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Budget credibility emergency

Since coming to power, the Abbott Government has repeated the mantra of a “budget emergency” and a “debt and deficit crisis” more times than anyone can remember.

This repetition of a slogan, like similar examples in other policy areas (“axe the tax’ or ‘stop the boats’, anyone?) has been effective, especially in justifying a harsh budget. But doomsday language about the state of public finances is unjustified and provides a great example of the old mantra: if you’re going to lie, lie big.

Even if we put to one side the fact that the federal budget deficit was doubled under the new government, Australia’s public finances are far from a state of “debt and deficit crisis”.

It is constructive to consider what a deficit or debt crisis actually means. In reality, such a crisis arises when capital markets lose confidence that a government will meet its financial obligations or honour its debts.

In such cases, interest rates on public debt skyrocket as investors shed bonds from their holdings, leading to a spiral in a country’s debt burden and ultimately crisis talks with the IMF along with bailout conditions to bring debt under control.

Such cases are extremely rare and usually involve a sovereign government that has borrowed in a currency which it doesn’t control (not Australia’s case), whether that be the Euro in the Greek case, or US dollars in the case of Argentina.

Rather than having the IMF discussing bailout conditions with Prime Minister Abbott, Australia enjoys a AAA credit rating from all three rating agencies. This means that in the view of the very institutions who’s job it is to warn markets about the credit worthiness of a borrower, Australia is as worthy and solvent as can possibly be. There is no AAAA credit rating which we could aspire to.

The reason for the confidence of rating agencies and financial markets alike is simple. The fact our government is paying $1 billion of interest on debt per moth is irrelevant, both in a qualitative and a quantitative sense. Markets know Australia has a very low public debt burden, just under 14 per cent of GDP, compared to almost 90 per cent for the USA, over 80 per cent for the UK and over 130 per cent for Japan. And in addition, we have an economy that is now in its 23rd year of uninterrupted economic growth.

The equating of fiscal sustainability and solvency with achieving a budget surplus by a given year is a mistake that both sides of politics have made.

Such equivalence neglects the fact that as well as surpluses, economic growth and inflation pay down government debt over time. In fact if we look at the USA, the US government has run budget deficits for the vast majority of its existence, and yet it has never defaulted on its debt. That is because its accumulated debt has been payed down not by surpluses or even inflation, but largely by economic growth and the growth in government revenue it brings.

To be sure, Australia does face fiscal challenges but these challenges are neither immediate or an “emergency” and certainly are not an excuse for dismantling our social safely net or cutting important investment in education, research or other drivers of economic growth.

Our challenges can be addressed through prudent and timely reform, especially on the revenue side of the budget.

In fact, these challenges offer an opportunity for any wise government to tackle two problems at once; gaining additional revenue to support the proper role of government and tackling some of the drivers of inequality in Australia, namely large and inefficient high-end tax breaks. Such reform would make the economy both stronger and fairer.

But for this or any government to cry “debt crisis” as a justification for an attack on the very role of government that supports broad based prosperity is not only grossly misleading and misguided, it is terrible long-term policy.

And justice would mean it also turns out to be terrible politics.

 

IMAGE CREDIT: Crikey

About Tom Skladzien

Tom Skladzien

Tom Skladzien holds a PhD in economics, was an economic adviser to Minister Combet and Treasurer Bowen in the last government and is currently the National Economic and Industry Adviser to the Australian Manufacturers Workers’ Union.

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