While much has been turned upside down in 2020, and we now talk of the pre-COVID world as one we will never return to, the abandonment in a matter of months of one of the central narratives of Australian economic history, the evil of budget deficits, is remarkable. Nearly as remarkable is how little reflection its abandonment has occasioned.
A budget deficit of over $200 billion is now not merely being forecast by economists, but urged. Already the government is committed to serial deficits of 4.3% of GDP and 9.7%. A debt to GDP ratio of 50% or 60% is cooly described as better than most other countries’. We now debate whether debt means anything at all if inflation remains low and central banks can merely purchase as many government bonds as needed.
As Labor has endlessly pointed out, the contrast with Labor’s smaller stimulus spending in response to the financial crisis, which saw deficits of 2.1% of GDP, 4.2%, 3.4% and 2.9% from 2008, is vivid: Labor was pilloried for its reckless spending to keep the economy out of recession and wasting the legacy of the Howard government, while the Coalition under Tony Abbott went to successive elections with extraordinary rhetoric about how it was the “fiscal fire brigade” and that it would deliver a surplus in its first year and every year.
This message co-opted a narrative put in place by the Howard government and endlessly repeated in the media, that Labor was the party of fiscal indiscipline, that John Howard had inherited a fiscal mess from the Keating government’s stimulus programs (“Beazley’s $6 billion black hole”, back in the days when that was thought to be a lot of money).
This continued into the financial crisis, with Peter Costello being taken seriously when he pronounced, from the luxury of opposition, that if had he been treasurer, he would have simply “let the automatic stabilisers work” rather than provide stimulus.
But, in Nixon’s famous words, we’re all Keynesians now — without any reflection on exactly why we were so obsessed with surpluses.
A similar fate befell another economic bogeyman, foreign debt. The current account deficit was the staple of economic debate in the 1980s and 1990s, with Australia’s until-then perennial borrowing from overseas seen as a crippling weakness. There was even a “twin deficits” theory that linked budget and current account deficits — a double-barrelled piece of economic moralism in which fiscal indiscipline led to needing to borrow from foreigners.
After the Coalition — which had hired a (foreign-manufactured) truck to drive around warning about “foreign debt” — was elected in 1996, the current account deficit completely vanished from public debate, even as it soared to levels far higher than ever seen before. “Consenting adults” was now the justification for foreign debt. The arrival of current account surpluses in 2019 was virtually ignored; the impact of the Liberal Party’s aim to undermine compulsory super — a key reform that addressed the level of national savings — disregarded.
So, like the current account deficit, was fiscal discipline always just a narrative peddled by conservatives and their media supporters?
It’s true that the Howard government practised what it preached to a degree. The budget returned to surplus in 1999. But fiscal discipline was achieved by increasing taxation rather than cutting spending; after two years of fiscal discipline, Howard and Costello racked up extraordinary increases in spending, usually to get themselves re-elected — 4% real increase in spending in 1998, 9% in 2000, 3.9% in 2004, 3.8% in 2007.
To pay for it, the Howard-Costello government became a ruthless taxation machine. Tax receipts as a proportion of GDP averaged 21% in Keating’s final term (it only ever exceeded 23% in two years of the entire Hawke-Keating era); in Howard’s last term, it averaged 24% — even after successive rounds of income tax cuts.
“Fiscal discipline” in practice meant a dramatic increase in the size of the government’s grip on the economy.
Taxation fell again under Labor: the highest level it reached under Wayne Swan was 21.3% of GDP. But once the Coalition returned, it went up again — in 2018 it reach 23% and even after six months of bushfires and COVID-19, it was still 21.8% of GDP for 2019-20.
Unlike the Howard government, the Abbott/Turnbull governments didn’t quickly return to surplus; unlike Peter Costello, who insisted he would have responded to a global crisis without stimulus, Abbott and Turnbull oversaw budgets that continued to pump deficits into the economy: spending to GDP was well above the levels inherited by the Coalition from Wayne Swan, indeed higher than any Labor year except 2009. Spending never got below 24.5% of GDP before the pandemic, despite Mathias Cormann’s hard work.
It was only under Scott Morrison that the Coalition began putting its rhetoric about deficits ahead of economic growth, refusing to heed repeated calls from both the Reserve Bank and business leaders for fiscal stimulus as the Morrison Stagnation set in in 2019, preferring to pursue the bragging rights (“Back in Black”) of the first surplus since 2007.
The lessons of more than 30 years of debt ‘n’ deficits rhetoric is that to the extent it was ever adhered to, it was via tax increases, rather than spending cuts; that the party of low taxes has always been Labor, and that, when it came to putting the budget ahead of the economy, figures as diverse as Paul Keating, Wayne Swan, Tony Abbott, Joe Hockey and Malcolm Turnbull preferred to support demand with more spending.
That this is contrary to the Coalition’s rhetoric, and much of the political coverage of these decades, suggests that, for all its centrality to public debate, “fiscal discipline” was more about politics than substance. The fact that it has vanished so quickly in 2020 backs that up.