Budget Week should in principle be a great opportunity for an educated national discussion about issues of public finance and macroeconomic management. But unfortunately the budget debate is always shrouded in such a thick fog of political rhetoric and misinformation that it turns into the most tedious week of the year.
The greatest nonsense tends to surround the interpretation of the deficit. Not that the discussion of the ill-fated CPRS, the resource rent tax, or the healthcare funding arrangements have been very informative. But when it comes to the macroeconomic policy aspect, you might as well read a good comic as listen to a minister or shadow minister on the radio.
There are two basic questions about fiscal policy that should be posed at each budget:
1. Is the fiscal stance, that is, the discretionary change in spending and revenue, an appropriate contribution to aggregate demand?
2. Is the fiscal balance on a sustainable path given the state of the government balance sheet?
This is not the place to answer those questions, but I’ve copied a couple of graphs from Budget Paper No.1 that might serve as starting point for a discussion on them.
The first graph indicates where the gaps in spending developed and how fiscal policy could fill them, and the second one provides a handy benchmark for a discussion of sustainability. A critic might not agree with all the assumptions underlying the Treasury forecasts, but they’d be obliged to spell out which ones they disagreed with and provide their own alternative model if the disagreement was profound.
However, instead of an informed and informative discussion of these matters, we usually get a debate over the meaningless question whether or not budgeting for a deficit indicates a responsible management of the economy. Of course this presentation of the issue bypasses Question 1 altogether: the budget balance tells us nothing about the magnitude of any net injections into total spending — it’s mostly a reflection of the state of the economy.
The size of the deficit is pertinent to Question 2, but indicates very little if it isn’t placed in context. We need to know the whole story: How big is the current net debt? How big is too big? How big do want it (not necessarily zero)? Given our current location in the business cycle, is the evolution of the fiscal deficit consistent with a feasible path from one to the other?
Last year we came a little closer than usual to a sensible discussion of the issues. That might seem ironic given that the budget balance plunged precipitately from a forecast surplus to a deficit of around five percent of GDP. However, partly because of the seriousness of the crisis and partly because the Opposition was led by Turnbull, there initially seemed to be underlying bipartisan agreement on the inevitability of a blow-out.
But by the time the budget was handed down, Turnbull had become a shrill critic of the stimulus package, even if it was the magnitude of the deterioration in the balance that he emphasised, rather than the sheer fact of the deficit.
And we’re right back to it this year. Tony Abbot declared Rudd a ‘crazy spender’, Andrew Robb announced sorrowfully on Lateline that this is the biggest budget deficit since World War II, and Joe Hockey has been rehearsing his Neanderthal crowding out argument all day on radio stations. And Rudd himself, who only a year ago was boasting about his government’s courage in implementing the stimulus, has already resumed mouthing his mantra from Kevin 07 days about being above all else a fiscal conservative, whatever that means.
If only the crisis had deepened, we’d be seeing better debate. Fortunately at the moment the Treasury seems to know what it’s doing, despite the best efforts of our elected governors to keep us confused. But it may not always be that way, so it’s probably high time to make them an independent statutory authority.