We shouldn’t allow the usual argy bargy about budget-week ‘winners’ and ‘losers’ obscure Australia’s overall economic and budgetary successes.
Jim’s article was first published by The Drum Opinion on 13 May 2013.
The news last Thursday that 961,027 jobs have been created under Labor was a stunning reminder just five days before the budget that the Government’s economic management has been far more successful than its critics in sections of the media and business community will concede.
And there’s another crucial piece of perspective in yet-to-be published remarks by “the finest public servant since HC ‘Nugget’ Coombs“.
Delivered by former treasury secretary Ken Henry to a University of New South Wales forum organised by the ‘Airport Economist’ Tim Harcourt, the unreported speech argues ‘fiscal activism’ has delivered Australia some extraordinary outcomes.
Chief among these is his analysis that “this recent period might be the only instance in Australia’s history of a fiscal stimulus having insulated the economy from an external shock that would otherwise have produced a deep domestic recession”.
This, in Dr Henry’s estimation, “could be a unique achievement”. And one not based solely on China or mining, or aggressive monetary policy, or other factors that Labor’s critics rely on to diminish its achievements.
The 961,027 new jobs created under Labor are perhaps the best evidence of its ability to help steer the economy through choppy international waters. Fiscal policy is of course not the only contributor to this enviable number, but it’s important. And the secret to the Government’s budget policy success is an over-arching framework that allows for flexibility when global circumstances demand it.
Australia owes its ‘unique achievement’ to a strategy of fiscal responsibility and discipline which permits this flexibility depending on the state of the economy. So when things turn down sharply, as they did during the global financial crisis, there is stimulus. When growth returns, a tightening. When it softens, or when revenue dries up, a middle course that offsets new promises but doesn’t cut so hard that jobs are threatened.
Sounds simple, yet it’s a strategy that has been ignored by many of the countries Australians like to compare ourselves with. In Britain and elsewhere, for example, bloodlust for harsh austerity measures has cruelled their economies and weakened their communities. They have not allowed the necessary flexibility, a fatal mistake. And we have seen a depressingly familiar pattern of excessive short-term austerity across the Eurozone, which bears much responsibility for the terrible state of most of those economies – a devastating legacy, only now starting to be wound back.
In Australia, whatever they think of the individual policies, the spending plans or the specific tweaks and savings, most credible, mainstream economists would agree with Ken Henry that fiscal policy has done the job well. Unlike in the UK, there has been discipline but not dogma; flexibility but not flabbiness; which allows our politicians to respond more precisely to economic developments. As a result, Australia hasn’t had to cut so hard when our revenues fall and throw our economy into reverse to maintain the confidence of markets like some European countries have been forced to do. And we haven’t been forced to trade away future potential like the US because we’ve been smart about budgeting and been able to make sensible savings elsewhere rather than hack away at the kind of productive spending that makes us more competitive and grows the future economy.
The budget pre-positioning already gives us a detailed sense of what the next chapter looks like. From the Prime Minister down we know of the challenges posed by dramatically lower tax revenues. We know a small fraction of the household assistance which was to come in two years has been abandoned because the international carbon price itself is expected to be much lower. We know the agreed way to lock in DisabilityCare forever is to attach it to an increase in the Medicare levy. This is the same approach taken to pension reform in earlier budgets, where an historic increase in the pension was accompanied with savings measures which made sure that the pension hike didn’t harm the budget even 40 years down the track.
The list of what we already know about this sixth Labor budget is long, yet it hasn’t stopped the guessing game about Tuesday continuing in its usual way. But in a sense we already know from the first five budgets what will be in this one. It’s a bit like how watching the first five Rocky movies gives you a pretty good window on the sixth. Yes, the plot and characters may change a little but the basic storyline is essentially the same.
Like the first five, this one will likely be about jobs and growth, without cutting harder than is necessary to pay for big new investments in schools, DisabilityCare and the modern economy. Smart and flexible fiscal policy will be the key again – even altering or abandoning policies announced in the last budget, or a surplus which was no longer possible this year nor desirable – matched as closely as possible to likely developments in the economy.
When the full Henry speech appears in a soon-to-be-released set of UNSW papers honouring Emeritus Professor John Nevile, it will enliven the debate about the success of budget policy under Prime Ministers Gillard and Rudd and Treasurer Swan. This will be no bad thing if it encourages people to understand that every initiative, every hike and save, in this coming budget or the five that preceded it, taken together, represents one part of a bigger picture of economic and fiscal success.
Budget time is a good time to acknowledge, if not celebrate, the fact that Australia has been able to do what few other comparable nations have: avoid a crippling and sustained recession through temporary stimulus; create almost a million jobs in five years; not just maintain but strengthen our standing with credit rating agencies; continue to invest in the future; all while staying true to the important task of protecting the most vulnerable.