Double talk by Michael Stutchbury

After reading todays column by Michael Stutchbury (Tanner needs to sharpen his razor gang to stay in surplus), where he urges that the Government should not fatten the budgets structural bottom line, I remain as bemused as ever.

The Governments fiscal strategy is clearly defined as
– achieving budget surpluses, on average, over the medium term; and
– improving the Governments net financial worth over the medium term.

This requires the Government to run a deficit in times of extreme market failure of which there is no better example than the present. All western g

Unfortunately, the Government (notably Mr. Swan) is itself indecisive stressing at times the risk of running a deficit and at other times the risk of not doing so.

Mr. Stutchbury jumps on the Swan bandwagon and puts forward three arguments against discretionary spending.

The first argument is political. Voters remain skeptical of deficit budgeting. Yes, they are skeptical (thanks to the rubbish that Costello was feeding the public for many years). But wouldnt voters treat the prospect of higher unemployment as a much more serious type of threat? Even Malcolm Turnbull is urging the Government to do more to save jobs, jobs and jobs. How else can you do it without active political intervention including infrastructure spending?

The second reason is economic. It is one thing to allow the budget surplus to shrink naturally as the automatic stabilisers from a weaker economy”, as they boost spending on unemployment and reduce tax revenue. It’s another thing again “to deliberately blow the surplus”. Where does the fiscal strategy make any distinction between automatic stabilizers and discretionary spending especially of the infrastructure kind?

The third reason is political economy. Once the possibility of a deficit world is entertained, there is no obvious limit to what could be spent. This is ideology triumphing over sound economics.

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Joshua Gans
Joshua Gans(@joshua-gans)
13 years ago

Good rebuttal, Fred, and succinctly stated.

By the way, I gather you’re working from the print version of the paper. The column is here.

Note that Stutchbury says:

It is one thing to allow the budget surplus to shrink naturally…

which makes a bit more sense than your typed rendering.

He’s right that counter-cylclical discretionary meaures are politically hard to reverse. But most of the work is done by bracket creep. The trick is not to reduce tax rates when you don’t need to.

I’m pleased that Turnbull isn’t taking the same line. I’d like to think it’s because he’s a responsible leader, but I’m afraid it’s because he wants to take the credit for urging the pension increase.

Tel_
Tel_
13 years ago

Even Malcolm Turnbull is urging the Government to do more to save jobs, jobs and jobs.

Malcolm Turnbull’s trick is to urge the government to do something that sounds outwardly reasonable but lures them into a trap. Then when the trap springs he jumps around saying, “Ha! ha! You did the thing I told you and now look what happened!”

For example, it was Turnbull’s urging that made the government keep increasing the value of savings that they were willing to guarantee, ultimately leading to freezing deposits and the infamous “Centerlink” comment, making Wayne Swan look like a turkey.

If Wayne Swan wants a quick trip to the political scrap heap, Malcolm Turnbull will be telling him the best way to get there.

How else can you do it without active political intervention including infrastructure spending?

Ireland did pretty well by using tax incentives to bring in offshore business. Better to get a small slice of a big pie. I’m not against government infrastructure spending but what tends to happen is that a government will use their spending to buy out key marginal voters rather than thinking carefully about what will give the biggest return for the nation as a whole.

Here’s a concrete example:

http://www.smh.com.au/news/technology/connectivity/wireless–broadband/government-calls-for-broadband-bids/2008/04/12/1208024963946.html

Communications Minister Stephen Conroy said in a statement late on Friday the government wanted the fibre network to deliver minimum speeds of 12 megabits per second to 98 per cent of Australian homes.

Sounds great, 12 megabits, but that is one direction only, from the net into the household. It’s a boon to consumers, but doesn’t help Australia’s competitiveness in terms of rack space for servers or good value upstream bandwidth. What are the consumers going to do with their 12 megabits? No doubt they will buy internet content (e.g. iTunes, etc) from overseas providers (because hosting in Australia is too expensive). Besides, if someone has a monthly quota of 10G then a 2 megabit stream is just as good as a 12 megabit stream because the quota is the limiting factor.

Tel_
Tel_
13 years ago

Once the possibility of a deficit world is entertained, there is no obvious limit to what could be spent

Rosalie Goes Shopping.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
13 years ago

Fred,

I’m sympathetic to your message as is obvious from what I’ve written, but the core economic argument of Stutchbury is stronger and not mentioned by you – which is that we may well be already running a structural deficit. If this is the case it means the adjustment path is longer because the right thing to do is to go further into structural deficit and then change direction as recovery takes hold – all part of my idea that aiming at a surplus through the cycle makes sense.

That line about not knowing where to stop makes me laugh. “Once the possibility of a deficit world is entertained, there is no obvious limit to what could be spent.” I guess you could say the same thing about pretty much anything – including surpluses!

Somehow reminds me of Lady Bracknell suggesting that social statistics – such as the average age of marriage – were sent for our guidance.

NPOV
NPOV
13 years ago

Tel, re Ireland, there’s no denying it demonstrates that tax cuts and reductions in government spending can lead to impressive economic growth, but Ireland’s economy in the late 80’s before the boom started is very different to Australia’s today – indeed, it’s only after 15 years of growth+tax cuts+spending cutbacks that Ireland is now a quite similar economy to Australia. You could just as well point to China and suggest that to achieve growth rates of 10% per annum you need a command economy (Heritage rates China as having a mere 50% business freedom, 30% investment freedom, 30% financial freedom, and notes that “The state still guides and directs much economic activity”).

derrida derider
derrida derider
13 years ago

Having a balanced budget over the course of the business cycle sounds moderate and reasonable. It’s a pity that there is absolutely no theoretic backing for it.

Surely as long as your population is growing you should be running some structural deficit because a component of your spending is investment to meet that growth, not current consumption. That investment should be paid for by its beneficiaries – future Australians.

Tel_
Tel_
13 years ago

You could just as well point to China and suggest that to achieve growth rates of 10% per annum you need a command economy (Heritage rates China as having a mere 50% business freedom, 30% investment freedom, 30% financial freedom, and notes that The state still guides and directs much economic activity).

Obviously, what China has done is one possible way to achieve 10% growth, but what we are looking at is a partial transition from a completely command economy toward a market economy, plus adoption of a great deal of imported technology. Once they have largely caught up with the rest of the world in terms of financial systems and technical know-how, the growth will roll off. It’s going to be a huge challenge for China to become self-sufficient in technology because both their government and their culture work against the free thinking and open discussion that are required to make scientific progress. There are a lot of internal political tensions in China that their government is pressing down tightly. I wouldn’t want to emulate the Chinese model, even if it did come with a promise of growth.

Having a balanced budget over the course of the business cycle sounds moderate and reasonable. Its a pity that there is absolutely no theoretic backing for it.

I predict that we are going to get a ringside seat watching a non-theoretic example of what happens to the US economy as a consequence of a severely unbalanced budget. I’m expecting that Australia and Canada will collect a substantial number of economic refugees.

That investment should be paid for by its beneficiaries – future Australians.

I see some validity in that, except that the future Australians may not want the infrastructure you have so generously decided that they deserve. After all, they never asked for it, and they never got any input into the selection. Future Australians have a number of options open to them should they decide they feel disinclined to pay the debts that have been run up in their name (inflating the currency is probably the easiest).

Tel_
Tel_
13 years ago

That line about not knowing where to stop makes me laugh. Once the possibility of a deficit world is entertained, there is no obvious limit to what could be spent. I guess you could say the same thing about pretty much anything – including surpluses!

Anything except a balanced budget, in which case you know exactly where to stop.

NPOV
NPOV
13 years ago

Tel…

Obviously, what Ireland had done is one possible way to achieve 10% growth, but what we are looking at is a transition from an overtaxed, protectionist, inefficiently governed economy toward a modern market economy, plus adoption of a great deal of imported technology. Now that they have caught up with the rest of the world in terms of financial systems and technical know-how, the growth has started to roll off.

In other words, I don’t think there’s a lot that Australia can usefully learn from either China or Ireland if it’s looking to achieve significantly higher economic growth.

Tel_
Tel_
13 years ago

but what we are looking at is a transition from an overtaxed, protectionist, inefficiently governed economy toward a modern market economy

And how is this substantially different from Australia? We are merely behind them in the transition and doing a worse job of managing the process.

The “overtaxed” Irish corporate tax was 32% up until 1999 when it began its transition away from being “overtaxed”. Given that the Australian corporate tax is 30% (I remember this used to be higher, but can’t find the details), the conclusion is that Australia could perhaps follow the same transition, so yes we could learn something from the Irish. I think there’s a bit more to it than just low tax. Ireland claws back some government revenue by a substantially higher indirect tax rate. The point being that VAT/GST mostly discourages consumption while income tax discourages production.

Both Australia and Ireland started out as strongly agricultural economies. Both have been in the process of opening up borders and easing protection and both are adopters of foreign technology. Ireland has successfully reduced dependence on agriculture and brought the foreign technology on board, with a big focus on education and providing a skilled workforce at good value to business. In this respect China has done a similar thing — educate the local population so they become an attractive workforce for foreign business, but also use the foreign business as on-the-job training in exotic technology. Lose a little bit in corporate tax, gain a whole lot more in human skills, reputation for excellence and an environment conducive to production.

On the other hand, Australia’s manufacturing sector is laying on life support. Our education system is not delivering a supply of skilled workers, and we are failing to attract foreign high technology business. We remain heavily dependent on primary industry and tourism. For the most part, our adoption of technology has been as a consumer of foreign made products and those products are steadily being packaged in such a way as to lock the local industry out. Our car industry was created as a deliberate offshoot of a wartime command economy under Chiefly, it soon was taken over by foreign multinationals who begrudgingly keep factories open in exchange for government handouts and access to our markets. We teach people to bolt together a few pre-made pods and pretend they built a vehicle (I exaggerate of course, but it’s a valid point).

For those who can’t scroll upwards, I’ll repeat the original quote:

Even Malcolm Turnbull is urging the Government to do more to save jobs, jobs and jobs. How else can you do it without active political intervention including infrastructure spending?

Well, Ireland is “how else”! They had no ability to build a high tech sector for themselves, so the made an attractive environment to get other people to build it for them… and it payed off. So there are options.

NPOV
NPOV
13 years ago

“We are merely behind them in the transition and doing a worse job of managing the process.”

I’d be interested in which areas you think Australia is noticeably behind Ireland as far as liberalising its economy goes. FWIW, I support reducing the corporate tax rate in Australia, though I doubt slashing down to 12.5% is going to do anything much in the current global economic environment.

Ireland didn’t have to “save jobs” because recession was looming – its economy had been stuck in a rut for decades. The unemployment rate in the late 80’s when the reforms started was over 13% – it took over 10 years to bring this down to something close to Australia’s level, pretty much where it has stayed for the last 8 years.

NPOV
NPOV
13 years ago

Interesting to note that Ireland is taking anti-Keynesian measures now it’s officially in recession…a path it seems Mr Rees is keen to follow in NSW.
Given almost every other economy in the world is doing the opposite (relatively few are cutting taxes, but almost all are boosting government spending) it will be interesting to compare the outcomes.

Tel_
Tel_
13 years ago

The Irish approach of attracting foreign investment does necessarily have the effect of making the local economy highly dependent on the business cycle of the investor nations. I’m not quite sure what prompted their switchback to higher taxes, I would think that this would be the worst time for a tax hike and they are doing it because they have no choice (i.e. they lost so much revenue due to business slowdown that they are desperate to avoid a major deficit).

There’s just a chance that Ireland may be hoping nearby EU boost to government spending spills into them somehow (through subcontracts or knock-on spending). I’m not sure how tightly EU nations can couple their government spending to domestic business (people have a habit of subcontracting to the cheapest bidder).

Putting this a different way: an Englishman, a Frenchman and an Irishman walk into a bank. The Englishman says, “I want to take out all my money”, the Frenchman says the same (with a comic Clueso style accent), the Irishman says to the banker, “can I interest you in some short-term finance at very reasonable loan-shark rates?”