The surplus that wasn’t – what we should be thinking about now

So what are the big “ takeouts” from the election? Firstly, however much people tell opinion pollsters of their need for better government services, and stronger communities, it doesn’t take much to arouse that hip pocket nerve. People voted for the economy on Saturday, in particular their idea of who would keep interest rates low. Ironically though, economists were distinctly under whelmed by the policies on offer.

Lord Acton once suggested rowing was the perfect preparation for public life. It trains people to face in one direction whist travelling in the other! We all watched on whilst our leaders gravely intoned the need for economic responsibility. And that shoveling sound you heard was cash - being disgorged as fast as it could be got out the door.

We should be running larger budget surpluses both because they enable us to run large deficits to fight recessions, and also because they contribute to saving when our debt to the rest of the world just keeps growing - right now by nearly $50 billion per year. But saying this cramps a politician’s style.

Politicians have learned that austerity goes down about as well in elections as Pauline Hanson at the Sydney Mardi Gras (or on the ballroom dance floor as it turns out!). But if we want to build our budget surplus, export more and reign in our excessive foreign borrowing, we’ve got to wind back the party a little.

We've seen it all before. Remember the 1996 election - when the budget deficit dared not speak its name? Paul Keating concealed it because it looked bad. John Howard didn't call him on it because then people might wonder which promises he intended to break. So the issue was studiously avoided by both sides until after the election.  Then, looking suitably grave our new leader told us of the monster that had been stalking us all the while: a deficit, now transformed into Beazley's $10 billion black hole, something so terrible that Howard's promises had been rocked to the core - well "non-core" as it turned out.

And so it was in 2004. Half way through the campaign six economists - including me - warned against an election giveaway arguing that we should be investing the proceeds of the last economic miracle in building the next. It made quite a splash - coming out quite fortuitously on the morning of the debate between Treasurer Costello and Shadow Treasurer Crean. Not only did neither man mention it, but also when asked by the media, both men went straight back to the usual bickering about tax winners and losers.

So how can we slay the budget electoral cycle in which each election degenerates into a spending auction? A few years ago the Business Council of Australia suggested establishing an independent agency to deliver fiscal responsibility with slight income tax variations. Sound radical? It’s how we run monetary policy right now - with the independent Reserve Bank setting short-term interest rates.

Elected governments would still set spending and taxing priorities - as they should. The agency’s remit would simply be to deliver the right budget outcome in the circumstances. Governments would get the first cut at it with their own policies. But if the government squibbed it, the agency would be standing behind it, reaching for the levers.

And you probably don’t need full independence. Australian governments retain the power to overrule the Reserve Bank in setting rates but so far they never have. Overruling the independent experts looks bad politically and even worse to financial markets. So “virtual independence” actually works out better. However reluctantly, governments become complicit in setting interest rates responsibly.

With strong surpluses in the good years there would be more leeway to fight recessions by allowing budget deficits. Voters and markets could see that it was not electoral pork barelling but rather its obverse, as it was when the Reserve eased interest rates in the wake of September 11 - the workings of trusted institutions optimising long run growth.

We don’t need to - probably shouldn’t - do it all at once. We didn’t with Reserve Bank independence. It would be a good start to establish a purely advisory fiscal authority as the Productivity Commission is with microeconomic reform. Where reforms are often difficult to propose from Opposition, promising an advisory body wouldn’t scare the horses and could even help an Opposition inoculate itself against the next interest rate scare.

The idea is building its following, featuring as one of just four ways in which we can revive economic reform in the recent book Imagining Australia. But perhaps it will return to Australia like other exports, having made its name overseas. The BCA proposal has attracted attention from influential English and European commentators and is regularly mentioned by Alan Blinder, former deputy of the US Federal Reserve.

While its time may not yet have come, the election shows it could not be more timely. When it is implemented, it will show we are ready to re-assume the mantle we so recently lost as a country that continually builds on its past successes, as the world’s most successful economic innovator.