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Federal

Dec 11, 2012

Christopher Pyne and the dangerous fantasy of surplus

The fantasy of surpluses peddled by the Coalition becomes dangerous when it substitutes for actual thinking about the economy.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Christopher Pyne

Christopher Pyne, yesterday: “Well if there had been a Coalition government for the last five years, Kieran, I think most people accept that we would have had continuing surpluses.”

Whether “most people” accept that might be a matter for pollsters, but it’s easy enough to use historical data from the budget papers to work out the maths for Pyne’s claim.

Under the Howard government, spending rose an average of $14.5 billion a year between 2001-02 and 2007-08. Assuming this rate of growth had been maintained and there was no attempt to respond to the impacts of the global financial crisis (even though Malcolm Turnbull supported the Rudd government’s first set of stimulus payments), the Coalition would have indeed recorded a surplus in 2008-09, but then sunk over $16 billion into the red in 2009-10 and nearly $14 billion into the red in 2010-11, due to the sluggish recovery in revenue growth — something they’ve steadfastly refused to acknowledge in their attacks on Labor’s fiscal management. In 2011-12, they would have managed a balanced budget.

So, for Christopher Pyne’s statement to be even close to being right, the Coalition would have needed to find an extra $25.7 billion in revenue, or find $25.7 billion in cuts, between 2008-09 and 2011-12 just to get back to balance, let alone generate surpluses. And that’s without a skerrick of stimulus.

So, pop quiz for Pyne: which new taxes would you have put in place, or which programs would you have cut, to address that $26 billion gap?

But wait: if there’d been no stimulus, the rate of unemployment would have gone up to perhaps 7% or 8%, significantly increasing transfer payments. Consumer and business confidence would have collapsed, with resulting falls in retail and other spending. In the resulting recession, more firms would have collapsed, sending still more people onto the dole queues. Personal income tax revenue would have fallen, GST revenue would have fallen, as would corporate profits, further slashing billions from Commonwealth and state budgets. Putting aside the inconvenience of hundreds of thousands of unemployed Australians, Pyne’s Coalition would have had to have found billions more in revenue or cuts in order to keep their surplus.

And, of course, those resulting cuts or tax rises would have driven further economic impacts, slowing the economy further, undermining revenue further, necessitating more cuts or tax rises. You get the point.

The only means of stimulating the economy would have been monetary policy, even though interest rates went down to “emergency lows” under Labor and the majority of mortgage-holders didn’t cut their payments, preferring instead to pay down their debt faster.

That’s not a projection or a fantasy, that’s the brutal reality of what is happening in Europe right now: in an effort to adhere to a particular fiscal policy regardless of its economic impact, the EU is in a depression — yes, a real, 1930s-style depression — that keeps pushing its fiscal targets further away, never mind the 50% youth unemployment and social dislocation. Austerity doesn’t work even at its specific goal of curbing government debt. It’s Sisyphean economics and it’s destroying a generation of European workers.

What is a fantasy is Pyne’s statement, of course, predicated on the broader fantasy peddled by Tony Abbott and Joe Hockey, that the election of a Coalition government next year will magically reset Australia to the Howard years, instantly returning us to a point before the GFC-cruelled revenues, before consumers returned to historical rates of savings and before mining companies began ramping up investment, when the principal task of the federal government was to figure out how to blow the windfall revenues that piled up every year.

That’s a political fantasy and good luck to the Coalition in trying to sell it. Maybe enough voters will believe it, who knows. All’s fair in love and politics.

The more dangerous fantasy, the one that can and will harm the economy, is the one that insists that budget surpluses are the key goal of economic policy, rather than a tool in the service of broader economic outcomes. Whether you believe it because you’re stupid enough to think governments are just like households and must always “live within their means” or you believe it because you have a pathological hatred of debt and think government is always too large, not matter what size it is, it means substituting ideology for thinking, and substituting the means for the ends.

The result is a polity incapable of coherently responding to changing economic circumstances, of doing what the Rudd government did when faced with the challenge of the GFC and retooling its economic approach to preserve jobs. Just ask the Europeans.

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66 comments

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66 thoughts on “Christopher Pyne and the dangerous fantasy of surplus

  1. Saugoof

    It “amuses” me hearing statements like this one. Christopher Pyne knows well enough that his statement is wrong but it’s just too good of an opportunity to attack Labor to let slip. The reality is that had the Coalition been in power during the GFC, their response likely would have been somewhat similar to Labor’s. They would have been less generous in going into debt, which would ended up leaving the economy in a bit of a worse shape than it is now, but for all the lunatic slogans that they put forward in opposition, I reckon there are enough sensible people in the Coalition to avoid the worst of those idiotic austerity measures being peddled around Europe.

    Reminds me a bit of all the rubbish the Coalition sprouted during the carbon tax debate. The reality is of course that had the Coalition secured the backing of the independents and Adam Bandt then the Coalition would have presented a pretty much identical carbon tax policy and Labor would have attacked it as a policy that will wipe out Australia.

  2. Jimmy

    This article is just fantastic and I hope people forward it to everyone they know.

    The sheer stupidity of the “This is the worst govt in history” crowd is just mind boggling but what is worse the people of this view should know better.

    For example I had an argument with a financial planner the other day who thought that interest rates needed to be 1% lower “to get this joint going again”. Now ignoring the fact that we are currently growing around trend & unemployment is low I said that if we really wanted to stimulate growth both sides of politics should abandon their surplus at all costs approach.
    This lead the planner into a big anti Gillard anti govt tirade which mentioned only the ALP were clinging to their “miserly” surplus (again ignoring the libs claims of getting a bigger surplus) and that this govt has ruined us by racking up $200b in debt.

    When you boil his arguments down you see a man who is complaining the economy is flatlining (retail construction and manufacturing are all F..ked apparently) and want it stimulated while having the govt concurrently run a contractionary fiscal policy so we have no debt – it is just stupidity.

    And what makes it worse is that this man was very much pro Labor in 2007 and assists people in making investment decisions.

  3. Jimmy

    Saugoof – “Christopher Pyne knows well enough that his statement is wrong but it’s just too good of an opportunity to attack Labor to let slip.” He also knows that he can make it with no scrutiny being applied by the MSM.

  4. klewso

    So saith the “Truth Fairy”?

  5. Jimmy

    Saugoof – “Chri stopher P yn e knows well enough that his statement is wrong but it’s just too good of an opportunity to attack Labor to let slip.” He also knows that he can make it with no scrutiny being appl ied by the MSM.

  6. Mark Elliott

    You seem to have ignored that fact that the reason that Europe is in so much trouble right now is because countries like Greece ran huge budget deficits in order to perpetually stimulate their economies.
    Running a budget deficit during the GFC was the right thing to do at the time but Labor are the ones promising to produce a budget surplus and that doesn’t seem likely.

  7. Apollo

    Mark Elliott, the surplus was very feasible had our currency did not elevate to the possible ‘reserve’ currency and put up with other nations QEs, and/or use a different approach and did not re-open Nauru & Manus island.

  8. SimsonMc

    Bernard – don’t underestimate the power of stupid people in large groups.

    Labor need to not only hold onto seats in Qld but actually need to win a few. If you scan through the comment section of the Courier Mail, you start to get a grasp of how hard a task that is for Labor.

    These people are still grappling with fading curtains, so what hope do you think they have of understanding the Australian economy.

    Look they were that stupid to vote in a bloke who before the election said Joh was his hero and now complain when the LNP do whatever they want, 1980’s style.

    How’s that turned out for you Qld?

  9. Apollo

    Why fuken mod me for?

    M.ark Ell.iott, the surplus was very feasible had our currency did not elevate to the possible ‘reserve’ currency and put up with other nations QEs, and/or use a different approach and did not re-open Nau.ru & Ma.nus island.

  10. Jimmy

    Mark Elliott – ” Greece ran huge budget deficits in order to perpetually stimulate their economies” True but we are a long way from Greece aren’t we, debt less than 10% of GDP, Govt spending being wound back to get the budget back to a neutral setting (whether a surplus is achieved this year or not).

    “Running a budget deficit during the GFC was the right thing to do at the time but Labor are the ones promising to produce a budget surplus and that doesn’t seem likely.” And the libs are the ones saying they would of run surpluses through the GFC and bigger surpluses now – which would of and will contract the economy further.
    And if the surplus isn;t achieved it isn’t becuase govt spending is out of control it’s because revenues have fallen.

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