JACK WATERFORD. The size of the COVID deficit is a political, not an economic choiceJun 2, 2020
We have had an obsession with the balanced budget and with at least the aim of a reduction of government debt, at least since John Howard blew the Budget in 1983-84, then, more than a decade later, discovered a $5 billion “black hole” in the last Keating Budget.
It has become a major political mantra, with competence as a government tending to be judged by success in restraining government spending, running surplus and reducing debt. As a part of the same “fiscal discipline,” we have fetishised tax cuts, whether in the form of income tax cuts or with corporate rates.
Rightly or wrongly (and in terms of the record over the past decade, wrongly) Coalition propaganda has succeeded in planting an image in the average mind that the coalition is sounder in economic management, so that deficits and debt growth will be greater under Labor governments. The flipside, equally successfully planted is that Labor’s instincts are always profligate, but also dangerous because they are continually attempting to increase the size of government with new programs, and thus the structural size of government.
But the function of fiscal policy and fiscal controls is not primarily about producing a “balanced” budget of government spending and revenues. Analogies of government economic activity with household accounts and living off the card are intrinsically misleading.
Government engages in significant economic activity in its own right, without any actual or theoretical requirement that they must be funded by cuts anywhere. Defence spending, spending on health care, universities, aged pensions and so on run on their own steam, and even stringent controls by the department of finance officers are rarely able to effect reductions of any substance.
But beyond the government’s own economic activity is the role of government in seeking to use its spending and revenue measures to seek overall economic outcomes in the wider economy. That, not a balanced budget of government income and expenditure is the real purpose of the government’s annual budget. If there is a deficit, government is putting money into the economy. If there is a surplus, government is taking it out.
The way it does this — whether, for example, it puts more money into education, or more into submarines — can have particular effects on particular industries or regions of Australia. The size of budgets has direct effects on national economic growth rates, on employment levels, and, often on inflation rates. The Treasury exists, in major part to monitor the health of the overall economy and to advise in the pulling of the levers that make it work.
Australia has mostly had substantial deficits (and ballooning government debt) over the past decade not because of profligate government spending by mostly coalition ministers, but because the economy has been weak, with growth secured more by economic pump priming than by surges in business investment, or business or consumer confidence. National growth has been well under historical average levels.
The Reserve Bank has done all that it can to stimulate extra borrowing and spending by reducing interest rates to historically low levels — levels indeed so low that even reductions can have the perverse effect not of stimulating borrowing (for, for example, housing or business expansion) but of reminding of the fragility of the economy, and thus, discouraging spending and focusing on paying off debt.
Before the pandemic, indeed before the last election a year ago, Morrison and Frydenberg were seeking to make a virtue of (what they promised) would be the first government surplus in many years. This was, for them, and perhaps a significant section of the public, a major achievement, suggesting prudence, sobriety and good management.
That political effect was, for Morrison, probably worth having, at least until the pandemic crisis. Yet the level of economic activity around Australia, of economic growth, balances between import and exports and so on, did not suggest that the national economy was in any sort of equilibrium. Going for a surplus was taking money out of the economy that business and consumers needed to keep up growth and employment levels.
With politicians abandoning sensible fiscal policy, the Reserve Bank’s control of monetary policy was focused on reducing costs, and increasing incentives, by lower interest rates.
Spokesmen for the Reserve Bank have been arguing for several years that government should be taking advantage of historically low-interest rates to itself invest in the economy — particularly by the building of fresh infrastructure, including social infrastructure, but also by the renewal of local, regional and national infrastructure that was deteriorating without adequate provision being made for maintenance and development.
If ever there was a time, for example, for a major reinvestment in urban transport infrastructure in major cities, in breakthrough transport and communication reforms, or in creating the buildings and the hardware for new generations of universities, schools and hospitals, it would have to be now, when payments on the money necessary to fund them was only at about one per cent — as it was during that great era, from about 150 years to 100 years ago, when state governments and their instrumentalities borrowed to build railways, city tram and train services, cities were electrified and clean water — segregated from waste water and sewage — was provided to most urban dwellers. That foundation served, among other things, to virtually double Australian lifespans.
Infrastructure programs before the pandemic have not been of anything like the size that the Reserve Bank has been urging. Failure to take the hint is primarily because of economic ideology among politicians (and in Treasury).
One can expect that Morrison is keen that economic restoration occurs so quickly that there can be a restoration of tight spending controls — and the usual suspects have been quite clear in insisting that nothing the government does should have long-term effects on increasing the size or range of government, or default levels of spending (presently, not counting pandemic spending, about 25 per cent of GDP).
They hope, in short, that a blast of cash running through the system will cause a rush of spending right through the economy, increasing the confidence of business entrepreneurs to restore or increase staffing levels, invest in new plant and equipment, and engage in research and development. As this new activity restores employment levels, government (or at least sensitive conservative coalition management) will wind down spending and step out of the way to prevent any crowding out of the private sector.
It wants to return to government as normal. Well, not necessarily exactly as it was before, because some people went broke and will not be going back into the market, and some developments (for example, in remote group meetings through the internet) will cause fundamental changes in work practices.
But big and little capitalists, new and old, will be excited into the marketplace. If payments to displaced people are to be quickly wound down, and welfare for scroungers returned to starvation levels, there will of course be continuing incentives for business expansion, not least through tax cuts, reduced environmental, health and safety regulation and a general “let ‘er rip” atmosphere.
As Morrison and Frydenberg plan their August budget it must be remembered that there is simply no economic imperative at all limiting the size of the deficit they must have. It is a political choice on a political agenda. If it eschews nation-building or plays to some of its mates and cronies by continued starvation of arts and culture, the ABC, and the university sector, it will not be because there is no money responsibly able to be spent. It will be because it does not fit the Morrison vision of what government - or the ideal Australia – is all about. The biggest threat to his micro-vision is that the progress to a reopened economy will probably take longer than he expects, with the flowers not blooming simultaneously.