This government has abandoned economic logic – and no one seems willing to call them on it
The Coalition needs to face up to the fact that living standards have been falling for five years under its watch
Sun 20 Oct 2019
The biggest con in Australian politics is the belief that a budget surplus not only matters, but that it demonstrates good economic management.
Our lives would be improved overnight if the political debate in this country could ditch the surplus obsession. The pertinent question at the moment is not whether a budget surplus will be delivered this financial year, but why on earth would you aim to do so?
Why do we need a budget surplus? It is not a question that gets asked too much – certainly not during the election campaign just passed, where both major parties argued over who had the bigger surplus.
The typical answer you get given is some vague notion of living within your means, saving for a rainy day, needing to pay down debt.
It’s all simplistic babble spoken by politicians with next to no economic logic in order to convince voters that somehow they are good at managing the economy – and for the most part it is taken as given by journalists.
The balance of the budget tells us very little about the management of the economy.
Liberal Party MPs would have you believe that the mining boom during the 2000s occurred because of the budget surplus. In reality the stonking amounts of revenue that flowed in to the government’s coffers during that time meant it was almost impossible not to run a surplus.
In 2000-01 government revenue reached 26% of GDP – a level greater than the amount of spending done by the Rudd government in 2009-10 when it embarked on its massive stimulus program to offset the impact of the GFC.
If the Rudd government had enjoyed the same level of revenue that the Howard government routinely did, it would have at worst had a deficit of about $3bn – rather than going into a deficit of 4.2% of GDP, or $54bn.
But of course, if it had revenue of that size it would not have needed to create a massive stimulus in order to keep the economy going.
When you get down to it, the only outcome that really matters in the economy is household living standards. We want low unemployment, high productivity growth and all other things because we want it to lead to better living standards.
During the mining boom, you could be forgiven for thinking that a surplus was a sign that the economy was being well managed – household disposable income was growing at around 4% a year in real terms
Now, government revenue is growing off the back of high commodity prices, but our economy is struggling and household living standards are falling.
Over the past three years household living standards have fallen by levels more akin to a deep recession than a period where a government should be seeking to take the heat out of the economy with a budget surplus.Advertisement
Because everyone should tattoo this to their eyeballs: the only reason for a budget surplus is to slow the economy in order to control inflation.
This happened during the mining boom – but so addicted was Howard to cutting taxes and providing tax concessions that the budget surpluses were actually too small to stop inflation growth from rising.
And thus the Reserve Bank raised interest rates 12 times in six years in order to slow things down.
Back then the Howard government was content for this to happen because they believed they would always be able to sell the line that interest rates would always be lower under a Liberal government.
Now we are in the opposite situation. Inflation barely has a pulse, the overall economy is growing slower than it has since 2001, and the private sector is growing slower than at any time since the 1990s recession.
The Morrison government is mostly content to let the RBA keep cutting rates to stimulate the economy because it believes it will be able to sell the line that it is doing a good job because it has delivered a budget surplus.
The last time we had a budget surplus was in 2007-08, when the RBA raised the cash rate four times, from 6.25% to 7.25%.
So far this financial year the RBA has cut the cash rate three times, from 1.5% to 0.75%.
That is not a sign the economy needs slowing.
The last time the RBA raised the cash rate was in November 2010 – a time so long ago Steve Smith had only played in two test matches, Novak Djokovic had won only one grand slam title and Australians had yet to see the new British TV series, Downton Abbey.
During that entire time we have been obsessed about trying to get back to a budget surplus and yet also during that time inflation growth has remained weak, and household living standards have stagnated.
But such has been the potency of the surplus con job that should the government actually face reason and dare to utter the words “stimulus,” most news outlets would be quickly running with the failure to deliver a surplus, and the ALP as well would quickly get on board attacking the move.
And we would continue this awful economic debate where we discuss things through a frame that has been irrelevant for more than a decade now.
At some point, someone in the ALP or LNP is going to twig that the economy has changed since the GFC – what seemed correct then is most definitely not now.
It is time to ditch the surplus mania and force our government to stop worrying about some political con-job about economic management and to start facing up to the five years of falling living standards that have occurred under their watch.
• Greg Jericho writes on economics for Guardian Australia\