Ideas@TheCentre
Governments aren’t economists
You may have missed it in a frenzy of shopping and family events, but just before Christmas, the ‘World’s Greatest Treasurer’ (Wayne Swan), broke the worst kept secret since the Fine Cotton horse racing scandal: Australia is unlikely to have a budget surplus this year.
Much like the cheap paint running off the sweating Bold Personality (the Fine Cotton impersonator), the cracks in the ‘hell or high-water’ surplus promise simply became too obvious to ignore any longer.
Predictably, some economists have praised the decision to abandon the surplus promise, mostly those who have kept to their interventionist, Keynesian leanings despite the failure of recent stimulus programs around the world (notably in the USA).
But what does the failure to achieve a surplus actually mean, aside from another black mark in the political trust copybook?
Economically, in the short term, it shouldn’t mean a great deal. The important thing is that governments live within their means and balance their budgets over the medium to long term.
Unfortunately, governments have strong incentives to keep spending and growing, and living within their means has proved impossible, as shown by the budgets in the USA and Australia since 1962.
The USA budget has been in deficit for almost all of the last 50 years. While Australia has done much better than the USA overall (which averaged a 2.7 per cent budget deficit over that period), if we exclude the Howard / Costello budgets, Australia has averaged a 1.1 per cent deficit over that period too.
Regardless of your views on Keynesian economics, statistically, governments aren’t Keynesians or indeed economists at all. In bad times they are ‘stimulating the economy’ and in good times they are ‘spreading the benefits of the boom’. Their answer is always more spending.
Indeed ever since poor Marie Antoinette vacuously suggested that the poor could eat cake if they had no bread, politicians have been wary of telling people that the economy is doing well. There is always another problem to fix, a crisis to combat or an election to fight. As Bert Kelly used to say, around election time he could feel a dam coming on.
This is why Australia’s failure to reach a budget surplus despite a mining boom, record terms of trade, low unemployment and resilient economic growth is important. It reveals the real problem, the underlying trend towards big, unsustainable government.
Simon Cowan is a Research Fellow at The Centre for Independent Studies.
