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May 04th 2011 print

James Allan

Look & learn

All of a sudden the contortions and backflips of this government make a certain sort of sense. Under whatever guise it can find it needs to bring in more revenue so that it can pretend to be economically conservative and responsible.

One of the big issues in the next Australian election campaign is likely to be whether the voters believe Labor can responsibly manage the Commonwealth government’s finances. That is why Julia Gillard and Wayne Swan are so desperate to move the books back into surplus and out of deficit.

Of course those of us like me who lived in New Zealand in the early years of this millennium will be well aware that there are government surpluses, and government surpluses. Some come from restraining government spending; others come from taxing, taxing and more taxing.

The Helen Clark New Zealand Labour government of those years managed to run surpluses, but it did it by relentlessly driving up government revenue (otherwise known as tax revenue). The inevitable effect of that was to leave New Zealand with more government spending as a percentage of GDP than even most Scandinavian countries.

That sort of Big Government economy does not correlate with high growth, nor even with above average productivity gains. Nor is it politically easy, once in place, to pare back, as the current New Zealand Prime Minister has learned since winning the 2008 election. Despite leading a centre right government Mr. Key has managed to do absolutely nothing on this front, and New Zealand continues to languish in wealth per person terms.

Here’s a better, if more scary, example. Take a look at the United States, the world’s biggest economy. Under former President George W. Bush federal government spending shot way up. Under President Obama that trend was massively magnified and federal government spending exploded. Today the US deficit (spending over and above revenue) is one and a half trillion dollars per year. And the Congressional Budget Office calculates that on current trends the government debt will be 140% of GDP by 2020 — making Ireland look good.

For believers in Keynesian stimulus spending in times of fiscal crisis or recession, the US government these past few years has done exactly what they would have liked, meaning it has spent like a drunken sailor. This orgy of spending, however, still finds unemployment at 9 per cent and inflation rising, not to mention a legacy of debt for later generations.

Leaving that aside, though, Australians would notice that this waterfall of government spending has not been accompanied by big increases in taxes to balance off the revenue side of things. That means that as of right now the US government is borrowing $188 million an hour, every hour of every day. That’s a fifth of a billion dollars it needs to borrow from others just to keep the federal government running for 60 minutes.

Put differently, out of every dollar the US government spends right now, 40 cents are borrowed. And the interest payment component of that spending, the amount that buys no health or education or military outputs but merely pays the interest on past borrowing, well that just keeps getting bigger.

You don’t have to be a believer in comparatively small government as I am to recognise the parlous, possibly catastrophic, state of the American government’s finances. That’s why the ratings agency Standard & Poors just last week downgraded the outlook for US government debt from ‘stable’ to ‘negative’, a clear sign that the country’s highly valued triple A status (which means you pay the lowest rate to lenders) is in long-term jeopardy.

The whole thing is a nightmare. And if anyone thinks it’s just a matter of bumping up taxes on the rich, the deficit in the US is so bad now that if the top 1% of earners — those on about $380,000 per year or more and who right now already pay 38% of all federal taxes — had every cent of their earnings taken from them, every cent, that would barely yield $900 billion. The deficit is nearly twice that at $1.65 trillion.

Even if you went after all those on more than $115,000 per year, the top 10% of earners who presently pay 69% of all federal taxes, and hit them with a politically impossible massive tax rate and hoped they’d continue to work out of some altruistic impulse, you’d still be nowhere near what you need.

The whole thing looks horrendous. And the US political system, most aptly characterised as a ‘checks and balances’ one, is at its weakest and worst when you need uncompromising action taken to fix the budget and finances. In such situations give me a Westminster parliamentary system any day of the week.

Luckily for Australia our Commonwealth government finances look wonderful in comparison to the US, by a few orders of magnitude. The worry, though, is that this Gillard government simply cannot control its spending habit and that it’s on the early stages of spending roller-coaster. To counter that worry, while using a phrase trotted out by Mr. Rudd before the last election, this Labor government needs to look ‘economically conservative’. And it reckons the way to do that is to run a surplus.

So if government spending is not going to be reined in, not really, you need tax revenue and pronto. Super mining tax anyone? Ah, that didn’t play too well with the punters. How about a carbon tax?

All of a sudden the contortions and backflips of this government make a certain sort of sense. Under whatever guise it can find it needs to bring in more revenue so that it can pretend to be economically conservative and responsible.

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