While the Prime Minister, his Deputy and the Treasurer continue to rain “decisive” down on us, the D-word the media is demanding is “deficit”, and the Rudd&Co-phrase-counter stolidly remains at zero for it. Damn but they’re good at sticking to their scripts.

The resistance to budget deficits reflects the mentality instilled first by Paul Keating and later by Peter Costello, that budget surpluses are a proxy of good economic management.

Both of them had excuses, in a way: in the 1980s, we were still captive to the “twin deficits” theory that blamed the current account deficit on budget deficits. Sadly, the current account deficit disobligingly remained and in fact worsened even as Keating racked up consecutive budget surpluses. Eventually — despite a prolonged media obsession with the satanic monstrosity of foreign debt and how each man, woman and child in Australia owed thousands to them furreners — we got over that. And Peter Costello, while making much of having “paid off Labor debt”, could do nothing after 2001 but sit back and watch the mining boom inflate his revenue to the stage where the Coalition nearly ran out of ways to waste it. What was a Treasurer to do — resign in protest at the amount of money flowing in?

The surplus fetish is also part of the myth of control that politicians like to peddle. Like the Liberal Party’s suggestion that a vote for them is a vote for lower interest rates — a claim terminated with extreme prejudice in recent months — the idea that surpluses can be conjured at will by any half-decent treasurer ignores the basic problem that the budget is driven by factors outside their control. There’s not much, short of significantly raising taxes, that a government can do to replace revenue lost to a slowdown, and no means other than slashing unemployment benefits to prevent the operation of automatic stabilisers that puff up expenditure.

So the current word games and debates about whether the Government will have the courage to plunge into the red are rather misleading. Unless Lindsay Tanner discovers some horde of cash forgotten about by bureaucrats, the Government will have little say in whether it goes into deficit.

Not that the Coalition would let you believe that for a second.

But the real issue is the quality of spending, which Glenn Stevens was careful to discuss in his gracious extension of permission for governments to go into debt. The Howard Government ran big surpluses, but its expenditure was the equivalent of a junk food diet, heavy on one-off cash handouts to politically-preferred constituencies like pensioners, on systemic income support for the middle class via baby bonuses and child care support, and on “regional development” projects that were politically-targetted and lacked any form of cost-benefit analysis.

Not much has changed — the Rudd Government is blowing most of this year’s surplus on one-off handouts to pensioners and grants to local councils to build, well, pretty much anything they like. The only difference is that at least there’s a macro-economic case for such a stimulus. The Howard handouts came in the middle of a boom.

The Rudd-Gillard mantra before and after the election was about quality spending — spending to retrieve our falling productivity growth through better infrastructure and a more skilled workforce. The simple problem is that the Government’s capacity to do that will be dramatically curtailed by the automatic operation of the budget in a recession. The issue then becomes whether infrastructure and skills investment, which will yield long-term benefits for the economy, should proceed anyway, funded by debt, or whether we delay it and wait for the good times to return.

That means the government has to be absolutely sure it has a good understanding of the costs and benefits of such investment. It has Infrastructure Australia to handle that task in relation to hard infrastructure. Who or what is making that assessment about investment in health, education and training?

The demands by Julia Gillard and Nicola Roxon for much greater performance information from the state education and health sectors were a good call before the budget collapsed. Now they’re absolutely essential to enable us to know where to target expenditure. Without them, we may as well be giving more handouts to pensioners for all the long-term benefit it will do the economy.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey