Opinion & Commentary
Budget cuts can be popular
Alexis De Tocqueville worried that democracy would only last until politicians realised they could bribe people with their own money. Spending and borrowing would spiral out of control, as voters lived increasingly at each other’s expense.
He was too sceptical, it seems. In Australia we’re enjoying ‘free’ visits to the local doctor and ‘free’ home buyer grants, for instance, yet our democracy is secure.
Democratic bribes like these are as insidious as they are tempting. But they are not fatal to democracy as long as bouts of political courage keep government spending and borrowing in check. Australia has been lucky to have treasurers with the will and temerity to bring budgetary discipline to bear.
In the Menzies government, to quell inflation Treasurers Fadden then Holt occasionally inflicted ‘horror budgets’ on voters, cutting spending and ratcheting up taxes. Menzies boasted in 1970 that the 1952 budget “was the most unpopular in modern political history”. And he won the 1961 federal election with only a wafer majority, partly because of earlier fiscal pain.
After the excesses of the Whitlam years, John Howard’s first budget in 1978 ground federal spending almost to a halt. Unfortunately the restraint was short-lived. By 1982 Malcolm Fraser’s more spendthrift ways had overwhelmed Howard’s frugal intentions. The Hawke government would never let Howard forget the resulting $9 billion debt.
Paul Keating, for all his profligacy as prime minister, is the only treasurer since 1970 to cut real spending. Against a backdrop of falling unemployment, high inflation and rising terms of trade (not entirely dissimilar from now), Keating in three years from 1986 lopped more than four percentage points from government spending as a fraction of Australia’s income. His 1988 ‘bringing home the bacon’ budget alone stripped more than 3% from real Commonwealth outlays.
After a peak of 27.3% in 1985, by 1990 Canberra was spending only 22.7% of Australia’s income, modesty not bettered since. Without cuts like these the debt burden at the end of the recession ‘we had to have’ would have been even worse.
The gold medal for tough cuts must go to James Scullin’s Labor government, however. His 1931 Premiers Plan, saw spending on public wages and social services plummet 20%!
Peter Costello’s first budget enacted $8 billion of cuts over two years. It is the toughest budget young adults can remember. Blood was on the floor, literally, as hundreds of outraged protestors stormed Parliament House in late 1996. Costello deserves great credit for his subsequent slew of surpluses, yet spending rocketed too.
So it was a relief to read in the Rudd government’s first budget about a “new era of responsible economic management”. Some of the Howard government’s excesses would at last be wound back.
Practically all governments in the 20th century had bouts of frugality; we were right to expect it from the Rudd government too.
Yet Wayne Swan’s first budget planned spending growth in each of the four years from 2008. Last financial year, following the North Atlantic financial crisis, we witnessed the biggest budget deficit since 1945. This financial year it seems we shall be lucky if we see only the third largest.
Two and a half years have elapsed since Lehman Brothers collapsed in New York. You could be forgiven for thinking it was an excuse to spend.
Now, as inflation mounts, unemployment falls, and the Commonwealth government’s spending hovers around 26% of national income, the government should take a razor to spending. For Australia’s long-term prosperity, Wayne Swan’s budget needs to live up to his ‘tough’ talk.
The torrent of money flowing into the Commonwealth’s coffers from the mining boom and banks will eventually recede. Spending excesses will be exposed and adjustment will be painful. Yet far from beginning to ween taxpayers off each other’s money, we are expecting extra handouts for ‘teen mums’ and more welfare for families with teenagers.
Government can more easily get away with such largesse because of our fixation with whether government revenue will exceed expenses in 2013. This habit obscures scrutiny of Commonwealth revenue and expenses today. Government behaviour is far more relevant than its intentions. I would prefer a deficit from a government with modest spending aims than a big surplus from a leviathan.
The growing complexity of the Commonwealth budget also needs reining in. Each year hundreds upon hundreds of extra ‘measures’ are enacted, collectively beyond anyone’s comprehension. They are too numerous to attract debate let alone subsequent evaluation.
Take one of last year’s undertaking’s to spend $2.7 million on five adventure playgrounds in Melbourne for children from “culturally and linguistically diverse backgrounds”. If anything is not the responsibility of the Commonwealth government it is adventure playgrounds.
Another was to provide over $100 million for 600,000 extra “home sustainability assessments”, which provide advice to households about how to improve their energy efficiency. This item included no underlying cost benefit analysis: presumably it would be too embarrassing.
You can find the other 400-plus measures in Budget Paper Number Two.
With an election still more than two years away the government should seize this opportunity to make the sort of cuts it should have made in 2008. Here’s one idea: why should parents of able-bodied adults aged 18 to 24 attract family tax benefit payments? Excising that insult could save up to $300 million a year.
All this assumes tough budgets need to be unpopular. Voters are not as venal and vacuous as many politicians seem to think. If politicians appeal to Australians’ better qualities of patience, sacrifice, and foresight, they can make securing our prosperity popular as well. As Peter Costello rightly noted, his tough 1996 budget was “one of the best received budgets in Australian history”.
Adam Creighton is a Research Fellow in economics at The Centre for Independent Studies.
