Business welcomes surplus decision, but questions remain over political timing

Business leaders and economists have given the Federal Government a stamp of approval over its decision to abandon the need for a budget surplus, but the political cost of such a move is still up in the air.

Several business groups and prominent leaders have been calling for the government to abandon its surplus promise for several months now, having warned the dedication to such a goal in light of a struggling economy would necessitate spending cuts that would threaten growth.

“This is certainly no surprise,” Australian Chamber of Commerce and Industry head of economics and policy Greg Evans told SmartCompany this morning.

“Given the slowing economy, it’s appropriate we need to be careful in terms of spending caps or consideration of tax increases,” he said, noting business may still be concerned the government will want to increase taxes in order to fill the fiscal gap.

Both the Australian Industry Group and the Business Council of Australia have released statements supporting the move. The latter said the decision was “realistic”.

Shane Oliver, head economist at AMP, told SmartCompany this morning the problem isn’t the economics of the situation – ditching the surplus makes the most economic sense, he says.

“It’s really a bit of a no-brainer. It made sense to head in that direction when the world and Australia seemed stronger, but now it just seems that with commodity prices having come off, the economy is slowing, maintaining the surplus isn’t a priority.”

Oliver says that with such little debt, and a relatively strong economy in relation to the rest of the world, maintaining a surplus seems unwise.

“We’re not like the United States or Europe, where it can have deeper consequences, where there are high levels of debt and deficits.”

“I think the government has done the right thing.”

But while business leaders may praise the government for its action, the timing of the decision leaves the government in a precarious political situation.

Wayne Swan attempted to fend off the political backlash yesterday, saying the likely condemnation from the Opposition would be misplaced.

“If the worst thing that people say is that we got the economics right again but fell short on the politics, then I say, ‘so be it’,” he said.

But this may be the government’s downfall, with Opposition Leader Tony Abbott likely to paint Labor’s inability to produce a surplus as a main point of contention in next year’s election. The government’s announcement also hides recent poll figures showing Abbott’s popularity has decreased.

“Now this second solemn commitment, this second covenant with the Australian people – dumped,” he said yesterday.

But business leaders don’t seem too concerned by the political chatter.

“We’ll leave the politics to the politicians,” says Greg Evans. Shane Oliver agrees.

“You can debate the timing and the realistic nature of it all, but when push came to shove the Treasury had to make the call,” Oliver says.

And despite the fact the decision means the economy isn’t performing as well as it should, Oliver says there’s no reason to believe a deficit will place any upwards pressure on interest rates – something that should keep groups like the Australian Retailers Association happy.

“There just seems to be a lot of doom and gloom around, but we’re actually in reasonably good shape.”

There’s only one fear, Evans says – that the government will try to increase taxes in order to plug the gap in the budget.

“That would be something to further dent confidence,” he says.

“Our expectation is that we’ll see a deficit budget in 2013-14 and possibly beyond, and in the context of a slowing economy it’s certainly no time to be considering further tax increases.”