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<p>Illustration by Jack Chadwick</p>

Illustration by Jack Chadwick

Surplus to Requirements

For some people, it’s feet. For others, clothes. For contemporary Australian politicians, though, the fetish is for surpluses — damn the economic sense.


It's a fetish. There is no other word for it.

The federal government's continuing obsession with having a balanced budget this year perfectly fits the dictionary definition of "any object, idea, et cetera, eliciting unquestioning reverence, respect or devotion."

“They started running into these vast quantities of cash that were thrown up by the boom. They found it extremely easy to run surpluses [and] to give away large amounts of money, much more money than they should have.”

There was Treasurer Wayne Swan, flaunting his fetishism again just the other day, in response to evidence that the economic picture was looking a lot less rosy than the "boom without end" brigade had forecast.

With China's economy growing at its slowest rate in eight years, with the domestic economy slowing so rapidly that the non-mining states of Tasmania, South Australia, Victoria and NSW are already teetering on the edge of recession, with unemployment up, albeit marginally, with commodity prices and the terms of trade down, bankruptcies and insolvencies at a new high, with company tax returns drastically down from those forecast, Swannie fronted the media to damn the torpedoes.

Yes, he acknowledged, the national accounts released that day, March 7, which showed the economy had grown by a measly 0.4 per cent in the December quarter, and just 2.3 per cent for the year, was falling well below the long-term trend, which he quantified as 3.25 per cent.

"I think the number today is somewhat softer than many people expected," he said.

"It certainly does reflect patchiness in our economy and it certainly does reflect pretty rugged global economic conditions at the end of last year."

He went on, stating the obvious: "This is the last National Accounts release prior to the Budget, so there will be a lot of interest in these numbers from that perspective as well and there's no doubt that these numbers will have a detrimental impact on our Budget bottom line."

"Having said all that, there is nothing in these numbers that deters the Government from bringing down a surplus in 2012-13 …."

In other words, notwithstanding all the evidence of contractionary forces working on the economy, the government would press ahead with a contractionary budget.

It's a fetish.

The reason is utterly inexplicable in economic terms, at least according to several economists The Global Mail spoke to. To understand how we got to this point, one has to look at things in purely political terms.

The fact is, the Labor Government has been maneuvered into a position where to abandon the promise of a Budget surplus now - regardless of the reasons for doing so - would come at a great political cost.

How it got to this position requires some delving back into political history.

It begins with the observation, widely made, that the Labor Party has always had to jump a higher bar on matters of economic management than the conservative parties.

As one source put it: "People seem to think that the Libs represent rich people, so they must know more about money and the economy."

Whether that belief has any basis in reality is in a way immaterial, the fact is the polls consistently show voters think the conservatives are better at the economy and Labor is better on social policy.

More specifically, a couple of the economists we approached for this story traced the roots of Labor's current surplus obsession back a generation, to John Howard.

This is kind of ironic, because John Howard was arguably the worst-performing Treasurer in Australian history. Before the Coalition government lost power in 1983, Howard achieved a unique trifecta: he simultaneously presided over unemployment of about 10 per cent, inflation of more than 11 per cent and interest rates of more than 13 per cent.

This helped the Hawke/Keating Government to power, and once they gained office they discovered another unprecedented Howard legacy, a huge blowout in the Budget deficit, to some $9.6 billion.

And so began an era in which economic management was absolutely central to politics. Tim Harcourt, from the Australian School of Business at the University of New South Wales, harks back to that period: "The Hawke/Keating Government did all those incredible reforms, with the float and reduction of tariffs and deregulation. They made the changes of a lifetime. [They] had very good economic credentials."

They also never let Howard forget that he didn't.

But time and the economy eventually turned on Labor, and when Howard assumed the Prime Ministership, in March 1996, he discovered Labor had left him a legacy, a deficit of similar proportions to the one he'd left them. Sweet irony.

<p>Illustration by Jack Chadwick</p>

Illustration by Jack Chadwick

"The moment John Howard got into office," says Nicholas Gruen, chief executive officer of Lateral Economics, "he decided to do to the Labor party what the Labor party did to him."

The "Beazley Black Hole", they called it, after the former Minister for Finance, Kim Beazley. Howard used that deficit as reason to break large numbers of his election promises and make savage cuts to spending, doing considerable damage to the economy.

It is often overlooked now, but the Howard Government did not get a lot of respect for its economic management in its early years; indeed it almost lost the next election. Howard himself looked shaky right up until 2001, when he switched the focus away from economics and onto other emotive issues - asylum seekers and the Iraq war.

Says Gruen: "The Beazley Black Hole was a lot more excusable than the mess that Howard left as Treasurer. But anyway, that's politics. But the Liberal-National Government targeted that for a long time."

It did big collective damage to Labor psychology, as the Sydney Morning Herald's economics editor, Ross Gittins, pointed out in a splendid analysis to an economists' conference in 2001.

"Labor developed an inferiority complex about macro management, it lived in fear of being asked 'Where's the money coming from?' and was never really game to take the fight up to the Libs on the weaknesses in their economic performance," he said.

John Howard and his Treasurer, Peter Costello, were not only lucky in war. The new millennium also brought the first round of the mining boom, and a resultant torrent of money into the Treasury.

"They started running into these vast quantities of cash that were thrown up by the boom. They found it extremely easy to run surpluses [and] to give away large amounts of money, much more money than they should have," says Gruen.

"It suited them in those circumstances to say this was all their own work, and that the Labor Party couldn't be trusted if it got in, we'd never see the end of the red ink."

As the money flowed, Costello was able to bring in some spectacular surpluses. In 1999-2000 it was $13 billion, or 2 per cent of GDP, the biggest in dollar terms, and close to the biggest in percentage terms ever. In all, 10 of 12 Budgets were in surplus.

Yet the late stages of the Howard Government were marked by what Gruen calls "fiscal incontinence" as Howard resorted to ensuring continued popularity through big giveaways in middle-class welfare.

“Fortunately, when the GFC hit, [Treasury secretary] Ken Henry said ‘go hard, go early, go household’, and we undertook what [Nobel Economics Prize winner, Professor] Joe Stiglitz said was the best-targeted stimulus package in the western world.”

Come the 2007 election, John Howard declared Australian families had never had it so good.

But Australian families begged to differ.

They were concerned, as the post-poll analysis amply showed (and the Liberal Party's subsequent policy shift showed), about the Government's radical industrial agenda. They also had tired of being bribed.

Thus when Labor's new leader, Kevin Rudd, gave his campaign speech, he came at the government from a position of economic conservatism.

"Mr Howard spent nearly $10 billion on Monday," Rudd told the crowd at the November 14 campaign launch.

"Trying to buy his way out of political trouble. And he did so little more than an hour after the Reserve Bank of Australia issued its monetary policy statement warning of rising inflationary pressures.

"How irresponsible can you get? Mr Howard has already presided over 10 interest rate rises in a row," said Rudd.

We all know the outcome: Labor won a landslide, and Howard suffered the ultimate indignity, as a Prime Minister who lost his own seat.

Governing was instantly tough for Labor, though. It almost immediately ran into the biggest global crisis since the Great Depression.

"Fortunately, when the GFC hit, [Treasury secretary] Ken Henry said 'go hard, go early, go household', and we undertook what [Nobel Economics Prize winner, Professor] Joe Stiglitz said was the best-targeted stimulus package in the western world," says Harcourt.

It worked a charm; as the other developed economies fell into recession, we didn't. But one of the quirks of political psychology is that people tend not to give much credit for a crisis averted. Political scientists have studied this: a politician who wants to spend money to build a levee to prevent a flood will encounter resistance; one who distributes money after a flood has hit, will encounter gratitude.

<p>Illustration by Jack Chadwick</p>

Illustration by Jack Chadwick

Thus the Opposition could make ground by criticizing the home insulation scheme, the school building scheme, the various other ways the government hastily and not always entirely precisely distributed money. And they criticised, above all, the fact that it meant the Labor Government went into deficit.

Come the 2010 election, and the woman who supplanted Rudd, Julia Gillard, spent much of her campaign launch speech defending these charges.

"All we hear from Mr Abbott is to be afraid, to be afraid as he goes around talking about debt, as he tries to sell you his slogans. But of course what Mr Abbott doesn't tell you is he doesn't tell you the simple facts. The simple facts that the global financial crisis caused debt and deficit for economies around the world, and when we look at other major advanced economies, they have a debt, on average, 15 times greater than ours.

"He doesn't tell you that when you look at the debt of this nation, it's the equivalent of someone who earns $100,000 a year having a $6,000 loan. That's where our nation is positioned.

"Now let me say this: I want to repay that debt. I definitely want to see this nation repay that debt, and that's why I'll bring the Budget to surplus in 2013 and it's why each and every day of this campaign, every time I have announced that we would spend on a new priority, we have also announced we would make the matching savings because I will not delay bringing the Budget to surplus by one hour, by one day. The Budget is coming back to surplus in 2013."

No doubt at the time it seemed eminently economically feasible, as well as politically necessary. After all, Australia was then confidently expecting the mining boom to end them all, which was presumed to bring money rolling into Treasury just as it had done for Peter Costello a decade earlier.

Alas, though, as the raft of statistics mentioned at the top of this story illustrate, things have got a bit "soft" in the economy since then.

Tim Harcourt, who also was formerly chief economist at Austrade, still expects things will come good, that "the long-term demands from China and India and the emerging markets still put Australia at the right place at the right time.

"The long term trends are in our favor," he says, "but there's clearly structural change going on.

"And you can expect China to slow a little. They had a big stimulus package in 2008, so they had to unravel a bit. One thing not well understood is that Europe is a bigger trading partner for China than America is now."

So in summary, the situation is this: Europe's still in terrible trouble, the US is in slightly less trouble than it was but is still far from healthy, China is slowing, and there is no need at all for Australia to rush for a budget surplus in the circumstances.

A politician who wants to spend money to build a levee to prevent a flood will encounter resistance; one who distributes money after a flood has hit, will encounter gratitude.

"I think the Rudd/Gillard government have got themselves a bit messed up on this one," he says, somewhat understatedly.

Nick Gruen is stronger.

"We're now re-running the mistakes that John Howard made in 1996. He said the books were much worse than they were told, which is basically true, and therefore he broke lots of his promises and ripped into the federal budget.

"He pulled outlays very quickly, and we had a jobless recovery. What really should have happened is the fiscal constraint should have been much smoother and more gradual and long-lasting," Gruen says.

"What's happening now is we've had a big stimulus … we made all these one-off payments, and now that we're not making those anymore, we're pulling very large amounts of cash out of the economy. Something like two per cent of GDP.

"It's not very surprising that growth is rather sick. We're doing it too fast. But the government thinks it's cool and groovy to say, 'Here's a surplus.'"

In fact, there is not much evidence to show the voting public would care all that much if the government did not meet its self-imposed deadline for getting the Budget back in the black.

John Stirton, research director for the polling company Nielsen, could point to only one occasion when his company had tried to assess what the public thought about the Budget fetish. That was in April last year. Only 29 per cent of people thought it was important that Labor get the budget back in surplus by 2012. More than twice as many people - 61 per cent - thought it could wait a couple of years. Eight percent thought it should be a low priority.

"It's clearly saying … that people are not nearly as excited about it as either the government or the opposition," said Stirton.

So how does he assess it?

"It's a spurious economic argument that's turned into a political problem of the government's own making," he says.

"When you look at the debt of this nation, it’s the equivalent of someone who earns $100,000 a year having a $6,000 loan." — Julia Gillard

Interestingly enough, the former Liberal leader and economist John Hewson broadly agrees.

"I don't think a lot of people are thinking there's any need to be going into surplus next year," he says.

In any case, any announced surplus will be "paper thin" and unlikely to be achieved in the end.

"Look," says Hewson, "the non-resource part of the economy is very flat. Retail, wholesale, manufacturing, construction, domestic tourism, education, most services. They're not getting any trickle down from the resources boom, which is now turning out to be a little bit weaker than people thought.

"We're at a very precarious position, with very little policy flexibility. That will come out in coming months. Unemployment will go up.

"The government will announce a surplus for next year, it will be a bit like this year. If you look at how much the deficit has blown out this year - they'll produce some sort of paper surplus but it won't be delivered.

"It's another race to the bottom, really. A matter of mine is bigger than yours," Hewson says, adding:

"The Opposition's running around saying 'We're going to have a surplus, we've always delivered surpluses, and this government's never produced a surplus.'

"We have a race to the bottom where both are locked into a surplus irrespective of the state of the economy, which doesn't make any sense at all."

No, it doesn't. But it's been 23 years since a Labor government last delivered a surplus, and Julia Gillard and Wayne Swan are going to find one, even if it kills them, or, more likely, the non-mining part of the economy.

2 comments on this story
by James

From the research I do on engineering skills, I can see that our engineering productivity is lousy. We are wasting maybe 10 billion a year, maybe more, on stuff-ups that you and I are funding from our savings. This helps to explain our poor record of productivity. I think you need to factor that issue into your argument, and I was surprised you didn't mention it. Most people link productivity to industrial relations policy, and while that is significant, it is only part of the picture. We are not building our engineering capacity, and hence we are undermining our economy.

March 18, 2012 @ 11:00am
by Joe

Preconceptions and biases exist in all areas of debate. It is the role of commentators to expose and of readers to recognise tendentious arguements. The article below is a study which shows how prone we are to thinking that we are right despite the evidence.

http://vision.psy.mq.edu.au/~peterw/corella/237/incompetence.pdf

March 18, 2012 @ 3:08pm
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