Saturday morning musings - Swan, deficits and the importance of fat

The statement by Australian Treasurer Wayne Swan that the Commonwealth was unlikely to achieve a budget surplus this financial year came as no surprise.  Apart from some rather strange reporting in the Australian (Labor exposed as Treasurer Wayne Swan breaks surplus promise), I think that the major reaction among many was one of relief. I said strange reporting because of the inconsistency between the main take-home message provided by the "story" and the detail contained within it; this is political commentary masquerading as reporting.

Why relief? Well, the numbers have been suggesting for some time that a surplus was almost certainly unachievable. The fear was that in its desire to protect a political promise, the Commonwealth Government would be forced into silly spending cuts. The latest national account figures showed that the Government sector in general is now detracting from growth as a consequence of spending cuts. Further cuts would have added to this at a time when the economy is clearly off the boil. Forget the social policy arguments about the adverse effects of cuts. When the business sector as a whole starts arguing for the abandonment of the surplus target, you can be reasonably sure that there is a problem.

In all the commentary on the issue, one simple fact appears to have been forgotten. Some time ago, the papers carried stories that that the Commonwealth's expenditure review mechanisms had been called into action to try to find further savings. That's not unusual in itself. What was unusual was the timing, the lead up to the Christmas shutdown.

With the lights burning late at both Treasury and Finance, I think that Cabinet's Expenditure Review Committee was given some very unwelcome news. You can't do it mate, or at least not without very major pain. I suspect, too, that the advice was that you shouldn't do it.

One of the difficulties that the Commonwealth Government faced can be summarised as the problem of fat. More precisely, the absence of it. Fat has acquired a very bad name, yet fat serves a purpose. It provides a reserve of energy for use in hard time.

In a social sense, our obsession with fat has become dysfunctional, creating eating disorders including (ironically) obesity. In a management and public policy sense, when you thin down to the point that you can only do what you are doing now, you lose flexibility and the capacity to do new things. This has adverse effects on efficiency. Beyond that, it means that you can only cut further by reducing what you do, abandoning or significantly modifying major activities. Of course, this is sometimes necessary. But to do it just to preserve a single accounting identity is plain silly. 

So, finally, Treasurer Swan was forced to face reality, not the atmospherics of politics. A bloody good thing to.