Australia has a problem. In recent years Labor and the Coalition have become more focussed on the politics of economics than on economic ideology. Both are now torn between what wins elections and what they believe in.
In theory, parties on the economic right favour ‘small government’ – low taxes and low spending. Those on the economic left favour bigger government – higher taxes and higher spending.
The trouble is, that’s not what happens when they get into power. Or rather they only deliver half the programme. The popular half.
Coalition governments cut taxes. But they rarely cut spending to match. Why? Because voters don’t like spending cuts. The result is deficits. Funded by borrowed money.
Similarly, Labor governments increase spending. But they seldom introduce matching tax increases. Why? Because voters don’t like tax increases. Again, the result is deficits funded by borrowed money.
This selective application of party ideology has contributed to budget deficits for the last fifteen years and, absent some dramatic change, will continue to do so for many years to come. Australia now faces the double dilemma of a significant structural deficit and escalating debt.
Of course, governments always have excuses for their deficits. One is that extraordinary events require extraordinary action – the GFC, the Covid-19 pandemic, the cost-of-living crisis. The trouble is that that’s the nature of the modern world – one extraordinary event after another.
Sound economic management means exercising fiscal discipline while having the budgetary capacity to cope with such events. Debt and deficits have their place when the exigencies of events demand it, but not permanently and not simply to shore up the government’s electoral prospects.
Lately the excuse for deficits has been that interest rates are so low that debt is practically free. That’s true, until it isn’t. Now there are permanent deficits that will have to be funded with increasingly expensive debt. And the rising interest bill will be funded by yet more debt.
The Coalition failed Australia over the last decade. There were tax cuts, but they weren’t matched on the expenditure side. A return to surplus was always just around the corner. Only the corner never came.
What came was a trillion-dollar debt.
Now it’s Labor’s turn. It has a progressive agenda that will necessitate much higher spending on health and education, childcare and aged care. The key issue is how it will fund that spending.
Major cuts in other expenditures? Unlikely. Too hard and too politically unpopular.
Raising taxes? Don’t hold your breath.
The obvious candidate would be the stage three tax cuts. They could be cancelled or seriously reduced. But the Albanese government has already said it will “stand by” those cuts.
Another possibility would be a tax on the ‘super’ profits of mining companies. Professor Ross Garnaut ran that idea up the flagpole at the recent Jobs and Skills Summit only to see it immediately shot down by Treasurer Jim Chalmers.
Before the May election Labor dumped the tax increases Bill Shorten had taken to the 2019 election and Chalmers promised no new taxes.
For Labor, like the Coalition, political pragmatism trumps ideological consistency. Increased expenditure on social services is vital, but they wouldn’t want to lose votes by paying for it with a tax increase. Better to put it on the national credit card. Let the next generation pick up the tab.
Buy now, pay later, the catchcry of modern consumerism, has been embraced by the political class.
Most of our politicians accept that more action is needed to protect today’s youth from the ravages of climate change. Yet they seem only too happy to saddle that same youth with massive debts run up to fund current consumption.
How do Australia’s major parties justify their fiscal malpractice?
Traditionally, Labor has defended unfunded welfare spending increases as ‘investments’ that will stimulate economic growth and pay budgetary dividends in the future. Ironically, the Coalition adopts the same logic for its tax cuts – they too will stimulate economic growth and yield future budgetary dividends.
How is it then that the last fifteen years of mismatched taxing and spending have generated fifteen budget deficits and there’s no hope of a return to balance any time soon. Even with record low unemployment and high export prices, the budget remains in deficit.
Australia’s Treasurers usually hand down their recurring deficits with the promise that they will eventually deliver surpluses. A classic case of Saint Augustine – “Give me chastity and continence, but just not yet”.
The problem of ideological inconsistency is not unique to Australia. The new British Prime Minister Liz Truss is a self-proclaimed champion of small government, a Thatcherite for the 2020s. Sure enough, within weeks of her ascension the Tory government announced the biggest package of tax cuts in half a century.
Was this massive hit to government revenue matched by a corresponding cut to public spending? Quite the contrary. Just days before the tax package, the UK government committed over 100 billion pounds of additional public money to an energy support scheme aimed at sheltering UK residents from spiralling energy costs.
Lower taxes but higher government spending. Bigger deficits and rising debt. Sounds familiar. So too does the UK Chancellor’s justification that the tax cuts will drive economic growth which will pay dividends in the future.
It’s unlikely the Chancellor or his PM will be part of that future. Both the voters and the financial markets have recognised that ideological inconsistency has its limits. Taken too far, the mismatch between taxation and spending becomes unsustainable.
To avoid a similar fate, Australians, particularly young Australians, need more ideological consistency from their politicians – a Labor government that’s prepared to fund extra public spending with corresponding tax increases or a Coalition government that’s prepared to match its tax cuts with similar cuts to public spending.
Wherever they stand on the political spectrum, Australians should demand more conviction from their political parties, less calculation.
More ideology, less politics.
Ross Stitt is a freelance writer based in Sydney. A former lawyer, he has a PhD in political science from the University of Sydney.
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