By ignoring the context surrounding the budget, the Abbott government has misled the public. Most of the increase in government debt in recent years is attributable to unfavourable economic conditions, rather than reckless spending.
The latest comes from Maurice Newman, chairman of Tony Abbott’s Business Advisory Committee, who in The Australian on Friday went heavy on the hyperbole and blamed the Rudd-Gillard governments for basically everything.
It is a common sentiment from those in the Abbott government so far — perhaps a holdover from their time in opposition, but nonsense nevertheless.
Newman’s opinion is that in 2007 then-prime minister John Howard and then-treasurer Peter Costello left the Rudd government in a glorious situation: no net government debt and a booming and competitive economy. Six years later we have record net debt and we are less competitive internationally.
Strictly speaking, that is correct. But it is also far too simplistic and even a little naive.
First, government debt expanded upon the onset of the global financial crisis and the reverberations felt in the years that followed. Regardless of the government or the treasurer, the federal government would have run deficits throughout fiscal 2008-09 and 2009-10. Soft economic conditions result in falling revenue while simultaneously increasing spending via automatic stabilisers (higher unemployment and welfare benefits) — there is no way to avoid that.
Second, the reality is that without the federal government’s stimulus package the economy would have gone into recession. The Reserve Bank was unfashionably late to the party, still raising interest rates until March 2008 and only sufficiently convinced something was up two weeks before Lehman Brothers collapsed. There’s no shortage of people who owe the Rudd government a fairly big thanks for saving their jobs back then.
Third, revenue struggled to rebound in the years that followed the start of the GFC, a common occurrence in a fairly weak economy. This would have been the case regardless of which party was in government.
That is not to say that the Rudd-Gillard government wasn’t wasteful at times. The stimulus measures could have been wound back a little earlier, and some policies were a little misguided. Some question the size of the stimulus, but in that situation too much is better than too little.
But the Howard government was hardly a model of fiscal conservatism. The International Monetary Fund stated earlier this year that the Howard government was the most wasteful government in Australian history. The period from 2005 to 2007 was marked by government expenditure increases that were more consistent with a recession, rather than an overheated economy.
But isn’t a surplus the very definition of fiscal conservatism? Not really.
Given the unprecedented economic conditions awarded to the Howard government, it could easily have run significantly higher surpluses than those achieved. So much cash was coming in it could afford to regularly provide tax cuts, while simultaneously throwing around cash like drunken sailors. From 2005 to 2007, the government consistently stimulated the domestic economy, forcing the Reserve Bank to work against it to contain inflation.
“The views of Newman are consistent with the government he represents but are not consistent with the prevailing facts of the situation.”
Interestingly, Newman had little to say about the Howard government’s fiscal profligacy. He had nothing to say about the expansion of middle-class welfare and concessions to already wealthy retirees — the baby bonus, first-home owner grants, and capital gains and superannuation concessions. Nor did he say anything about how these welfare policies came at the expense of necessary infrastructure investment.
It is clear that our fiscal situation is not as black or white as Newman or his handlers, Abbott and Treasurer Joe Hockey, suggest. Economics is always about context, and the context surrounding the budget has been lost amid three-word slogans. Budgets are determined by the prevailing economic conditions at the time, and the government is often a bystander to these conditions. To ignore that or pretend otherwise misleads the public.
Newman also delved into the competitiveness debate, and while he is correct to say that wages are high in Australia, this is far less a problem than Newman or many people believe. He says, “Our minimum wage is more than 50% higher than in Europe, Canada, Britain and New Zealand, and more than double the US. Clearly something has to give.” So what?
I somehow doubt that reducing the minimum wage — which few people receive — will do a great deal to reduce business costs. Perhaps if businesses desperately want to address high wages they should direct their attention towards the top end, where wages increasingly bear little resemblance to the contribution those employees often make to the profitability of the business.
The debate on country competitiveness irritates a bit. It brings forth images of Australia as a business and competing against other businesses such as China and the United States. It preys on our competitive instincts, but that image stands up to little scrutiny.
For example, most of Australia’s production is consumed by itself. Find me a company that consumes around 80% of its own production. Coca-Cola? Microsoft? What about Apple? Not even close.
For reference, the United States consumes almost 90% of its own production. Countries in Europe trade a lot more, but that is mostly due to the common currency and the more integrated countries in the region. Competitiveness matters for businesses — they thrive and falter on the basis of it, but it is not so relevant for countries as a whole.
Australian wages are high because they are determined largely by domestic factors. We should stop viewing our own productivity and high standard of living as a bad thing. Naturally that should not preclude us from cutting red tape and unnecessary regulations and we should never shy away from international opportunities.
The views of Newman are consistent with the government he represents but are not consistent with the prevailing facts of the situation. They lack context and without that they become little more than ideological nonsense. The Rudd-Gillard government was far from perfect and at times even a little embarrassing, but they were far from fiscally reckless during their time in office and our country remains as competitive as it needs to be.
*This article was originally published at Business Spectator