For the past two years and, it seems, for several more years, several European countries are playing out a real-time experiment in economic policy: whether large levels of government debt can be brought under control with aggressive fiscal austerity.
The answer, thus far, is no — whether it is the dysfunctional economy of Greece, or one of the world’s largest, the UK’s, debt reduction targets have been missed because of the impacts on economic growth of austerity. That’s along with the apparently incidental human cost in terms of high unemployment.
Despite the ongoing failure of the experiment in Europe, Australians are increasingly being urged to austerity by conservative commentators. Foremost among them is David Murray, former head of the Future Fund, who is repeatedly given more or less unchallenged space at the national newspapers and on the ABC to endlessly rehearse his warnings about succumbing to the same disease as Europe, and the need to dramatically slash government spending.
It’s fitting that much of Murray’s advice is delivered via The Australian Financial Review and The Australian. Both papers are owned by companies busy cutting costs in an austerity drive that will can only staunch their bleeding, not return them to growth.
Fortunately, Australia is not in the desperate positions in which Fairfax Media and News Ltd now find themselves.
When pressed to explain in detail the nature of the threat to Australia, with its low levels of government debt, Murray produces an external shock scenario that has been repeatedly addressed by the Reserve Bank and external agencies such as the International Monetary Fund, as being an unlikely one that Australia, its federal government and its financial system should be able to handle if indeed it eventuates.
And Murray and people like him can’t point to one economy where austerity has driven growth, cut unemployment and made the people of that economy wealthier and more at ease with themselves.
But the hairshirt scenario being pressed on us is less about real-world challenges and more about ideology. The ideology is to be found in the railing of Murray and others at “welfare”. Australia indeed has a middle-class welfare problem (no one is accusing the government of unmerited generosity to Newstart recipients; quite the opposite). But Murray and conservative commentators have been strangely silent when the current government has mustered some courage to cut it back.
As the Reserve Bank explained on Tuesday, there is a genuine question over what will drive Australian growth as the current phase of the mining investment boom comes to an end next year, especially given the sluggish state of global growth. With low inflation and a government committed to a dramatic fiscal tightening, it has been left to monetary policy to refire domestic demand in anticipation. Donning the fiscal hairshirt, however, would place far too much pressure on monetary policy, with its known limitations. The cost would be lower growth, greater difficulty in returning to and maintaining surplus, and a human toll in unemployment.
There’s an adage in business, which says: you can’t cost your way to growth.