Sucking Up The Surplus


It’s the most important time of the year for your average government department: budget time.

In the so-called "central agencies" of Treasury, Finance and the Prime Minister’s Department, bureaucrats and bean-counters are burning the midnight oil to ready the nation’s great statement of accounts. Fingers are typing, spreadsheets are being updated and no doubt the Treasurer, Wayne Swan, will already have begun to hone the language in his budget speech.

But this budget will differ from nearly all others in the past decade: it will be in deficit, and a pretty serious deficit at that.

What exactly is a deficit? It’s pretty simple: the government spends more than it takes in from taxes and revenues. The remainder is financed by borrowing.

Mind you, a deficit for a nation state like Australia is not quite the same thing as a loss for an ordinary business. Australia is one of the world’s 20 largest economies, and it has an almost infinite capacity to levy taxes on the productive wealth of its citizens. As a sovereign nation, Australia sets its own interest rates, maintains its own currency and gets to borrow money from international lenders at rates you simply can’t access for a domestic mortgage.

Moreover, Australia has very little federal government debt. This means that even after borrowing hundreds of billions of dollars over the next few years to service these deficits, Australia will still easily be able to meet any repayments. For a government, these generally take the form of "coupons" and redemptions on government bonds.

The reason for the deficit is also simple: after many fat years of high growth and healthy tax receipts, the Australian economy has followed the rest of the world into recession. Federal budgets nearly always go into deficit in recession, because tax revenues dry up as firms make losses and go bust, and unemployment benefits rise as people lose their jobs. And that is exactly what is happening now.

It’s a mirror image of the large surpluses governments typically run in boom times, buoyed by record corporate profits and full employment — a situation the budget enjoyed only two years ago. It seems like a long time ago.

The tendency of government finances to run to surplus in good times and deficit in bad is actually a good thing. In a boom, the big surpluses help moderate inflation while allowing a prudent government to pay off debt and build up a nest egg for a rainy day. In a recession, the extra money flowing out of government coffers into unemployment benefits and stimulus packages helps those affected by the downturn. These swings and roundabouts act as a counter-cyclical balance to the rest of the economy, which is why economists call them "automatic stabilisers".

There is always a catch, of course. In Australia, it comes from the strange obsession of conservatives, like the loopy South Australian Liberal Senator Cory Bernardi, with balancing the budget at all times. Over the past 30 years, as neoliberalism has tightened its grip on the minds of Australia’s decision-makers, the sensible idea of not spending more than you earn has morphed into an obsession with keeping budgets in surplus, no matter what the circumstances. In good times, this has meant "handing back" budget surpluses to taxpayers in the form of tax cuts — rather than saving the money, or investing it in productivity-producing public assets like schools, roads and hospitals.

In tough times, this "fiscal rectitude", as it sometimes called, means cutting back on government spending in order to balance the books thereby potentially worsening the downturn at the very moment government spending is most needed. To keep a budget in balance in a downturn, governments have to stop buying things, retrench government workers and delay important capital investments. It makes the numbers add up, but also risks deepening the recession.

Of course, for some conservatives and libertarians, smaller and lower-spending government is an article of faith. Perhaps this explains the Liberal Party’s current fixation on the supposedly huge debts Kevin Rudd is running up. The Liberal Party, you might recall, has been strongly opposed to Kevin Rudd’s economic stimulus. Malcolm Turnbull calls it a "cash splash" — which he apparently thinks is a thoroughly bad thing.

New Liberal Party Shadow Treasurer Joe Hockey has a similar message. "They are spending too much money, and they are spending it unwisely in many areas, and effectively they are trying to borrow their way out of this downturn," Hockey told Sky News.

Borrow our way out of a downturn? Quelle horreur! Who would do such a thing?

Well, nearly every finance minister of every government in the world for the last six decades, actually — including John Howard in the early 1980s — actually. Borrowing to finance a deficit is standard practice across the world. It’s called "Keynesianism" after John Maynard Keynes, the British economist who first pointed out that Herbert Hoover’s decision to cut US government spending to balance the budget in the early 1930s helped turn the Wall Street Crash into the Great Depression.

Balanced budgets and low government debt sound great in the abstract, but they run headlong into economic reality at times like the present, when unemployment is rising, growth is falling and businesses are not feeling confident enough to invest.

In any case, Australia’s public debt is tiny — we do have rather more private debt, but even that debt is relatively manageable. Australia has less public debt than any country in the G7, and among the lowest public debts in the rich world. The most recent Treasury and OECD figures (November 2008) show Australia’s net debt across all governments to be only 1 per cent of GDP, compared with 48 per cent of GDP for the OECD as a whole.

It’s very difficult to argue that maintaining government spending is a bad thing in a recession. When demand in the rest of the economy is low, government spending runs no risk of "crowding out" other, potentially more productive investments. Infrastructure spending can also take up the slack in rapidly slowing industries like construction.

Even "cash splash" handouts are, after all, simply taxpayers’ money being returned. There was plenty of this during John Howard’s government, including regular tax cuts and the very same one-off bonus payments to which the Liberal Party is now so opposed.

In May 2007, the Howard government announced a $3 billion health and aged care package which included a one-off, $500 payment to pensioners and carers. At the time, the Liberal Families Minister Mal Brough had no qualms in calling it a "bonus", arguing that "the bonus payment for older Australians allows them to share in the economic prosperity that they’ve helped to create."

Of course, 2007 was a long time ago. Just ask Mal Brough, who isn’t even in Parliament any more.

Ben Eltham is New Matilda's National Affairs Correspondent.