Spending Like There’s No Tomorow

Following the Prime Minister’s expectantly close-to-death experience, the government has been expending greater energy on policy announcements.  Not all of these have been sensible — think the proposal to tax foreign home-buyers and the half proposal to restore subsidies to a mortally wounded car industry, not to mention the oxygen expended in pleading the case of two death-row drug smugglers. 

Mr Abbott also promised to listen harder on the tax-and-spend issues, which have helped drive his adverse polling.  There’s nothing like a penitent government saying that it has changed for the commentariat to offer advice.

The Australia Institute had an answer for Mr Abbott, but this involved further economic vandalism of the sort that seems to be its stock in trade.  With its agenda focussed on preventing the use of modern, cost-efficient sources of energy, its solution is a carbon tax and, as luck would have it, Bernie Fraser and his ALP/Greens sympathisers at the Climate Change Authority are scheduled to advise on this in June.  Others in the renewables cheer squad commend the same approach, in some cases with poker-faced suggestions that this would raise business confidence, especially if accompanied by higher taxes.

More pressing issues are seen to be the restoration of a balanced budget inthe face of reckless spending commitments of the Rudd/Gillard and Howard years.  Treasury Secretary John Fraser has declined to criticise predecessor Martin Parkinson’s “spend big” advice to the Rudd government in the wake of the 2008 crisis.  Even so, his view is clear that “austerity”, as followed in the UK, has been far more successful.

Mr Fraser is tasked to overcome the legacy of an expenditure-fuelled budget deficit, together with the promise of additional but unfunded spending on education and social services.

Budget crises followed previous ALP extravaganzas in the 1970s and the early 1990s. But even the rather half-hearted attempt to correct spending excesses in the 2014 Budget was massively unpopular, demonstrating that re-stabilisation today is more difficult.

The fiscal restoration in the 1970s came at the expense of a ratcheting up of spending from 19% of GDP to a new plateau of 24%. It stayed at that level until then-Treasurer Paul Keating carved into spending, only to see his prime-ministerial alter ego, Keating PM, embark on a fresh spending spree.

The mid 1990s budget repair job, conducted by Treasurer Peter Costello, confronted an economic imbalance similar to that of today, but in the context of a much easier economic climate.  In fact, Costello provided a real spending increase of over 11% in the five years following the 1993/4 culmination of Prime Minister Keating’s excesses.  By the year 2000, the share of Commonwealth spending within national income still exceeded that seen during Keating’s term as Treasurer.

Following this pale version of austerity, the Howard government then settled into cruise control, boosting spending in line with the wealth derived from the China-induced mining boom.  This was further stoked during the Rudd/Gillard years, which also unleashed a plethora of regulatory measures, including the economy-sapping carbon tax and renewable energy regulations. All this returned us to the level of government spending within GDP bequeathed by Prime Minister Keating.

But this time the Chinese cavalry won’t be there to finance our self-indulgence.

With the budget deficit now bobbing up to $40 billion, the Commonwealth is spending 10% more than its revenues.  A government enjoying control in the Senate and fewer commitments to avoiding cuts could easily find  $20 billion-plus from measures that would include heavy reductions in foreign aid, scrapping industry programs, selling the ABC and drastically paring duplicative environmental agencies.  For its part — surprise! surprise! — Labor has signalled its intent to address the budget imbalance by imposing  higher taxes, with a re-introduced carbon tax featuring.

After the 2008 recession almost every country bit harder into expenditures than did Australia.  Many implemented cuts in public sector wages: Czech Republic by 43%, Hungary 12%, Latvia 25% and Ireland 5%. Some of those nations also made across-the-board spending cuts, with the Czech Republic’s 10% and Hungary’s 15% coming immediately to mind.  These and other countries that curbed spending most resolutely, think here of the UK and New Zealand, are now seeing modest returns to economic growth.  Their performance contrasts starkly with those countries that have not cut spending significantly, like Italy and Japan.

The Queensland election suggests that voters are dismissive of the logic in calls for spending reductions.  They even opposed privatisation of electricity, despite publicly funded research undertaken for UnitingCare demonstrated that Queensland consumers would be better off with a privatised network. Unfortunately, that research was published only after the election.  Those and similar research findings are now receiving more attention from a media that recognises ALP throwback policies regarding government ownership, having prevailed in Queensland, might also do so in New South Wales.

While necessity and the discipline imposed by adversity are often midwives to politically painful measures, Australia may be able to rack up spending and increased debts for several more years before confronting a crisis.  To ignore the inevitable and coming crunch, however, places a mortgage on future income levels — a simple fact that nobody within the political class seems able to explain or is even willing to try.

Alan Moran is with Regulation Economics