The best of promises – and the worst

Here’s one of the three pieces I contributed to Crikey as a correspondent from the lockup.  I’d not done the lockup for over a decade – and it’s very like sitting an exam, including the relief and relaxation when it’s finished after a hard slog and you can catch up with people you’ve not seen in a while.  Had a great time afterward meeting some of the Crikey and Business Spectator people and talking to Alan Kohler about his business.

As a temporary member of the press gallery, I had my ‘gotcha’ question ready for Wayne Swan, but alas didn’t join the shouting match to get my question in. But I can share it with you gentle reader – a little esprit de l’escalier a few hours later.

Treasurer, do you support the Budget’s Paper’s call for the Budget to retain “the necessary flexibility for the budget position to vary in line with economic conditions to support macroeconomic stability,” or your Prime Minister’s commitment to return the budget to surplus in 2012-13 come what may?

Julia’s promise is the best of promises – and the worst of promises.

Electorates like spending but hate the taxation to pay for it. Thus, while it’s not the most rational approach, the obsessive concern with getting back to surplus has been a healthy counterweight to the drift towards endless deficits and mounting government debt.

The average government debt to GDP of the G-7 countries is just shy of 75%. Australia’s will peak at less than a tenth of this. And Keynesianism isn’t a perennial spendathon. If you plan to increase spending to fight recession you should use booms in the way the years of feast are used in the Book of Genesis – to replenish the fiscal larder.

This government hasn’t proven itself particularly courageous in taking on middle class welfare, but wearing the hair shirt of returning to surplus come what may, is nevertheless delivering impressive constraints in outlays.

But the rigid timetable for restoring surplus could become a huge handicap – economically and politically. Announced in the haste of her very first press conference as Prime Minister and so literally the prototype for many other misjudgements of similar provenance, it looks decisive and statesmanlike – but not after a moment’s thought about what could go wrong.

First, the macroeconomic success of the Government’s stimulus in saving over a hundred thousand jobs is testimony to the importance of playing the short term exigencies of the economy on their merits not as you planned three years before. Locking in the pace of returning to surplus is at odds with the logic of the stimulus. Much worse, renders the government hostage to fortune.

If the economy remains strong, returning to surplus will be both straightforward and salutary – indeed we should be heading there more vigorously. This Budget revises down tax receipts by a whopping $16.3 billion over two years from the Government’s late 2010 Mid-Year Economic and Fiscal Outlook published just six months ago. That’s before counting the near $6 billion cost of 2010’s national disasters.

So that delicately poised 2012-13 $3.5 billion dollar surplus could easily slip from the Government’s grasp. We don’t need any dramatics for the surplus to evaporate. Indeed quite minor parameter changes send the budget into the red (See “Welcome our new, more fragile budget” [Another piece I did for Crikey). Heaven help the government if the Chinese (bubble?) economy took a serious hit. Returning to surplus by the due date would not only require a politically suicidal fiscal contraction, but also one which would simply inflict more economic damage.

Second, making the return to surplus the touchstone of economic responsibility exemplifies Labor’s loss of nerve – its concession of the narrative to the Opposition. In fact – as the ALP had argued with increasing justification as its time in government drew nearer – its opponents had slipped into a fiscal torpor shovelling out the proceeds of the mining boom to fund a string of lame, improvised vote buying exercises. But Labor couldn’t cut through from opposition, because Howard kept running healthy (looking) surpluses.

So forming government was a moment of truth – an opportunity to reconstruct the way things work and so the way they’re thought about. The new Government might have done so by unhooking the Future Fund from its ostensible purpose of funding commonwealth superannuation and transforming it into a proper sovereign wealth fund and by building institutions to deliver more independent disciplines on fiscal policy.

One could make fiscal policy more independent by establishing an independent agency to provide regular public advice to government on its fiscal stance, in the way the Productivity Commission does with industry assistance. In the interim, one could seek the same advice from the Reserve Bank via its regular publications.

Had the Government done so, (it could still do so now) it could expel the demons of fiscal laxity without booby-trapping its own future in the event that things turn out worse than expected. It could commit to following its independent fiscal advisor’s advice to publicly advise it on managing the return to surplus, or more timidly, could commit to its current course with an escape clause allowing it to delay the return to surplus if so advised.

Alas, the change of government came to look more like a quick backstage costume swap. Now it’s the new Coalition Opposition arguing – quite rightly – for higher surpluses so that we don’t squander the dividend of the resources boom (as they did when they were in Government).

Likewise the ALP in opposition attacked the consequence of the push to minimise debt at all costs – the Howard Government’s neglect of infrastructure investment – while ALP State governments were . . .  well neglecting infrastructure investment. Ask John Brumby, Kristina Keneally and Anna Bligh how that’s all going.

All this from accepting, and so reinforcing, one’s opponents’ framing of the issues.

 

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16 Responses to The best of promises – and the worst

  1. Paul Montgomery says:

    Nicholas, I’m not quite following the reasoning behind this concept of the independent fiscal advisor. Isn’t that what Treasury is for? Or is this an admission of how partisan Treasury has become in recent years? How does Treasury interact with this new body if it gets up… what happens when they differ in opinion?

  2. Nicholas Gruen says:

    Treasury is set up to provide private advice. We don’t get to see it. It is also not set up to be insulated from political pressure. It is essentially the servant of the government of the day even thought it should and I think usually does discharge this duty within the traditions of the Westminster system of impartial advice.

  3. derrida derider says:

    All good stuff – especially the bit about the consequences of accepting one’s opponent’s framing of things and using infrastructure as an example.

    EXCEPT you used my bete noire term – “middle class welfare”. We’ve had this discussion before, but it is one of those framings (by opponents of the welfare state – note your own point in the post) that obscures rather than clarifies. Cutting it is NOT automatically a Good Thing. “Middle class welfare” is part of an inevitable tradeoff for other things, and mindlessly cutting it sacrifices those other things.

  4. Paul Montgomery says:

    So let’s say the new body does get created, and it advises the Government to go one way yet Treasury advises the opposite. Previously the Government probably would have followed Treasury’s advice, but now it has external media pressure from this new body and unless it leaks Treasury’s advice it has no defence. Of course, Government usually has no problem leaking Treasury documents when it suits them, but do we really want Treasury conflicting with this new body and the Government in the middle? Politically, I can see it being a big problem.

  5. Nicholas Gruen says:

    DD thanks for picking me up. I completely agree with your objection to my phrase. I plead only that I was racing for the clock and didn’t have a better summary expression. How do you think I should have put it?

    Paul,

    Large fundamental disagreements are unlikely but there are always differences of opinion. The government is there to listen to advice and make the best decision it can. It gets different forecasts from its various advisors. It isn’t a bit deal. We live in a pluralist democracy. It can also overrule its advice – public and independent or private. It has the power to overrule the RBA’s management of monetary policy so long as it does it publicly and likewise is at liberty to take, reject or partially accept advice from the PC or any number of other august bodies.

  6. Paul Montgomery says:

    How often does the Government overrule the RBA on big issues, though? They’re a special case, I would have thought, given their extra powers.

    I guess my concern is that this new body might be on a par with the RBA in terms of respect its pronouncements are given in media circles, whereas places like the PC get ignored all the time for a number of (usually political) reasons. This would have good and bad aspects. If this new fiscal advisory body is merely on the level of the Productivity Commission, what good would it be really? Just another toothless NGO thinktank that the Government can ignore when convenient. But it can’t really be given any RBA-level powers to earn it respect, because we’re not the Eurozone and we have no external impetus to push us into giving up sovereignty over domestic fiscal policy.

    I don’t quite see the need for a quasi-independent, media-friendly version of Treasury. Fix Treasury first before manufacturing a homonculus of your own design. Perhaps I’m wrong to raise the spectre of Europe, but the concept smacks to me of creeping technocracy.

  7. Nicholas Gruen says:

    What do you think is wrong with Treasury that needs fixing?

  8. Joshua Itzkowic says:

    “Electorates like spending but hate the taxation to pay for it”

    To be clear in a country which is sovereign wrt to its currency taxes DO NOT fund spending.

    Government spending occurs before taxation and provides the private sector with the funds necessary to extinguish their tax liabilities.

  9. Patrick says:

    creeping technocracy.

    I don’t think Nick sees this as a bad thing!

  10. Paul Montgomery says:

    Nicholas: I might ask you the same question. What would this new body do that Treasury doesn’t? By proposing it in the first place, you must think that there are some functions that Treasury isn’t fulfilling. As I understand it, this new body is essentially Treasury minus full access to Government accounts, plus a direct media interface.

    I don’t see the need for it unless there’s some problem with the structure of Treasury. Is the problem that when the Opposition attacks Treasury, as it has done recently, Treasury can’t fight back?

  11. Nicholas Gruen says:

    Paul you said “Fix Treasury first before manufacturing a homonculus of your own design.” which is why I asked you what you thought was wrong with Treasury.

    The problem is that Treasury is the government’s private advisor – plain and simple. There would be a lot of duplication in the roles of the High Court and the Attorney General’s department – both would be trying to come up with interpretations of what the law is at any given time. But they have quite different roles. The Treasury advises the government privately on all reports the PC produces, but the PC’s advice is public. It’s a different constitutional relationship. And yes, there’s some duplication. Not a big deal when you’re talking about decisions where a good decision can be billions of dollars better than a bad decision.

  12. Patrick says:

    IMHO that’s the best analogy you have come up with so far, Nick, in about 3 years of talking about this. Possibly reflecting that I am a lawyer by training ;)

  13. Nicholas Gruen says:

    No – you’re right Patrick – I’m always thinking of how slowly I refine arguments, and really good examples may come only when one is seeking to explicate something which seems obvious to me but which is being challenged by someone else.

  14. Pedro says:

    Yes, the public service generally is a creature of the government and should be. The RBA and the PC are only independent to the extent specified in their respective Acts and that is subject to the whims of appointment. The PC would be a different creature if headed and staffed by Bob Katter clones. A PBO would be the same. I like the idea of a PBO very much.

  15. Ken Parish says:

    It seems to me that Paul Montgomery might have a point that an independent fiscal rectitude watchdog without any real regulatory teeth would be much more likely to be ignored like the Productivity Commission than treated with great respect like the RBA.

    OTOH Paul’s suggestion that the task be vested in Treasury seems to lack understanding that Treasury is simply a government department which simply cannot (without breaching the fundamental principle of responsible government) either possess or appear to possess the necessary level of independence of the political government without which the fiscal rectitude watchdog role is meaningless.

    Thus why not vest the power in the RBA itself on a permanent basis rather than just as an interim measure?

    I certainly agree that Gillard would be wise to begin building herself plausible policy escape hatches now in case she’s mugged by reality such that continuance of a deficit beyond 2012-13 (or at least increased borrowing for productive infrastructure) becomes a necessity. An independent fiscal rectitude watchdog is the most obvious way of doing that, and also creates ongoing desirable checks and balances/transparency mechanisms which future governments will also find difficult to escape (e.g. no government would now get away with hobbling or ignoring the RBA on interest rates).

    Gillard will certainly backflip on the surplus promise if reality forces her to do so, just as she has on carbon tax and now the Pacific Solution. But surely she should by now have learned the need to create wriggle room for oneself in advance. That was one of Howard’s best tricks. Mind you, Howard didn’t have to contend with an Opposition Leader with Abbott’s single-minded, relentless, ruthless effectiveness in characterising every policy alteration or backflip as either incompetent or dishonest or both, when the reality is that they are usually simply sensible policy responses to unforeseen changes in circumstances in a complex world economy where all governments possess very imperfect knowledge. However, a PM capable of learning by her mistakes would at least include a suitable range of weasel words in every forward policy commitment. But an independent watchdog providing cover for weaseling is even better.

  16. Nicholas Gruen says:

    Pedro, of course the idea of a PBO is different again – because apart from being a creature of the parliament, possibly in a way which is similar to the Treasury being a creature of the Govt, a PBO is not advisory, and only provides technical/factual advice. This can nevertheless be helpful but it’s not going to come out and say that the Govt’s fiscal policy is inappropriately loose or tight.

    Ken, the other thing is that the advisability of an independent advisor has been evident throughout the whole GFC episode – the ALP only did what they were told and got tarred with the ‘reckless spending’ brush. And yes, it could be a lifeline for them in the future. But heck, it’s new, and business isn’t calling for it (or isn’t calling for it with any consistency) and things seem to be going along OK don’t they? So far, so good.

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