Obsession with debt reduction puts nation-building on hold

The PM is wrong to give priority to paying off Australia's small debt.
By · 18 Oct 2010
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18 Oct 2010
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The PM is wrong to give priority to paying off Australia's small debt.

'ON ANY objective criteria, Robert Gordon Menzies was well to the left of any minister in any contemporary Labor governments. Menzies believed in high rates of tax for high income earners, pump-priming the economy, public ownership of telephones, airlines and banks, centralised wage fixing, legislated protection of union rights and the right to bargain collectively."

So observes veteran ALP watcher Rodney Cavalier in his valuable study of New South Wales politics, Power Crisis: The Self-Destruction of a State Labor Party.

Prime Minister Julia Gillard, meanwhile, is even well to the right of the OECD experts who last month put out a report on fiscal consolidation after the blow-out in member countries' spending and public debt levels following the global financial crisis. The report said that even countries with very high levels of debt should be cautious about reducing debt levels too quickly and running the risk of a "double dip" recession. For countries such as Australia, with debt levels equal to less than 60 per cent of gross domestic product, there was scope to expand their levels of debt in order to maintain recovery. Australia has a debt of about $90 billion and is forecast to peak at about 6 per cent of GDP in 2013. In fact, Australia's debt could grow by about $4 billion a year without changing the level of debt as a proportion of GDP.

But last week in a speech in Brisbane, Gillard said: "First we must deliver ourselves fiscal consolidation . . . this has always been the first step in economic reform." Why?

Gillard continued: "We come to fiscal consolidation well-placed. Australia's debt is lower than any advanced country." She noted that Australia's debt was equivalent to somebody on $100,000 a year taking out a loan of $6000 and contrasted this with the G7 biggest OECD countries' debt levels, which are equal on average to 90 per cent of GDP.

You would think this is one issue that should be down the bottom of the list of national concerns. But no.

Gillard went on to say: "There is no room for complacency. That is why the government is undergoing the most significant consolidation in 50 years." She said that the government would reduce Commonwealth debt by 4.5 per cent, equal to $60 billion, over the next few years.

This is hardly the stuff of nation-building. Gillard claims her economic reform program will look to business for inspiration and that she will apply "market-based tools that have improved private service sectors to drive structural reform of Australia's health and education markets".

Real education reform would begin with bringing funding levels of state schools up to the level of non-government schools, but that would involve tough decisions such as taking on the Catholic hierarchy and middle-class parents who tacitly support education inequality.

In the area of health, one of the first steps would be to abolish private health insurance, which chews up 15? in every dollar of premiums in administration, advertising and profits, compared with less than 5? in every dollar to run Medicare. This measure alone would save a billion dollars a year and using a single purchaser of health services would save even more over the long term by keeping health provider incomes down.

If Gillard wanted to look for a relevant business-private market analogy, she might ask how private shareholders would judge a company with a zero debt level as its top priority when the company is considered credit-worthy by its bankers and when profitable investment opportunities are going begging for want of funds.

The directors of such a company would not be congratulated by the shareholders. On the contrary, the directors would be accused of presiding over a "lazy balance sheet".

Nation-building politicians in the 1950s and '60s, such as Menzies nationally and Henry Bolte in Victoria, borrowed as much as they could get and the money was used for social and human capital investment in education and public housing and for economic capital such as electricity and sensible telecommunications infrastructure. ( Menzies was also prepared to impose a 5 per cent income tax surcharge to curb an incipient boom rather than rely on the blunderbuss of higher interest rates.)

If Gillard really wanted a sensible reform agenda, she would look first at the financial services industry whose output (mainly in terms of profits and wages) has blown out from 6 per cent of GDP in 1986 (about $90 billion in today's dollars) when financial markets were deregulated and compulsory superannuation was introduced, to about 10 per cent or $150 billion today. Given information technologies, the income share going to finance should be shrinking, not increasing.

Compulsory superannuation is no different to an income tax except that it is put in the hands of fund managers who mainly invest (gamble) on the stock exchange and now put money into public-private partnerships such as desalination plants and roads that (if needed) can be funded far more cheaply by public borrowings that governments are well placed to undertake.


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