Now it is official. If the treasurer’s forecast $58 billion deficit pans out this coming financial year, the Rudd government will have brought down the largest federal deficit in Australian history, not only in dollar terms, but as a fraction of the Australian economy too. Gough Whitlam’s 1975 record of 4.7 per cent will be surpassed if projected borrowing in fact exceeds 4.9 per cent of Australia’s national product — all the more surprising given this Prime Minister’s avowed affection for surpluses and economic restraint.
But this is a ‘programme of responsible borrowing’, the treasurer told us on Tuesday night; he even claimed it is ‘the only responsible course’. We are not so sure. Such a record level of borrowing might be excusable in a real crisis, but is completely unjustifiable now. Despite the Prime Minister’s routine evocation of economic Armageddon, Gough Whitlam faced a combined oil shock and stagflation far worse than what we currently endure. The Australian economy shrank about 2 per cent in 1982, or four times faster than the treasurer expects it to this year; and unemployment in the late 1980s far exceeded today’s rate. Indeed, unemployment registered a significant improvement last month. Yet the government continues to prattle about the ‘most challenging economic conditions since the Great Depression’ — while the Australian share market surges.
As we pointed out last week, this Budget provided a unique opportunity for the government to take advantage of the hype surrounding the ‘crisis’, and the government’s own popularity, to bring about a fundamental shift in the level of profligate, damaging and expensive welfare that gushes from Canberra every fortnight. Our hopes had some foundation. The treasurer presaged a Budget of ‘hard choices’ and ‘discipline’, yet it is very difficult to find such evidence in the pusillanimous thumb-twiddling Budget that has emerged.
The ‘toughest’ measures include a reduction in the private health insurance rebate for families earning more than $150,000 per year, and a freezing of the nominal level of household income at which family tax offsets stop being paid (for three years only!). What little savings these measures make are more than wiped out by the $64-per-fortnight increase in the age pension, and the introduction of tax cuts for high-income earners from July 2009. According to the Budget papers themselves, these measures ‘are expected to leave all taxpayers better off’. So much for severity! The government’s determination to avoid any electoral pain, even at dizzying levels of popularity, augurs badly for Australia’s public policy when its popularity starts to falter.
It is difficult to see how an additional $150 million for the ABC to create a new children’s television channel usefully prevents us from being ‘overwhelmed by the scope and the ferocity of the biggest global downturn in memory’, as the treasurer fears. Another $2 billion for the university sector is of equally dubious value.
Unfortunately the government appears set on two particularly egregious welfare schemes. Despite the biggest surge in first-home borrowing for established properties since at least 2003, and ubiquitous reports of inflated house prices in the sub-$500,000 segment, the government is extending its Non-Home Owners’ Gouge (NHOG) for another six months. Second, it appears Australia’s taxpayers will continue to ensure that a set of large private companies can borrow very cheaply and freely pay their staff massive salaries. The treasurer made no mention of curtailing the repugnant ‘large deposit and wholesale funding guarantee scheme’, which should be known more accurately as the Bankers’ Salary Enhancement Programme (BSEP).
Two flagship reforms in the Budget were mere election promises. The government’s celebrated $700 million plan to pay new mothers who take time out for the workforce is not due to start until after the next election. And the lynchpin to restoring the pension system to ‘sustainability’ is lifted straight from a Monty Python script: the treasurer gravely announced that eligibility for the age pension would be lifted to 67, in 2023!
The Rudd government’s plan to return the Commonwealth’s finances to a sound footing is based on rosy and highly uncertain forecasts (which last year proved massively optimistic). What if the impending withdrawal of the baby-boomers from the workforce permanently diminishes our economic vitality? What if our level of productivity remains subdued? Technology has been stagnant for most of human history, yet we assume trends of the past 60 years will re-emerge apace. If the government insists on spending extravagantly, then some of the massive shortfall should be paid for now by increased taxation.
The confused rhetoric surrounding the Australian budget reflects the inevitable tension between a traditional view of public finance that emphasises the link between taxes and expenditures, and the more sophisticated ‘Keynesian’ notion that national budgets should ‘manage the cycle’ by borrowing during temporary economic setbacks. While the latter has certainly justified and encouraged an unprecedented expansion of government since the 1930s, it is far from clear whether it has been helpful. Temporary deficits have a tendency to become permanent, whatever the circumstances. To paraphrase Adam Smith, what is bad for the household can scarcely be good for the nation.