By Greg Jericho Posted Wed 23 Apr 2014
Photo: The need for budget repair is regurgitated by any LNP politician within sight of a microphone. (Dean Lewins: AAP)
Joe Hockey and Tony Abbott would prefer you just assume that "fixing the budget" will improve the economy without them actually having to demonstrate how, writes Greg Jericho.
Among all the talk in the run-up to the budget, the overriding narrative has been that "fixing" the budget is required to fix the economy. It's a narrative the Government hopes you take on faith rather than on evidence.
The budget emergency first related to the present situation of the budget. When this didn't fly with reality, the Government turned to the period beyond the budget estimates. This is where the ALP had apparently hidden all the blowouts in expenditure (even though expenditure in these years for programs like the NDIS and Gonski were well known).
Embed: Australian Government Budget
With budget deficits supposedly for the next decade and government debt growing, the need for budget repair is regurgitated by any LNP politician within sight of a microphone.
Certainly the ageing population and associated increases in expenditure and declining revenue base is in need of discussion. But the Government has gone beyond this to actually arguing that moving to a surplus will improve the economy.
Tony Abbott has articulated this view many times - such as when he told Parliament that "if you want to fix the economy, you have got to fix the budget first". Joe Hockey similarly claimed that "the bottom line here is that if we are to maintain our standard of living as a nation we have to fix the budget."
Behind such talk is the implicit belief that ongoing deficits are bad for our economy, and the debt is a drag on our growth.
And yet the link between government debt and economic growth is pretty skint. There is a plethora of evidence showing a correlation between the two - that increased government debt occurs at the same time as poor economic growth. But proving that debt causes lower economic growth is rather more tricky.
Economists Carmen Reinhart and Kenneth Rogoff in 2010 tried, but after much trumpeting by austerity supporters around the world, it was discovered their conclusions were based on an error in their Excel spreadsheet. Indeed, one of the reasons the budget is projected to be in deficit is because GDP growth is not expected to be high like it was in the 1990s when the recovery from the recession powered the return to surplus.
Saying that fixing the budget will fix the economy is again confusing correlation with causation.
We are also told ratings agencies like budget surpluses. It seems we think more of ratings agencies than they think of themselves. Standard & Poor's lawyer told a court last year that "Triple A does not mean anything hanging out there as a concept," and that it was akin to Top Gear giving a car a good rating.
While it may be nice to have a AAA rating, the reality is our bond rates are driven by numerous factors and presently the difference between Australian and USA's government 10-year bonds yields (or interest rate) is just below the 10-year average:
Embed: Differential between Australian & US 10-year Govt Bond Yields
Moreover, Australia is one of only eight who have a stable outlook AAA rating from all three credit agencies. So clearly the ratings agencies are not too worried about our budget emergency.
But even if they were, a AAA rating is a hell of a thing to put before the performance of your economy. And looking across the 14 nations that have a AAA rating from at least one of the agencies, there is a pretty wide scope of performance according to GDP growth, employment and budget balances.
So if it's not debt, then what? Abbott has suggested it is because of the ability to lower taxes. He noted that "you cannot fix the economy unless you fix the budget, and a stronger budget means lower taxes and more jobs."
And surely lower taxes do mean higher growth and more jobs? Well, yes. A study in the USA by economists Christina and David Romer looked at the impact of cutting taxes on growth by taking into account the context within which such tax cuts occurred. They found that a tax cut of 1 per cent of GDP could improve GDP growth by 2-3 per cent within three years.
Except they were talking about stimulating the economy by increasing the budget deficit through tax cuts. They also noted that government spending increases would likely have a bigger impact. Even worse for Abbott, they also found that in the USA, tax cuts did nothing to reduce government spending - and certainly this was the experience in Australia during the early-mid 2000s. They also concluded that "unemployment typically rose and output fell following austerity programs".
Moreover, a major reason why we currently have any sort of budget emergency is because of tax cuts already given. The Parliamentary Budget Office noted that:
"Over two thirds of the 5 percentage points of GDP decline in structural receipts over the period 2002-03 to 2011-12 was due to the cumulative effect of the successive personal income tax cuts granted between 2003-04 and 2008-09."
And the OECD data on the tax wedge (or burden) since 2004 shows that the people who benefited most from those tax cuts were high-income earners rather than those on average incomes:
Embed: Change in income tax burden since 2004 by earnings
Of course, some argue that tax cuts can occur so long as wasteful spending is cut by more. Except "wasteful" generally means "spending we don't like", or "spending the people who pay us to lobby/think tank for them don't like". Also government spending tends to worry more about inequality than does the supposedly more efficient private spending, which is not much of a concern to those for whom inequality is something that happens to other people.
A couple weeks ago the Secretary of the Treasury, Dr Martin Parkinson, delivered a speech in which he talked of our living standards and fiscal sustainability.
However, his focus on living standards was "weak productivity growth, a falling terms of trade, and an ageing population". When he attempted to link our standard of living with the budget he referred to the need to build up our reserves so that should another global recession hit, we could respond similar to how we did in 2008-09.
When he mentioned taxation he talked about the desirability of shifting the dependence from income tax to indirect taxes such as the GST more than about reducing our taxes overall.
In the past, the talk was of budget surpluses over the cycle - that when our economy was performing at trend or above, the government should shift to a surplus. Now the Government has moved to suggesting that shifting to a surplus will see the economy grow above trend.
At present Hockey and Abbott would prefer you just assume their "fixing the budget" will improve the economy without actually having to demonstrate how. Perhaps this is because it removes their need to talk about things like the GST and your blind faith will also make it easier for them to break their election promises.
Greg Jericho writes weekly for The Drum. View his full profile here.
Coalition banks on blind faith in budget 'fix' - The Drum (Australian Broadcasting Corporation)
