The reaction to the budget update, or MYEFO, has focused on Joe Hockey’s decision to allow a $10.6 billion blowout in the budget bottom line in order to cushion the Australian economy at a time of weaker growth and rising unemployment.
Hockey stressed that using the budget as a “shock absorber” to declining revenues from the mining sector due to a fall in Australia’s terms of trade – the ratio of the price of our exports to the price of our imports – was necessary to head off sharper increases to unemployment.
We can be thankful that Hockey did not opt for deeper cuts in MYEFO to offset the decline in revenue, and perhaps, as some commentators have suggested, it’s an encouraging sign from a Treasurer who has frequently appeared to lack the economic credentials required for the job.
But should Hockey really be commended for merely doing no further harm to the economy? And should he be doing more?
Hockey and Abbott have long drummed up a ‘fiscal crisis’, and used it as a pretext to attack Labor and attempt to dismantle core features of the Australian welfare state.
The numbers, of course, tell a different story. Australia has a modest budget deficit, at 1.4 per cent of GDP, and the third lowest level of government debt in the OECD.
Unfortunately, the government’s doomsday rhetoric has changed the tone of discussion around Australia’s public finances, and distracted many in the media from both the reality of our fiscal position and the primary function of fiscal policy – namely, to counteract fluctuations in economic growth and unemployment.
There is a need to sure up government revenue over the medium and longer term – though Hockey has done little to demonstrate he is committed to boosting revenue – but the short term priority ought to be supporting growth and jobs.
Unemployment has risen steadily throughout 2014, and consumer and business confidence have dropped off significantly. The MYEFO predicts a further increase in unemployment next year.
And yet, as Fairfax’s Peter Martin has noted, MYEFO assumes that the economy will grow at a level that will automatically restore unemployment to its so called ‘natural rate’ of around five per cent.
What is the basis for this assumption? Plainly, there isn’t one. It’s an assumption rooted in the bogus idea that the economy will self-correct regardless of the economic reality – in this case, that the mining boom has slowed significantly, and that there are few signs of other areas of the economy picking up the slack.
In this context, it is unforgivable for the government to forge ahead with a plan to return the budget to surplus at all costs. Of course, we are not in a recession, but Hockey’s fiscal tightening is acting as a drag on the economy at a time when it requires targeted government spending – perhaps on shorter term infrastructure projects – to support growth and jobs.
A back of the envelope calculation would suggest that we need growth of more than three per cent for a sustained period of time in order to achieve the reduction in unemployment to five per cent outlined in MYEFO. It’s difficult to see how such a level of growth can be achieved without the budget playing a more active role, especially with the cash rate at a record low of 2.5 per cent.
But it’s unlikely that we’ll see any kind of serious reversal from Abbott and Hockey’s surplus-at-all-costs approach to fiscal policy, unless the economy takes a sharper turn for the worse.
The problem, however, is not confined to Australia; neoliberals worldwide have a pathological aversion to budget deficits, even when, as in Australia’s case, temporary deficits might be necessary to support growth, and will have no long-term effect on the sustainability of public debt.
It’s only when a recession hits that the debt and deficit hawks reluctantly accept the need for Keynesian stimulus measures. As soon as those policies work and return growth to normal levels, the fear mongering begins again and we collectively forget that fiscal policy is vital to maximising growth and minimising unemployment throughout the economic cycle, not just during a recession.
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