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Keeping Keynesian

In today’s Punch, I have an article on the debate over a budget surplus.

The deficit chicken littles ignore the numbers, The Punch, 7 January 2012

Rarely have economic commentators been so united on an issue arguing that the Australian Government should not aim for a budget surplus this year. From John Quiggin to Warwick McKibbin, the OECD to the IMF, respected economists across the political spectrum have taken the view that the best economic approach is not to try and fill the 2012-13 government revenue shortfall by making further budget cuts.

From a macroeconomic standpoint, there’s barely any difference between a $1 billion surplus and a $1 billion deficit. Far more important is the fact that when the Global Financial Crisis hit, we increased spending: supporting jobs through household payments and infrastructure programs. In the past five years, we’ve found savings that total $138 billion. We boosted government spending when private demand fell, and cut spending as private demand recovered.

Cutting spending isn’t easy. When we means-tested family tax benefits and the Private Health Insurance rebate, the Coalition said we were playing ‘the politics of envy’. When we phased out the outdated Dependent Spouse Tax Rebate (a measure that discourages secondary earners to work), we were accused of attacking the family. When we reduced the Baby Bonus for second and subsequent children, Joe Hockey drew comparisons with China’s One Child policy.

One marker is whether spending falls in real terms (that is, adjusting for inflation). As economic commentator Stephen Koukoulas has observed, during their combined total of more than twenty years in office, the Fraser and Howard governments never once cut their real spending. By contrast, Labor governments have cut real spending on five occasions since the mid-1980s. Painful as it is to admit, aiming for a surplus in 2012-13 probably instilled some additional discipline into the budget process – even if we don’t end up achieving the target.

Had revenue as a share of GDP been at the same level as in the early-2000s, these spending cuts would easily have ensured a 2012-13 budget surplus. Yet company tax revenues have recently been hit by a double-whammy: lower commodity prices (caused by a softening of world demand for our minerals), but a high dollar (due to a demand for our AAA-rated government bonds). Revenue for 2012-13 is $20 billion down from what Treasury projected back in 2010.

To understand the recent announcement by Wayne Swan that a surplus will be difficult to achieve, it’s worth comparing taxes as a share of GDP with the Howard Government. If we had Howard Government revenue today, the current budget would easily be in surplus. Conversely, if the Howard Government had today’s revenues, many of their budgets would have been in deficit. From an international perspective, Australia’s economic performance remains in the top tier, with better growth and unemployment numbers than almost any developed country. But overseas problems have directly hurt Australian government revenues through an unexpected channel: as European demand for our government bonds drives up the Australian dollar, company tax receipts fall.

The debate over the 2012-13 surplus risks obscuring the bigger picture, which is that sensible Keynesian fiscal policy means more government spending in bad times, and less in good times. That’s why we boosted spending to save 200,000 jobs in the Global Financial Crisis, and it’s why we’ve cut spending in recent years. The essence of good fiscal policy is a willing to switch tack if the economic outlook changes. Given the $20 billion shortfall in revenue this year, it may not make sense to aim for the same target. As Keynes himself said, ‘When the facts change, I change my mind – what do you do, sir?’.

Andrew Leigh is the federal member for Fraser, and his website is www.andrewleigh.com.

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