The Greens must embrace fiscal conservatism

Greens leader Senator Christine Milne laid out her party's clearest economic vision in years in a major speech to the Press Club yesterday – claiming, among other things, that "the Greens are the most economically responsible party in the parliament".

That statement will have some readers reaching for their blood-pressure pills.

To many, this will sound like far-Left eco-rubbish: "A reduction in non-essential consumption will certainly lead to a reduction in debt. A reduction in debt will lead to a sustainable economic environment and will help sustain the earth's environment.

"The rules of economics will eventually dictate that the human race will need to learn live within its means. The aspiration for a better lifestyle will have to be balanced with the needs and rights of the future generations."

But before we throw the book at Milne, let me reveal that those words were not hers – they belong, in fact, to accomplished fund manager John Abernethy. There's nothing 'far-left' about them, and they are certainly not rubbish.

In late 2007, Abernethy wrote a remarkable article (Economic warming, November 2007) calling for "governments and central banks ...to make radical changes to the economic rules to make the economic environment sustainable for future generations".

Abernethy is no lefty – he's an important cog in Australian capitalism. And far from being a tree-hugger, he was complaining that the wise aversion to debt that our grandparents had has been replaced by a credit culture that makes debt-funded consumption seem like a basic human right.

He was, in essence, praising 'fiscal conservatism' in the private sector, just as the private-debt phase of the sub-prime crisis was getting into full swing.

"Rather than stand back and provide a safety net to financial institutions," he wrote, "the central banks will have to actively control credit and credit creation to ensure the sustainability of the economic environment."

History tells us that central banks did provide that safety net, with horrible results.

In the US, the resulting fiscal nightmare has convinced Tea Party Republicans to promote idiotic plans to return the budget to surplus 'NOW!' regardless of the human cost. In Europe, central bankers are desperately trying to hold together a fraying web of bank bailouts and austerity-driven fiscal U-turns. If these two fiscal 'nuclear' events can somehow be survived, the return to the 'debt is a right' mentality must not be allowed to return.

But back to Milne, who devoted a large part of her speech to the issue of balancing government budgets: "The Greens are calling on the government to either work with us to find savings and revenue in a forward-thinking, caring manner, or use the upcoming MYEFO to delay their ill-advised quest for a surplus at all costs to closer to 2015-16."

Milne made a number of criticism's of both Labor and Coalition fiscal policy, and suggested a number of solutions – a slower return to a fiscal surplus, higher taxes and some strategic spending cuts.

On the revenue side Milne said: "Removing four big fossil fuel subsidies, including making sure mining corporations pay the same excise on the fuel they use that you and I do, would create an additional $2.8 billion dollars in revenue in next the financial year and would have created $7.6 billion in revenue from the 2012/13 financial year until 2014/15.

"Reforming superannuation tax concessions to encourage those doing it tougher now to also save for retirement would save $2.6 billion in its first year.

"The total additional revenue the government could have raised through these simple and Treasury costed steps is $13.2 billion over three years."

On the cost-cutting side, Milne argued that investing public money in fossil fuel export infrastructure was a mistake: "Investing billions of dollars in expanding coal ports is extremely short-sighted when a simple examination of our major markets for that coal – China and India – shows that they are both moving away from coal as they see solar outcompeting it in the next few years.

"Government funding of coal export infrastructure should cease immediately. It's not only bad economics, not only does it lead to higher insurance premiums, but it is terrible environment policy."

Regular readers will know that I have been a strong advocate of pricing of carbon (by either side politics, thankyou) and there is clearly a cleaning up of highly inefficient coal power generation going on across China, partly in anticipation of the 'carbon constrained global economy'. All good news.

However, Milne's argument oversimplifies the energy needs of billions of China's poor who will not be provided for, in the short term, by solar technologies. Coal is ugly, but it's an energy source in transition, not to be cut off like a Tea Party budget deficit.

And it's on the issue of budget deficits that Milne's speech really fails to learn the lessons of the GFC. She said: "While the Greens support running a balanced budget over the economic cycle, trying to hit a political surplus target when an economy is already weakening has serious consequences for people's lives, for small business and for our future if it defers essential investment in education, health and innovation. The surplus fetish must end."

Well that would be true if we expected to re-enter an extended period of normal-ish economic cycles. The smoothing effect of Keynesian fiscal policy seems like common sense, until you realise that the 'black swan' of the GFC is likely to be repeated.

A new fiscal conservatism is called for both in public finances and in the regulation of private debt markets – and that's a call that the Greens should make, for a number of reasons.

Milne said yesterday: "While objection to debt bears scrutiny in the US, where the debt to GDP ratio is over 100 per cent, or Japan where it is well over 200 per cent, Australia's debt is a remarkably low 29 per cent of our GDP – the fourth lowest in the OECD."

Yes, and all those nations higher up the list are stuffed. Public debt needs to be reduced precisely because Australia will need as much 'dry powder' as possible when the next 'black swan' bears down upon us.

Milne's tax increases would fund worthy 'investments' – a position I argued in favour of on Tuesday (Time to shut down our oldest tax dodge, 25 September) – such as the Gonski education reforms and public dental care.

However, running through her speech is a clear risk of both revenue and expenditure rising as a percentage of GDP, as real investments (dental, education, disability insurance) are piled on top of vote buying measures:

– The bloated money-go-round of the family tax benefit system, which returns too much money to relatively well off households;

– And generous tax breaks for high income earners such as negative gearing and super tax concessions (which, to be fair, Milne is targeting).

And in all of this fiscal argy-bargy, the Greens should be more aware than anyone that when the tax/GDP and expenditure/GDP ratios are high, it's because the major parties are buying votes – something a smaller party can't do, or at least can't take credit for.

That's why, despite the strong currents of left ideology in the Greens voter base, Milne should call for strict caps to public spending/taxation to keep public budgets lean and honest.

We do need education, health and infrastructure investment. We don't need vote buying. It's up to the Greens to make that case – because neither Labor nor the Coalition will.

'Economic warming' was, and is, real. The Greens must stop arguing that public debt is not an issue, and help clean up our financial/fiscal environment as much our ecological world.