear pundits say “what does it matter if we have a small deficit”. It matters a lot whether the Government is held to its promise. First, if the Government decides to break its diet then it is likely to go on a massive binge of spending. Second, we need to get interest rates down to get the exchange rate down. If we tighten up on fiscal policy then we can loosen monetary policy. I should not overstate the effect that tighter fiscal policy will have on the level of the $A, but it surely will not help the two speed economy problem is the RBA has to raise rates because of Federal Government profligacy.