No. 62

Being mean is good for government health

STONE the crows! When did everybody swap sides on the dangers of deficit? Perhaps it happened while we were worrying about Tony Abbott’s training injury (Annabel Crabb reckons absence of exercise is putting him off his game). And, the Prime Minister is looking worse than her poll results (she looked absolutely exhausted when denouncing Scott Morrison on ABC TV on Thursday).[i]

But while we focused on the politics of personality, something strange was going on in the economics arena, where the main game is played. Economists were suggesting that it did not matter all that much if paying for the Queensland floods kept the federal budget in deficit for a year or two longer.

Reserve Bank Member and policy wonk pin-up, professor Warwick McKibbin spoke for the emerging orthodoxy when he said the proposed levy was not a good idea, that Canberra should borrow to pay for natural disasters “to spread the cost of this over many future generations” and that “this deficit fetishness is going to in the medium-term get Australia into some serious problems when future shocks come along.” [ii]

But the government, including Innovation Minister Kim Carr, keeps saying nothing doing, that it’s time to cut spending. (Yes that Kim Carr, the one who was spruiking a $6 billion subsidy for the car industry in 2008.[iii])

As he said on Friday, in an interview to warm whatever finance ministers have instead of a heart, “we can be as creative as you like, but there will be a reduction in activity. … This is a dilemma that all ministers are facing: how do you find the room for new activity at the same time as reducing old activity.” [iv]

Anybody old enough to remember Gough Whitlam’s belief in government expenditure as sovereign remedy for absolutely everything is in Kim’s corner.

In 1974, as the economy unravelled, Prime Minister Whitlam decided to keep spending. As PM Whitlam put it at the time:

Cuts in government spending would simply aggravate our present problems. Our program of government expenditure has been achieved without excessive increases in the number of public servants. … Further, and it cannot be stressed too often, the quality of life in Australia-the real standard of living of all Australians-cannot be maintained, let alone raised, unless governments accept responsibility for community services which individuals can no longer provide adequately for themselves. [v]

The result was a rising trend Australian government public debt that lasted 30 years. Granted, it was not an especially awful bucket of money in the early 1990s, only approaching 20 per cent of GDP once. But debt it was and it took nearly 40 years for Canberra to return to being all but in the black as it was at the start of the 1970s. [vi]

It demonstrated how hard debt is to get rid of and it shows why the Government is right to promise to get the budget into surplus without delay.

As Peter Costello rightly put it when Australian Government public debt was all but eliminated, “The effort to correct failed economic policy takes much longer than the failure. It takes years of good government to undo short periods of bad government.” [vii]

Which is why Ross Gittins sensibly makes the case for the Gillard Government ignoring the call of the spending sirens – that this time is different and that a little debt in a good cause is an economic positive:

If more economists were familiar with behavioural economics, they’d see Gillard’s promise to return the budget to surplus in 2012-13 not as an irrational “political” act but as a “pre-commitment device” – a calculated act of self-control – akin to what the Productivity Commission wants to be available to problem gamblers. [viii]

And if you think this is all unnecessary, consider the catastrophe facing the Yanks – which everybody in Washington recognises, but nobody is doing anything about.

The US government will spend US$1.6 trillion it does not have this fiscal year and that’s the good news. Once retiring baby boomers start making serious demands on health and welfare spending at the end of the decade the bad news will really begin. According to President Obama’s own commission on budget reform, on existing trends all of Washington’s revenue will go to health and social services by 2025, with the government having to fund everything else by borrowing.[ix]

Scary stuff, which nobody is ready to do much about. For the moment the GOP is banging on about waste, cutting funding for high speed rail and even knocking off a program favoured by House speaker John Boehner, to build a second engine for the F-35 Joint Strike Fighter.[x] While manoeuvring Senate Democrats into vetoing discussing welfare cuts in budget talks is smart politics for the Republicans, it is playing at the periphery.[xi] And the House Republican’s vote to trim $60 bn from the budget on the weekend, including cuts to health care, climate change and defence spending was essentially a stunt designed to keep faith with the tea party faithful.[xii]

Sooner or later Washington will have to spend less on core programs and tax more to pay for them, which will require the executive and legislature both putting the national interest above what the electorate wants. Easier said than done, with only 12 per cent of Americans prepared to accept cuts to health and welfare benefits. [xiii]

Once programs are in place, they are all but impossible to cut. And once deficit spending to fund recurrent activity is adopted for some programs it becomes acceptable to all. And that way Potomac profligacy lies.

Bringing the budget back into surplus may make the Prime Minister the queen of mean, but it is in Labor’s interest, as Senator Carr understands.

Fiscal discipline upsets spending ministers but it helps governments live longer.

Endnotes


[i] Annabel Crabb, “Nothing wrong with Abbot an abflex wouldn’t fix,” @ www.abc.net.au/news/stories/2011/02/10/3135496.htm recovered on February 20

“PM slams Coalition comments on Muslim immigration”  @ www.abc.net.au/news/stories/2011/02/17/3141338.htm?section=justin recovered on 20 February

[ii] “Senior economist casts doubt on levy” @ www.abc.net.au/worldtoday/content/2011/s3122940.htm recovered on February 20

[iii] Alexandra Kirk, Government unveils car rescue plan”, ABC Radio, The World Today, November 10 2008 @ www.abc.net.au/worldtoday/content/2008/s2415047.htm recovered on February 19

[iv] Louise Dodson, “Business told to pay up for R&D,” The Australian Financial Review, February 18

[v] E G Whitlam, “Statement on the economy,” November 12 1974 Hansard, 3349

[vi] Katrina Di Marco, Mitchell Pirie and Wilson Au-Yeung, “A history of public debt in Australia,” @ www.treasury.gov.au/documents/1496/PDF/01_Debt.pdf recovered on February 19

[vii] Peter Costello, “Debt-free day: Speech to the Committee for Economic Development of Australia” 20 April 2006 @ recovered on February 19

[viii] Ross Gittins, “Fiscal heaven is pollies worrying about deficits,” Sydney Morning Herald, February 14

[ix] Commission on Fiscal Responsibility and Reform, The Moment of Truth @

www.fiscalcommission.gov recovered on December 10

[x] Karl Rove, “Why the GOP should welcome a budget battle,” The Wall Street Journal, February 17, Janet Hook and Nathan Hodge, “House shoots down Boehner-backed project,” The Wall Street Journal, February 17

[xi] Jonathan Weisman, “GOP denounces absence of entitlements overhaul,” The Wall Street Journal, February 15

[xii] Janet Hook, Naftali Bendavid and Corey Boles, “US House votes to cut 61bn in government spending,” The Wall Street Journal,” February 19

[xiii] Gerald F Seib, “Voters balk at cuts close to home,” The Wall Street Journal, February 15

'2012