No. 73

Wayne Swan, Kim Wells – beware the lessons of the 1920s

STONE the cows! Listening to the Treasurer on Tuesday looks like being a bit of a bore, given the government has leaked so many of the best budget bits (more spending on training and welfare) and signaled some of the phony-tough aspects, (watch out slacker teen parents).[i]

On the evidence of all the leaks, Wayne Swan’s speech will seem familiar, not just for what we have already heard, but for the way it resonates to the early 1980s, when the Fraser Government talked tough about reforming the economy but did sod all to upset anybody.

The Treasurer’s promise yesterday to give everybody receiving all of the old age pension a digital receiver (plus help turning it on) so they will not miss a moment of free (but not to the taxpayer) TV will not encourage anybody hoping for a budget based on national needs, not nonsense.[ii] The Crows look forward to the red bike and pony allowance for working families in the lead-up to the next election.

And before anybody argues that it is only costing $309 million, what is “only” to the welfare industry and its political pals is a big bucket of money to the people whose quarterly ATO tax demand was due last week.

And then there is the high cost of the parish-pump. Kim Wells may not have taken us roaring back to the 1920s last week, but he still spent where he could save. Kim who? Oh come on, Kim Wells, the Victorian Treasurer who brought down the Baillieu Government’s first budget.

Both Swan and Wells are spending when they could save, because they appear to assume the cash will keep coming forever and that political opportunity trumps economic reality.

At a national level, Swan seems straight from the 1970s. As Paul Kelly puts it, after the 1980 election, which he came closer than expected to losing, “Fraser became an agent of resistance to necessary economic change, to broadly based indirect tax wanted by Howard and then resistant to freeing up interest rates and deregulating the financial system.”[iii] Now, who wrote that report on reforming the tax system? The one the Treasurer commissioned and now appears to have mislaid? Horace? Hugo? Some bloke called Henry?

As for Spring Street, in spending up last week Kim Wells’ budget is in the tradition of the 1920s, when state economic strategy was to spend everything they could borrow and then repay the loans by borrowing some more.

In the decade to 1929, state government expenditure increased by 75 per cent. Canberra created the Loans Council to coordinate borrowings and stop the states competing with each other to source money offshore.[iv]

Given the Gillard Government’s parlous position in the polls, it is probably too much to expect that reforms designed to increase productivity and reduce government’s share of national income will upset anybody on Tuesday night.

But at least they could do something about the debt. Not the headline figure covered by Wayne Swan’s promise to return us to surplus by 2012-13, but the structural deficit caused by spending that will continue when the mining boom stops.[v]

Economic consultant Stephen Anthony says the underlying deficit could reach 5 per cent of GDP this year, the worst since WWII, and only gradually improve over the rest of the decade. According to economists, the whacking great windfall Canberra has collected from the boom will total $294 billion by 2014-2015. But “successive governments have treated the temporary boost from the resources boom as permanent … [and] most has so far been frittered away on tax cuts, family benefits, baby bonuses and, more recently, stimulus spending.”[vi]

On a more modest scale Kim Wells’ could have weighed in with Kennett-cuts to restore state spending to stability. Instead the first Baillieu budget is an unremarkable document designed not to especially upset people and fund public sector pay rises – the police want 4.5 per cent and the teachers 30 per cent over three years.[vii]

Overall it makes $2 billion in savings of the nip and tuck type over five years but allows net debt to nearly double to $23 billion across the budget cycle and spends $2bn on a “cost of living package” and a regional development fund.[viii]

Of course, with debt at 5.9 per cent of gross state product the budget will look less wasteful than wonderful to anybody in the US or Europe. [ix] The Age was certainly impressed, editorialising that a bit of government debt was no bad thing – which rather missed the point.[x] The government could have cut its debt and funded productive infrastructure from its own resources, or a bit of both, if Kim Wells had gone looking for real cuts to recurrent expenditure.

His explanation why he did not says it all, “the issue for us was that if we were to deal with the debt problem in year one there would have been massive job cuts, massive increase in taxes and massive cuts to services. We were not prepared to do it.” [xi]

With a new mandate and massive majority, if the Baillieu Government will not cut now the crows wonder if they ever will.

Which is what got the states into strife in the 1920s when Australian governments kept borrowing to pay the interest on previous loans.[xii] By February 1929, our credit was considered so crook that in February 1929 only 16 per cent of an Australian loan on the London market was subscribed.[xiii]

What appears to escape Wayne Swan and Kim Wells is that while we are not living beyond our means now, today’s national income will not last, that without productivity gains once the boom busts so will tax income.

Glenn Stevens explains how it happens:

The sequence goes as follows. Some genuine improvement in economic conditions leads to more optimism. It may be a resource discovery (including the opening up of new productive land), or a technological change, or a rise in the terms of trade, or even just greater confidence in economic policy’s capacity to solve problems. Human nature being what it is, people (or governments) are inclined to project into the future with undue confidence and insufficient assessment of risk. They often decide to invest more in ventures that are marginal, or even speculative, borrowing to do so. Because their assessment of permanent income is that it has increased, they also decide to consume more now (either privately or in the form of public services). Financial markets and institutions – which are populated by human beings after all – help them do both these by making capital available. Then, at some point, an event causes people suddenly to realise they have been too optimistic. Maybe the “new paradigm” disappoints in some way or the terms of trade decline again. The cycle then goes into reverse, usually painfully.[xiv]

The way to avoid future pain at state and national level is for treasurers to forego present pleasure. You can generally rely on state governments being sybarites (they can always blame Canberra for the economy) but what are the odds on Wayne Swan being a stoic on Tuesday night. Long, unless you can explain how digital receivers for pensioners will improve productivity.

[i] Paul Osborne and Bonny Symons-Brown, “Education focus for budget, says Gillard,” Sydney Morning Herald, May 3, Matthew Franklin, “Battling parents to get more cash,” The Australian, May 4, Patricia Karvelas, “Tough rules on teenage mums,” The Australian, May 4

[ii] ABC News, “Swan says budget night not ‘a one night show’ ” @ recovered on May 8

[iii] (quoted in) Max Blenkin, “How 1980 marked a turning point to reform,” Sydney Morning Herald, January 1 2011

[iv] Kosmas Tsokhas, Making of a nation state: Cultural identity, economic nationalism and sexuality in Australian history,” (Melbourne University Press, 2001) 72

[v] AAP, “Swan’s budget more than ‘one night show’ ” Sydney Morning Herald, May 8

[vi] Adrian Rollins, “Budget must do the business,” Australian Financial Review, May 6

[vii] Mark Skulley, “Wage talks threat to forecasts,” Australian Financial Review, May 4, AAP “Victorian teachers demand pay rise,” The Australian, December 6 2010

[viii] John Ferguson, “Rethink for Baillieu after debt blowout,” The Australian, May 4

[ix] Mathew Dunckley and Jason Murphy, “Debt soars in Baillieu’s first budget,” Australian Financial Review, May 4

[x] “Treasurer delivers a budget less austere than promised,” The Age May 4

[xi] Shane Green, “Grey skies and gloom from Kim the Grim,” The Age, May 4

[xii] Anne Henderson, “Government debt and Australia: hark the 1920s call”, Sydney Institute Quarterly, (35) June 2009

[xiii] David Gruen and Colin Clark, “The great depression in Australia from the perspective of today,” Sydney Institute Quarterly, (36) December 2009, 12-20, 16-17

[xiv] Glenn Stevens, “The role of finance: Shann Memorial Lecture, 2010” @ recovered on May 7