No. 158

STONE the crows! The country has attention deficit disorder.

Yes, there is a bipartisan consensus that we should pay approving attention to government budget deficits – which strikes the Crows as an especially dangerous disorder.

On Thursday, Treasurer Wayne Swan dusted off the Whitlam political playbook and “criticised the world’s biggest developed economies for shacking global growth through what he calls ‘mindless fiscal austerity’ ”.[i]

On Friday, Mr Swan less hinted at the content of the budget outcome than switched on a flashing neon: “Creating jobs rather than returning the budget to surplus will be the top priority.” [ii]

Good-oh, unless of course, surpluses generate jobs, without the bother of borrowings that attract interest.

But you won’t hear that from Wayne Swan, what with the way the government began to back away from its previous rock-solid, ridgy didge promise to be in the black next financial year in December, when Commonwealth cash receipts were written down by $4bn in the first four months of 2012-13.[iii] The collapse in the European carbon price this week did not help – the feds have already spent the income, which was to come from linking the cost of Australian permits to the EU market.[iv]

But at least the Crows were comforted by the conservatives’ (sort of) continuing commitment to putting the national government back in the black.

Joe Hockey has variously promised a surplus in all or some circumstances. But, in general, the Liberals look more debt adverse than the government.

Or they did. On Friday, Joe Hockey said Australians “understand that it is important to live within your means”. However, and it is a cracker of a qualification, he also said, “We are not going to go down the path of austerity simply to bring the budget back to surplus because it would end up being a temporary surplus, depending on how big the deficit is that we inherit.” [v]

Fair enough, although the Crows wonder whether securing a surplus isn’t a good start to ending deficits.

Opposition Leader Tony Abbott has also established an out, announcing “all bets are off” on a surplus, “given the government will not tell us what the deficit will be”.[vi]

Again okay, although the Crows suspect whatever the deficit actually is, a Coalition government will be able to delay a return to surplus for as long as it suits, using for an excuse the Swan “sump” (our era’s equivalent of the Beazley black hole).

Getting into deficit is easier than getting out. But staying in surplus or, at the very least, only borrowing what can be paid back without using people’s bank accounts as an ATM – in the Cypriot fashion – is a sovereign source of economic growth. As economists Reinhart and Rogoff point out, Australia, Canada, New Zealand and the US have never defaulted or delayed meeting external debt payments:

The non-defaulters, by and large, are all hugely successful growth stories. This begs the question “Do high growth rates help avert default or does averting default beget high growth rates?”[vii]

There is, they explain, another reason for government to avoid borrowing big. In advanced and emerging nations alike, the bigger the debt the greater the drag on growth. “When gross external debt reaches 60 per cent of GDP, annual growth declines by about two per cent; for levels of external debt in excess of 90 per cent of GDP, growth rates are cut in half.” [viii]

There are two qualifications to this argument. The first is that they are flat wrong, and that when a coding error in Reinhart and Rogoff’s data is corrected economies deep in debt are shown to grow by 2 per cent, not contract. [ix]

However, Reinhart and Rogoff retort that if heavily indebted countries do grow it is at half the rate of better-managed economies:

It is very misleading to think of 1 per cent growth differences without recognising that the typical high debt episode lasts well over a decade (23 years on average in the full sample) and it is utterly misleading to speak of a 1 per cent growth differential that lasts 10-25 years as small. If a country grows at 1 per cent below trend for 23 years, output will be roughly 25 per cent below trend at the end of the period, with massive cumulative effects.[x]

The second qualification is that it does not appear to apply to us. Reinhart and Rogoff report (without offering any explanation) that, between 1902 and 2009, whenever Australian federal government debt was over 90 per cent the economy grew by 4.6 per cent.[xi]

Now the Crows aren’t economists, they struggle to count the number of wings they have. But they suspect this figure applies to the growth spurt after WWII, when pent-up demand overwhelmed the impact of war debt.

The connection between GDP growth and Canberra’s borrowings is not utterly unambiguous but growth did pick up as debt came down in the late 90s. [xii]

And new social welfare expenditure, Gonski, carbon compensation, the NDIS and Tony Abbott’s proposed universal access maternity income, are all harder to fund when the government has to devote tax revenues to interest payments on the $281bn of Commonwealth Government Securities. [xiii]  Interest on net government general sector debt this financial year is $7bn, which if available for investment or spending on income producing projects could produce continuing jobs. [xiv]

And anyone who argues that debt is a fact of life for government is generally right – it mostly is. The federal government has paid no interest on general debt for just nine of the last 42 years. It was only in 2006-2008, for the first time since the start of the 1970s , that Canberra earned interest, $1bn a year (and no it wasn’t the Future Fund) on its surplus funds.[xv]

For a country that has a choice, debt is a bad way for governments to generate GDP. Whoever wins the election should at least make a start on reducing debt. A serious start. As John Howard describes the 1996 budget, “A new government has a lot of political credit in the bank. There is almost an expectation that it will do tough, unpopular things during the early months of its stewardship.”[xvi]

The Gillard Government has demonstrated it does not mind upsetting people who are not key constituents (single mothers with children over eight and vice-chancellors to name two especially aggrieved groups). It could continue with a big savings budget which would surely be hard for the conservatives not to endorse.

Will it happen? The Crows doubt it. But, in the immortal words of Stewie Griffin, “We’re just saying.”

 

ENDNOTES


[i] Jacob Greber, “Swan accuses EU of ‘mindless austerity’ ” Australian Financial Review, April 18

[ii] David Uren and Stuart Rintoul, “Priority is ‘jobs over surplus’ “ The Australian April 19

[iii] Simon Cullen, “Swan dumps budget surplus pledge,” ABC News, December 20 @ http://www.abc.net.au/news/2012-12-20/swan-dumps-surplus-pledge/4438508 recovered on April 20

[iv] Sid Maher, “EU carbon crash to dig $10bn budget hole,” The Australian, April 18

[v] Jacob Greber, “Hockey not wedded to idea of austerity,” Australian Financial Review, April 19

[vi] Jacob Greber, “Abbott kills off surplus promise,” Australian Financial Review, April 20

[vii] Carmen M Reinhart and Kenneth S Rogoff, This time is different: Eight centuries of financial folly, (Princeton, 2009), 44

[viii] Reinhart and Rogoff, “Growth in a time of debt,” American Economic Review: Papers and Proceedings, 100 (May 2010) 573-578, 573

[ix] Brenda Cronin, “Seminal economic paper on debt draws criticism,” Wall Street Journal, April 16

[x] Reinhart and Rogoff, “Reinhart and Rogoff admit Excel mistake rebut other critiques,” Real time economics-Wall Street Journal, April 17 @ http://blogs.wsj.com/economics/2013/04/17/reinhart-rogoff-admit-excel-mistake-rebut-other-critiques/?mod=wsj_valettop_email recovered April 20

[xi] Reinhaer and Rogoff, “Growth in time of debt,” op cit 576

[xii] Trading Economics, “Australia’s GDP rate 1959-2013” @ www.tradingeconomics.com/australia/government-debt-to-gdp recovered on April 20, Trading Economics, “Australia government debt to GDP 1989-2013,” @ www.tradingeconomics.com/australia/government-debt-to-gdp recovered on April 20

[xiii] Richard Webb, “Budget review 2012-13: government debt,” Parliamentary Library @ www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201213/GovDebt recovered on April 20

[xiv] Australian Government, Budget 2012-13, Appendix D: Historical Australian Government Data,” @ http://www.budget.gov.au/2012-13/content/myefo/html/13_appendix_d.htm recovered on April 20

[xv] Budget, ibid

[xvi] John Howard, Lazarus Rising (2010), 240

'2012