In the run-up to the September 7 elections, we will hear a lot of misleading stories about the economy and deficits.
My contention is that with the good luck of the China boom, the government has managed the Australian economy well. Our economic performance is amongst the best in the world. But the public debate has been side-tracked by nonsense about debt and deficits.
Despite the political rhetoric and the flak from News Limited, the evidence on the economy is very clear.
- Australia has had six years of uninterrupted growth even through the global financial crisis. Few countries achieved that.
- Inflation is low, unemployment is low and economic growth has been above world levels.
- In May this year John Howard said ‘when the Australian Prime Minister and Treasurer and others tell you that the Australian economy is doing better than most, they are right.’
- The three major credit rating agencies have all retained Australia at a AAA rating.
- In April this year the IMF said that ‘Australia has the strongest economy in the developed world … we expect the Australian economy will outstrip growth over all other advanced economies over the next two years’.
But the government has allowed itself to be side-tracked over the populist nonsense that debt and deficit are the important measures on the economy. The previous Treasurer, Wayne Swann, contributed to these misleading stories by continually making pledges to get the budget back into surplus when it was neither possible nor desirable. In fact, debt and deficits, whilst not unimportant, are secondary issues. Sometimes debt and deficits are appropriate, as in a recession. Sometimes they are not, as in an economic boom.
Have we got a debt and deficit problem?
- In world terms our debt problem is very small. Total net government debt as a percentage of GDP has remained very low at 12%. This compares with such countries as Japan 134%, US 88%, France 84%, UK 83%, Euro area 72%, Germany 57% and Canada 35%.
- The CEO of the National Australia Bank told us only last week that we do have a debt problem but that the problem is that we don’t have enough debt. He contended that a country such as Australia needed to borrow more for infrastructure.
- With a mistaken mindset about debt, Europe has embarked on savage budget cuts that have caused great hardship particularly for young people and encouraged nascent right-wing, anti-immigration and racist parties. Europe is rightly now regretting its obsession with debt at the expense of other important issues.
There is a long-term and structural debt issue for Australia, even if it is a minor one. That problem was largely inherited by the government from the Howard and Costello years. The Howard government locked in tax cuts over eight years from 2004. The IMF in January this year reported that Australia’s most wasteful spending came in the Howard era. Without those tax reductions in the Howard era, budget revenue would now be about $26 billion p.a. higher after adjusting for inflation.
The Rudd and Gillard governments should have done more to reduce the relatively small structural deficits. It did not address some key areas of wasteful and inequitable spending – negative gearing on property, tax-free superannuation income for those over 60 (like me!) and the subsidy to the private health insurance industry. Taken together, reform in these areas would quickly fix the small structural deficit we have.
In short, the economy is performing well. We do not have an unmanageable deft and deficit problem.
Unfortunately the Treasurer Chris Bowen has now confused the issue by promising a wafer-thin budget surplus of $4 billion in 2016-17. Revenues are too volatile for a promise like that in three years’ time to have any credibility. That promise will play into the hands of the economically illiterate in the media who have persuaded themselves and others that the budget is the same as the economy. It is not.