Debt and deficit emergency half-full glass

That Tony Abbott should have been forced this week to concede defeat on fiscal reform by declaring partial victory over “debt and deficit” (“the glass is half full”) is both ironic and fitting. As I discussed in a fairly recent post, Abbott was responsible for bringing to destructive perfection the toxic mix of “small target” strategy and relentless negativity that both major parties now employ when in Opposition. Tony has now been hoist with his own petard, brought undone by his own success in convincing the electorate to believe erroneously that governmental debt and deficit are universal evils that can never be justified. He finds himself just as helpless to achieve a budget surplus in the foreseeable future as his ALP predecessors, and for essentially the same reasons: unexpectedly slow recovery of revenue in the wake of the Global Financial Crisis; progressive collapse of iron ore and coal prices; and a recalcitrant Senate with an opportunistic Labor Opposition gleefully intent on being just as relentlessly negative towards Abbott as he was towards them.

Peter Hartcher had quite a good article in yesterday’s Fairfax media (which I can’t now find) outlining the recent history of tit-for-tat political bastardry that has brought Australia to our current situation of almost complete governmental paralysis on fiscal policy. However, the cycle of retaliatory fiscal mischief goes back decades. I would date the phenomenon back at least to Paul Keating’s cynical and unprincipled demolition of John Hewson’s Fightback policy in the lead-up to the 1993 election, a tactic that Keating pursued relentlessly notwithstanding that he himself had advocated a GST only a few years previously and that John Howard by contrast had had the guts and integrity (not words that most on the Left would associate with him) to support most of the Hawke/Keating government’s necessary deregulatory, market-based reforms over the previous decade.  The gloves were off on fiscal policy from that moment on.

In one sense Abbott’s observation that a net debt position of 60% of GDP in 40 years’ time on current fiscal settings wouldn’t be too bad a performance (because it would make us only about half as bad as Greece and the other PIIGS countries) might seem foolhardy, especially when examined alongside his previous alarmist claims of a “debt and deficit emergency”.  On the other hand, his breathtakingly audacious fiscal U-turn might well succeed in painting Labor into a corner, given the incisive(not) leadership of Bill Shorten.

However, the modestly bad Intergenerational Report mid-range debt and deficit projections themselves are based on assumptions that are somewhere between heroic and highly optimistic (leaving aside the fact that projecting that far into the future is inherently almost meaningless anyway).

cash balance

Net debt

The middle “currently legislated” line is based on assumptions that economic growth will average 2.8% per annum over the entire 40 years, and that there will be no significant recession during that period.  History suggests both assumptions are quite unlikely to be realised.

On the other hand, the inexorably rising levels of net debt only seem that way because it is implicitly assumed that future governments won’t do anything effective to rein in the growth in debt.  As academic economist and veteran blogger John Quiggin (and numerous others) emphasise, Australia’s current debt levels are miniscule by world standards, and even 60% of GDP actually isn’t all that bad (this may be one of the few times when JQ and Abbott have actually agreed with each other). After all, most of our Western trading partners currently have significantly higher net debt levels. The trouble is that the IGR graphs imply continuing steep growth in net debt beyond 2055, and if you also factor in Australia’s long-term average growth rate of just 2% of GDP (rather than the optimistic 2.8% the IGR assumes) as well as a couple of significant recessions during that time, then a Greece/PIIGS outcome might not be so hysterically exaggerated at all.

What is the probability that such a dire outcome could befall Australia as a result of a long-term continuation of the current fiscal paralysis flowing from the evolved and highly successful tactics of Mutually Assured Destruction by demonisation of any attempts at meaningful economic reform by the government of the day? The example of the PIIGS nations suggests it isn’t a fanciful fear. However, paradoxically Tony Abbott’s thinly-disguised concession of defeat on the mythical “debt and deficit emergency” presents an opportunity, especially for Labor, to shift economic debate onto a more rational plane. It might even be that Labor politicians like Chris Bowen and Andrew Leigh possess the intellectual and rhetorical capability to explain to Australians both the dilemmas we face and the solutions to them in as graphic and effective way as Paul Keating managed in the 1980s.

However, success for Labor will depend not only on articulate and economically literate advocates like Bowen and Leigh, but also on a more thoughtful and discriminating approach to the truisms of the neoliberal agenda. Keating’s embrace of the deregulation and market-based reforms of the 1980s was both necessary and highly successful, underpinning much of Australia’s economic success since then (along with the more fortuitous factor of the Chinese development boom). However, both Keating and cronies like Peter Walsh also uncritically embraced much more dubious aspects of the neoliberal agenda, especially the “private good/public bad” fallacy and the proposition that low taxes are always a wonderful thing. Keating continues to be a rather uncritical advocate of the neoliberal prescription on privatisation, arguing in favour of the NSW Baird government’s proposed privatisation of electricity “poles and wires” despite the fact that the benefits of it would appear to be dubious at best.  The example of the Scandinavian countries especially indicates that there is quite a wide range of taxation settings equally consistent with prosperity and economic success. Indeed pretty well all EU nations have a total tax take in excess of 40% of GDP, and most of them are just as prosperous as Australia. Many have demonstrably superior health, education and social welfare systems. Given that opinion polls consistently indicate that most Australians want and expect improvements in publicly-provided health and education services, and don’t think they are paying too much tax, there are grounds for cautious hope that there might now be an opportunity for a decisive shift in the bi-partisan extreme neoliberal consensus that has characterised Australian politics since the mid 1980s. If Labor values still include any sort of commitment to social democracy, fairness and equal opportunity, that opportunity should be grasped with both hands.

Nevertheless, the short-term power of the “small target + relentless negativity” strategy can’t be ignored. It seems to me that promising and implementing an idea that Troppo’s Nicholas Gruen has long advocated, namely an Independent Fiscal Authority, would go a fair way towards combating opportunistic Opposition scare campaigns on fiscal policy.  Somewhat like the RBA on monetary policy (albeit with an advisory rather than determinative role) the IFA would provide citizens with an authoritative independent evaluation of the fiscal policies of both governments and oppositions. Labor should promise to legislate to establish the IFA and to require that it regularly publish reports outlining the parameters of responsible economic policy by reference to current conditions.  Both the government’s annual budget and Opposition response would be analysed by the IFA. All major new infrastructure projects would be required to be assessed on a cost-benefit basis by Infrastructure Australia, while new recurrent spending programs (e.g. Labor’s needs-based hospital funding reforms and the Gonski education reforms) would have to be assessed by the Productivity Commission.

Moreover, Labor should as a general practice make clear that any new spending promises it makes are conditional on always keeping within the parameters of responsible fiscal policy as defined by the IFA. It should be made explicit that Gonski and other large new spending programs might need to have their implementation slowed down if adverse and unforeseen economic circumstances intervene. Given that the Coalition’s pretensions to superior economic management skills have been comprehensively and publicly dismantled over the 18 months that Abbott has been in power, Labor has a unique opportunity to generate public confidence in its own fiscal management credentials by submitting itself to independent expert transparent scrutiny.  I’m not suggesting that any of this is a magic bullet solution; the equivocal success of the Charter of Budget Honesty demonstrates that.  But I do think that embracing and enhancing the combination of Gruen’s IFA mechanism, together with enhanced roles for Infrastructure Australia and the Productivity Commission, would provide a credible framework of independent and transparent policy evaluation that would go quite a long way towards repairing the damage that has been inflicted on the ideals of liberal democracy by sophisticated “spin” and manipulative marketing techniques.

About Ken Parish

Ken Parish is a legal academic at Charles Darwin University, with research areas in public law (constitutional and administrative law) and teaching & learning theory and practice. He has been a legal academic for almost 12 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in he early 1990s.
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6 Responses to Debt and deficit emergency half-full glass

  1. Alan says:

    An independent fiscal authority is an excellent idea. I wonder what would restrain any future government or opposition from declaring its reports a transparent stitchup (without ever uttering one sentence explaining why) and getting on with the good stuff of talking about the irresponsible fiscal behaviour of the enemy?

    We need to reform the way our monitory agencies are appointed and how they are treated.

    Most of all commentators need to give the reports of each agency the same standing. The Productivity Commission cannot be treated like a source of sacred and authoritative text while the Human Rights Commission is nugated or the Electoral Commission does not even have the resources to investigate violations of it sown legislation.

  2. Nicholas Gruen says:

    Thanks for the comments Ken.

    The IFA is a kind of hair shirt for pollies so why would they sign up to it? This is why they haven’t signed up to it. (This and their lack of the imagination to drag things into the Overton Window which haven’t been already served up by the Paul Kellys of the world.)

    But consider if, on coming into government in 2007, the ALP had taken my advice and introduced precisely the mechanism you have suggested. Firstly it’s an almost zero risk policy from Opposition. In Opposition it strengthens one’s fiscal credentials. The ALP largely followed it’s professional advisers’ recommendations on managing the economy but was never able to come out and say so and its advisors were never able to do some of the heavy lifting of shaping public expectations as to what good policy was – in the way the PC and RBA do.

    So it would have not just been good policy, but good politics, not just in Opposition, but also in Government. Of course occasionally it would have cramped the Government’s style, but in the broad scheme of things, being kept to the economic straight and narrow is an asset in government.

  3. john Walker says:

    Ken and Nicholas
    Looking at the 2 graphs it seems that the projected problems really start to take off in around 2025, is that correct?

  4. Hasbeen says:

    What a pile of tripe.

    Labor, with a few scraps thrown to the greens, & a bit more to the independents, had control of the senate, enacted every bit of stupidity they wanted, & got us into this mess. Gonski, NDIS anyone.

    On the other hand Labor & the Greens have refused to pass in the senate, every cost cutting measure the coalition has tried to introduce.

    If you want your efforts to be taken seriously, I suggest you try starting with the truth, not ideological clap trap. Every word after your first paragraph was a total waste,. You started with a rant &. thinking people, not locked into your own ideology would not have read any further.

  5. Barry says:

    Article commented
    unexpectedly slow recovery of revenue in the wake of the Global Financial Crisis;

    Well of course it never fully recovered.
    That is because energy never recovered after the peak in oil production in 2005. The tight shale oil gave us a 10 year opportunity to do something about it, but as the politicians just cannot believe what they are told, it is just too far out of their comfort zone, we now face this big problem of the cost of oil.
    That is what makes the economies lethargic and it will get worse.

    It is the energy stupid !

  6. I am and will always be Not Trampis says:

    Hasbeen according to PEFO there NEVER was a mess. time to take those pills again!

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