Wayne Swan is in a pickle. The revised Treasury figures he is releasing today show a further $3 billion blowout in the federal budget deficit — to around $40 billion for 2011/12 — with most of the damage due to falling company tax receipts.

That makes Swan’s task of delivering a surplus for 2012/13 not just harder, but also much more dangerous.

Why dangerous? Because the federal budget must now tread an incredibly fine line between post-European-crisis fiscal responsibility (the new vogue being to eliminate debt completely in all but crisis years), and the need to protect non-resource sectors for the economy to generate enough tax revenue to create a fiscal buffer before we hit the next serious financial/economic crisis.

This is not an easy dilemma to explain, let alone solve. And it is not only Swan’s dilemma.

As the Business Council of Australia has argued in its pre-budget submission, we must expect another crisis, and we must be pretty ruthless in preparing for it — their suggestion is to create a “recharge reserve” fund worth 3% of GDP to fund emergency fiscal measures next time a “black swan” craps on us from a great height.

It’s a nice idea, but the creation of such a fund won’t happen for years, if ever, simply because getting to surplus, and staying there, looks tougher every time Treasury revises its figures.

Both sides of politics now regard a return to surplus as non-negotiable. Labor is making fierce spending cuts (to be unveiled in the May budget), but at least has some revenue from the mining tax to give it wriggle room on politically sensitive areas of public spending. On current estimates, that’s $3-4 billion a year the Coalition won’t have.

The carbon tax is not so relevant here — half the revenue it raises will be immediately returned to voters in the form of tax cuts, and the other half is earmarked for financing clean energy projects that would not otherwise go ahead. So while it boosts Commonwealth receipts, it also boosts spending in roughly equal measure.

The Coalition, which plans to scrap the mining tax, and which, like Labor, is promising company tax cuts in its first term, must find even greater savings.

The danger for both sides is that cutting back public demand by cancelling or scaling back public services runs the very real risk that there will be no private sector demand to replace it. Consumers are growing fonder of deleveraging and saving by the day.

While it’s fashionable to refer to Greece’s bloated public spending as the antithesis of good governance, it’s easy to forget that public “co-investment” and stimulatory public spending both have a place in smoothing economic cycles — that’s not a radical Keynesian position, as the BCA’s pre-budget submission shows.

So there’s the dilemma: it’s wise in the face of seemingly permanent global volatility to bring our national debt down and build up a reserve fund for a rainy day, but trying to get there too quickly could cause a further collapse in company tax receipts, as firms in struggling sectors continue to report losses or just go under.

Productivity Commission supremo Gary Banks gave a speech yesterday warning that subsidising inefficient industries — auto manufacturing being the hot topic in this regard — costs the nation jobs in the long run, rather than creating them.

I must say I agree, and many readers will too — subsidies only socialise inefficiency, thereby sucking blood from efficient sectors to give a transfusion to inefficient ones. And the whole economy ends up looking anaemic.

As economic theories go, that’s all pretty simple. What complicates it is the unpredictability of the markets into which we sell our most competitive exports — iron ore and coal.

If we knew for certain that current commodity prices would hold, or even just decline slowly over time, it would make sense to let our ailing manufacturers stand or fall on their own — that is, let the market tell us where our competitive advantage lies.

But to date most forecasts of commodity prices have been wrong — the highs were mostly not predicted and, if a price slump ensues, most pundits will have got that call wrong too.

Treasury and the government think about commodity prices in a very different way to the miners themselves. When Treasury Secretary Martin Parkinson and Swan peer into the future to see where commodity prices will be, what the Australian dollar will be worth, and what effect all this will have on our trade-exposed industries, their starting point is today’s very high iron ore and coal prices.

Companies don’t have to think like that — their cost of capital and return on equity is more important. It was the WA Planning Minister Brendon Grylls who first opened my eyes to this fundamental truth when he told me last year, while outlining his plans to increase the size of population centres in the Pilbara, “the mining companies aren’t investing for $300 per tonne prices, they’re investing for $100 per tonne”.

And that, in a way, is why both sides of politics face a terrible dilemma. If commodity prices stay high, and the high dollar continues to crush other parts of the economy, we should forget the surplus and keep the rest of the country on life support.

If commodity prices suddenly end up closer to where mining profits are just OK, rather than “super”, the non-mining sectors will start growing again, making profits again, and paying more tax.And Swan, or Joe Hockey for that matter, just don’t know which of these will transpire.

So we’ll get “the surplus we had to have”, but may just permanently damage the economy getting there.

*This article was originally published at Business Spectator