Could a 'defeatist' budget work again?

'Horror budgeting' has helped Australia in the past, when conditions were starkly different. But Joseph Stiglitz’s modern take says one piece of the puzzle is missing.

Watching Professor Joseph Stiglitz criticise the austerity of the first Abbott-Hockey budget in interviews in past days, one can only wonder what Coalition strategists see ahead for the domestic and global economies that the Nobel Laureate does not.

It is a serious question. Because although Stiglitz is the fourth most cited academic economist in the world, he does not have the direct knowledge of backroom business and political conversations that Coalition MPs have.

That is not a criticism of Stiglitz – just an acknowledgement that all leaders in business or politics have to weigh up different kinds of knowledge before making big calls.

There is both the macro-economic and geopolitical view, based on deep and broad empirical studies (Stiglitz’s world); and the visceral, immediate, coal-face knowledge that leaders often acquire on the ground.

At face value, Stiglitz’s remarks in the past week were virtually read aloud from Labor’s playbook.

On the ABC’s Lateline program, the Professor pointed out:

– Australia does not have a budget crisis

– Our debt levels are very low by world standards

– Borrowing and spending more could actually improve future fiscal outcomes

– Australian governments should be investing in skills and infrastructure, not cutting back.

What is at stake here is what the 2014-15 ‘horror budget’ will look like when seen in retrospect, 20 years hence. Will it, to recall the original ‘horror budget’ handed down by the Menzies government in 1951, achieve what Treasurer Arthur Fadden was able to call just two years later the “stability we set out to achieve…”?

Fadden noted at the time that “the recent boom, one of the sharpest in our history, was brought under control without incurring anything that, by any stretch of imagination, could be called a slump. That, I venture to claim, was a quite unprecedented achievement.”

Or will the first Abbott-Hockey budget prove to be quite the wrong tack?

Stiglitz clearly thinks the latter, because he is placing Australia firmly in the context of a global economy in which it is unexceptional, and much more blown about by global winds than the Coalition would care to admit.

The Coalition has tried to claim, for instance, that the GFC was a northern hemisphere phenomenon that lasted just six weeks – a doomed line of argument.

Of course, everyone but the most embittered Labor figures will hope the Coalition is right, and we will find a way back to stability, as Fadden did.

Back in 1951, the world was still experimenting with Keynesian responses to periods of economic overheating or slowdowns.

Fadden found himself early in 1951 with sudden surges of spending by consumers, which he tackled by dramatically increasing taxes and cutting spending to take a considerable amount of private and public demand out of the economy and tame rampant inflation.

Labor member for Fawkner, Bill Bourke, lectured Fadden in parliament that: “... in order to tackle the problem of inflation we can ... drain off surplus money or, alternatively, we can increase the supply of goods and services...

“The government has made the defeatist approach and proposes to drain off some money demand instead of adopting the positive method of increasing the volume of the goods and commodities available to the community.”

Well in that case the ‘defeatist’ approach did return price stability, though partly by good fortune - the soaring wool price sparked by the Korean war, that had ignited the inflation problem in the first place, fall to earth with a thump and a lot of heat went out of the economy.

In fact, Fadden then had to take expansionary measures to get things going – meaning his tax hikes were very short lived indeed.

But what about this time? We are not dealing with an inflationary problem, but a global economy with large pockets either in, or in danger of teetering into, deflation – really a much harder nut to crack.

Last week’s TD Securities-Melbourne Institute inflation gauge showed Australia’s headline inflation at 3.0 per cent, with increasing prices in rent, petrol and tobacco offset by falling prices in fruit and vegetables, health, and recreation and culture.

Given the Reserve Bank’s target for price stability is 2.0 to 3.0 per cent, everything must be hunky-dory, right?

Well, Stiglitz’s outsider macro-economic view highlights the fact that externally we rely heavily on exports to China, our terms of trade are weakening, resources capital inflows are slowing, and internally we are struggling with sagging consumer confidence.

In such circumstances there is no need, in the language of 1951, to ‘drain off’ public demand as the first Abbott-Hockey budget has done, particularly by cutting benefits to the unemployed, disabled or aged – three groups that have a high propensity to spend just about every cent they receive.

Which brings us back to the question posed earlier. Why doesn’t the Coalition see it that way? By global standards our budget ‘emergency’ is actually quite benign, and yet Prime Minister Abbott has been prepared to take a walloping in the polls with a tough budget anyway.

Through Stiglitzian eyes, one possibility would be that all those backroom conversations have revealed something very dark about Australia’s predicament -- a coming contraction or deflationary shock that is generated by domestic factors, and simply cannot be propped up by continuing borrowing and spending the professor suggests.

The other alternative, and the one he’s articulated, is that he just plain thinks the government’s wrong.

Related Articles