Pearls and Irritations

There is much political rhetoric spouted by both sides of Australian politics when it comes to economic management and the truth generally lies somewhere in between the myths and the half-truths. To make matters even worse, so-called economic experts from the financial and business sectors, shock jocks and news media outlets tend to centre discussion narrowly on surpluses, deficits and government debt taken out of any meaningful, economic context. The language or terms used in the news and in political debate, often gives an inaccurate or incorrect picture of what is really happening. The political pundits and the commentariat tend to give the impression that the process of preparing budgets and guiding an economy to prosperity is a simple, straightforward process and only requires a good measure of common sense.

Managing economies in the 21^st century, is a complex difficult process with pitfalls in collecting accurate up to- date data and constructing relevant models of the economy. Since the Global Financial Crisis of 2008, Economics as a discipline has been found wanting. As a consequence of this traumatic economic event, old ideas are being revised and new ways of thinking have emerged from behind the scenes. Universities, central banks, governments and the financial sector are slowly beginning to revise their fiscal and monetary understanding of how economies operate. Poor theory leads to less than optimal policy construction and implementation. Despite these efforts there is still a large element of uncertainty in any economy and no economist can honestly say they have all the answers to a country’s economic problems or can make accurate predictions.

Simplistic notions about Public Finance abound in the minds of many Australian people even politicians. Running a Federal government budget is totally unlike running a household budget and drawing any analogies between the two is misleading. The way income flows in and out of an economy is different to a household.There are many times when a government will need to run a deficit or a surplus or a balanced budget and none of these positions are intrinsically bad or good. Economists have an array of fiscal and monetary tools in their economic kit bags and they have to know which one is the right one to use at the appropriate time.

The current notion that deficits are inherently evil is patent nonsense. When economies are in a downturn, deflation and unemployment maybe growing so deficits may have to be sustained until the economy picks up. There are times in the business cycle when the private sector is not investing and aggregate demand in the economy is flat. When this happens government must spend to cover the shortage of investment, create new jobs and boost consumer confidence. Deficits stabilise the economy until consumer and business confidence improves. If we look at Australian fiscal history we will see that the Federal budget has been in deficit more times than in surplus and governments took the appropriate action as was required, irrespective of political or ideological perspective.

Australian governments have run surpluses in only a very small number of years since Federation. Labour governments have achieved government surpluses in 18% of all years they were in power, while right-leaning governments have hardly done much better, with surpluses in 26% of years in power.(See Owens’s Chart 2) However consideration must be given to the economic conditions at the time the government was in power. The years in which Labour governments ran deficits or incurred increased government debt were during the Great Depression, the oil shocks of the early to mid 1970’s and the 2008 Global Financial Crisis.

If we factor these extraordinary distorting economic events into the equation, we find there is little difference between governments of either political persuasion. Neither side of politics can claim to have an economic management edge.

Deficits predominate

Surplus years have been few since 1900. 77% of the time the Australian budget has been in deficit. Aside from the early years of state or territory balanced budgets before Federation, the only surplus budget outcomes have been in the following years:

• 1933, 1934 and 1936 resulting from the depression austerity plan under Joe Lyons (UAP). Deficit spending to stimulate the economy was not an option because foreign credit markets refused to lend to Australian governments following the default and restructure on the entire stock of domestically held government bonds in 1931. The government had no option but to balance the budget by imposing austerity measures including savage cuts to wages and spending
• 1949 (just) under Chifley (Labor)
• 1988, 1989, 1990 and 1991 under Hawke/Keating, in the late 1980’s boom prior to the deficit spending in the 1990-1991 recession
• 1998, 1999, 2000 and 2001 under Howard/Costello, in the ‘dot-com’ boom prior to the impact of the ‘tech wreck’ slowdown
• 2003 through to 2008 under Howard/Costello (although Labor under Kevin Rudd won the election during the 2008 fiscal year), in the 2000’s mining/credit boom prior to the ‘global financial crisis’. 

Some Australian Fiscal History

If we look at the bare economic facts and stats over a long period of time and interpret them correctly within a reasonable, consistent objective context, we will see that neither side of the political fence has performed any better than the other.

If we were to use another measure to look at which side has been the most astute, innovative or creative when it came to utilising government and private resources during good and bad economic cycles, we may discern some differences. There may be an argument to say that some outstanding Labor governments have just slightly outperformed their Liberal coalition opponents in this area.

The reforms of the Whitlam and the Hawke /Keating years were crucial to bringing Australia onto the world scene, economically and socially and set some new economic parameters and structure for future prosperity. Without the removal of certain tariffs, deregulation of the financial sector, some labour market flexibility, the floating of the Aussie dollar and closer economic ties to Asia, we may have become an economic backwater that was just a quarry or a farm for our international, resource hungry neighbours. The Global Financial Crisis of 2008 could have been much worse for Australia if the Rudd/Gillard government had not acted swiftly and increased government spending at the right time.

Every government in history is dealt its unique hand consisting of a constellation of mixed economic and socio-political factors and what they decide to do will depend on their economic competence and political ideology. As a rule, conservative governments tend to do better during stable economic periods, whilst labor governments perform better during turbulent economic times, when economic innovation and creativity become more necessary.

Wayne McMillan is a keen student of Economics and keeps up to-date with socio-politico economic affairs. He resides at Whalan in Western Sydney NSW.

Stats provided from Ashley Owen May 16 2014 http://cuffelinks.com.au/budget-time-labor-v-liberal-fiscal-discipline/

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