Australia is set to run a $50 billion deficit in the 2013-14 financial year. Thank God.
The economy will need every single cent to support an increasingly uncertain economic environment – though admittedly as my colleague Rob Burgess said today some of the uncertainty is the government's own doing (Roll up for the MYEFO horror show, December 17). We are staring down an economic environment characterised by a soft labour market, an unprecedented downturn in mining investment and an international economy that is still trying to find its feet.
Budget frugality right now would be just another in a long list of headwinds trying to upset 23 years of uninterrupted growth. Government expenditure is estimated to be $20 billion higher in 2013-14 compared with the initial budget estimates, and while this blowout appears largely to do with political point-scoring, there is also the happy coincidence that it will help support the economy over the next six months.
However, it is of concern that political ideology could eventually stand in the way of economic growth. Ideology should not replace the need for facts and the facts are this: government debt in Australia is incredibly low. Despite a government budget blowout of $123 billion over the forward estimates, net government debt is expected to be less than 16 per cent of nominal GDP in 2016-17.
Effectively, our budgetary emergency does not actually exist and we shouldn’t let our imagination get in the way of using government policy to support the Australian economy over the next few years. The economy will need it.
Unfortunately, the budget deficit has taken on far more importance than is reasonable over the past decade and has significantly dumbed down the level of public discourse. Surplus has become the sole badge of quality economic management, even though it says little about how well the government has performed.
A deficit says nothing about the quality or scope of services and little about how the government has managed downturns or booms. But if you pay attention to the majority of economic and budgetary commentary today, you would never know that these are the things that really matter. Instead, Australia’s debt-phobia is in full force.
This is not to say that all spending is good spending. The federal government budget is often incredibly wasteful, full to the brim with nonsense and unnecessary concessions that accrue primarily to the upper and middle-class. Governments from both sides of the fence must share the blame.
At some point we have forgotten that government spending is important. It provides essential public services (roads, public transport and hospitals) and it might have saved your job, whether in 2008-09 or back in the early 1990s. It is much more important than a simple residual balance.
We need to have a more grown-up discussion regarding government spending, one that recognises that running a surplus is much more challenging than it once was. The economy has changed, dynamics have changed and demographics have changed. As recently suggested by the Productivity Commission, an ageing population will make it increasingly difficult to run a budget surplus.
To address this, Alan Kohler recommends tax increases (The income tax has to go up, December 16) and if we want to increase government services then that is a sacrifice we should make. We must also remove inefficient policies and redirect those savings towards more productive uses. But we also shouldn’t be afraid to admit that it is okay to run small deficits year after year.
We don’t need most forms of middle-class welfare, nor do we need to award homeowners with billions of dollars every year simply for owning their home. We do, on the other hand, need the National Disability Insurance Scheme, education reform and infrastructure investment. These are much more worthy goals of government than simply running a surplus.
Our budget deficit will get most of the attention following the release of the MYEFO estimates, but government debt is of little immediate concern. We can realistically run small deficits indefinitely without putting any pressure on our economy.
In the near term, deficit spending will be essential as the Australian economy progresses though a difficult and potentially prolonged transition. But it is likely that deficit spending will become the norm as our population ages. This needs to be addressed but it does not necessarily mean that we have to make drastic cuts to achieve a surplus.
Treasurer Joe Hockey said most of the right things during his press conference today, but hopefully he will not let ideology stand in the way of good economic policy. It is one thing to use the deficit to score political points, but hopefully the government doesn’t believe its own rhetoric.