While most politically minded Australians were tuning in to the US election telecasts, Treasurer Wayne Swan chose the moment to reveal the Mid Year Economic and Fiscal Outlook from Treasury.
It’s not pretty. Australia’s massive budget surpluses have evaporated in the white heat of the global financial crisis. The fat years of Australia’s boom appear to have ended, and with them go a lot of the easy reforms that Kevin Rudd had been counting on.
Money has long been one of the chief policy levers of the federal government. Name a difficult policy area, and you can quickly find an accompanying federal bribe to make the whole thing stick: competition policy, automotive industry reform, tariff reductions, water policy, public hospitals, university infrastructure and, yes, even laptops for schools. And that’s not to mention the huge pension and family benefits bonuses Kevin Rudd recently announced in the form of a special stimulus package.
For years, the Commonwealth could afford to do all of these things, plus shower taxpayers with annual tax cuts and family benefits payments, because the budget was awash in corporate and personal tax revenue. High commodity prices meant huge profits in the mining and resource sectors, which flowed through to the federal cofffers. As Ken Henry’s tax review observed earlier this year, a growing economy meant low unemployment, growing GST and income tax takings, as well as low social security payments.
Now the economy is slowing, and the rivers of gold are drying up. Commodity prices are suddenly tanking, growth is slowing and unemployment is going to rise slowly. The result is that the budget will go from having fat surpluses to a serious case of anemia, and quickly. Wayne Swan may even have to announce a deficit next year.
You can just imagine the horror with which this news is being greeted by Kevin Rudd and Julia Gillard. Not only is the fiscal outlook deteriorating, but Swan’s fumbling press conference on Wednesday now has many in the media speculating about his future in the job. On the policy front, nation-building projects like the Infrastructure and Education Funds were partly predicated on future surpluses. That money has suddenly disappeared. What should the Government do?
The answer is simple, actually: borrow money and keep spending. Thanks to Peter Costello’s grave fear of it, the Australian Government has next to no debt. Consumers, on the other hand, are hocked to the eyeballs. Australia’s households spent up big in the fat years, buying expensive houses for much more than they were reasonably worth, and running up some pretty serious credit card balances while they were at it. Now Australia’s consumer sector is in the ugly process of de-leveraging, as belts are tightened to pay off debt.
Our Government has no such problems. It can borrow money cheaper than any business or family, and it has huge flexibility in its ability to repay it. In fact, no Australian government has ever defaulted — even in the Great Depression (although Jack Lang wanted to).
And this is precisely the point. Australia should borrow more to fund Kevin Rudd’s infrastructure and education programs, because the long-term pay-off will be more than worth it. Fred Argy, who has worked as a senior official in the Treasury, made exactly this point in a recent paper. He called Australia’s fascination with balanced budgets a "fiscal straitjacket".
You can almost hear the critics saying, "but what if we lose our AAA credit rating?". Indeed, the NSW Government has been "warned" of exactly this recently when contemplating whether to build its proposed north-west Sydney rail line. Actually, there’s little chance of this. But even if there were, so what? Why the hell should we care what ratings agencies say? These are the same guys who told everyone that sub-prime mortgages were safe.
When you consider how ridiculously cheaply the Commonwealth can borrow, the shock-horror stories from the Opposition and its friends in the Murdoch press about a deficit are absurd. Sensible, well planned infrastructure not only pays for itself in increased productivity growth and a better functioning economy, it keeps on returning benefits long after the costs have been paid off. Australia’s major cities are all serviced by dams built generations ago. The pipes in many of our cities were laid in the early 1900s. Most of Sydney’s trains first entered service in the 1960s (and don’t Sydney-siders know it!).
Much the same thing is true for Australia’s investments in human capital. Our current higher education system was built predominantly by Menzies and Whitlam. For good or ill, John Dawkins further expanded the system in the 1980s. But there has been little investment in the sector since. Consequently, the academic workforce is ageing rapidly and many of our university’s buildings are falling into disrepair.
In other words, large parts of Australia’s economy are enjoying the fruits of capital investment that was paid off long ago. John Howard and Peter Costello were content to run down much of this infrastructure (except in defence, where they spent up big) and spend the proceeds of the boom on tax cuts for the middle and upper classes. Kevin Rudd and his Government now need to hold their nerve and keep their promises to rebuild Australia’s public infrastructure. The penalty for not doing so will be felt in the decades to come.
What the government shouldn’t do is worry about the political consequences of a deficit, as economic forecaster Chris Richardson pointed out yesterday. Of course, that’s not easy. The Opposition and The Australian are already bleating about "fiscal irresponsibility" — but a deficit can be sold to the electorate, if properly explained. Some types of debt are sound investments, and it shouldn’t be hard to argue that these include better education for our children and vital infrastructure for our railways and ports.
When Rudd announced his incoming Cabinet late last year, I asked of the new Treasurer: "If the economy runs into trouble in a couple of years time, will Swan have the guts to run a deficit? Let’s hope we don’t have to find out. " Now we are about to.
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