Ideas@TheCentre
That 70s Show: Whitlam Era Spending is Back
So much for fiscal conservatives. The 2009 budget forecasts the biggest expansion in federal government spending since Gough Whitlam.
The federal government spending share of gross domestic product will increase by 2.6 percentage points this financial year, with a further increase of two percentage points forecast for next financial year, the biggest increases since the early 1970s. Government spending will reach 28.6per cent of GDP in 2009-10, a figure unprecedented in peacetime. Government spending has increased 13.5per cent this financial year, an increase unprecedented since the Whitlam era, and it will increase by a further 3.9 per cent in 2009-10.
While the budget deficit is being sold as a necessary response to the worst global economic downturn since the Depression, government spending will hinder growth long after Australia's recession is over. The Government has made much of the reduction in revenue flowing from the global downturn and the resulting domestic recession. But this is only one side of the budget deficit equation. The unprecedented deterioration in the budget balance is also driven by the biggest increase in government spending in a generation.
It is appropriate that the Government should allow the automatic stabilisers to work in response to an economic downturn. However, the deterioration in the budget balance has been made worse by discretionary fiscal stimulus packages of doubtful effectiveness. There is little reason to believe that these discretionary policy decisions have been effective in supporting economic growth. Even Treasury concedes "it is not possible to measure precisely the actual impact of the economic security strategy".
As PJ O’Rourke said of economic stimulus policies during his visit to Australia earlier this month: 'Think about last time you were broke...now how well did it go with spending your way out of it? Did that work?'
We should remember that Australia also has seen an unprecedented easing in monetary policy, which has made a much more timely and significant contribution to supporting economic growth than the stimulus packages. Monetary policy can be tightened again when recovery begins, but the legacy of the Government's fiscal stimulus packages will be with us for much longer.
While the Government talks up the short-term stimulus effects of government spending, it neglects to mention the crowding out of private investment by government borrowing that will occur long after the recession is over.
Dr Stephen Kirchner is a research fellow at the Centre.
