“What are the most pressing economic issues the government should be tackling right now?”
“Well the current and previous governments are avoiding the obvious problem, they’re not focusing on reducing the deficit!”
That is a small excerpt from a conversation I had with someone a few days after the release of the federal budget. Since then I have had a couple of similar exchanges. Perhaps it is a question which is easily misunderstood, but I am more inclined to think that there exists a common misconception regarding fiscal policy and the overall performance of the economy.
Economic performance is not defined by budget balances. The performance of an economy is a complex relationship of statistical indicators, public policy, international relations and evolving social norms (the list goes on). Common indicators of living standards and welfare are, but not limited to, measures such as nominal/real GDP per capita, wage growth and unemployment levels. All macroeconomic indicators play a significant part in determining the ‘performance’ of an economy, each with their own limitations and fallacies. The key is to consider the relationship between economic indicators in the context of material and non-material living standards.
A Budget Primer
Fiscal policy refers to the anticipated changes in federal government receipts and payments through the management of aggregate demand and supply policies. The role of the budget (from a purely economic perspective) is to target the five economic goals: strong and sustainable economic growth, full employment, stability of the currency, external stability and equitable distribution of income. These goals vary in priority depending on the economic environment and provide a simple benchmark when analysing the complex relationship between policies in the short and long run. Those who have taken high school economics in Australia should be familiar with these goals, but if you would like a more detailed explanation, please click here.
The budget balance is the difference between receipts and expenditures and is determined by structural and cyclical factors. Cyclical budget balances are dependent on movements in the business cycle, where surpluses are achieved during booms and deficits during times of economic downturn or contraction. For example, during an economic downturn, there is weaker economic activity, less spending, higher unemployment and thus higher welfare payments and less tax receipts received by government. The converse is true during economic expansions.
In the current context, the key issue is that the budget is in a structural deficit. This means automatic stabilisers would be relatively ineffective in reducing the deficit in an economic expansion, let alone pushing the balance into surplus. The structural deficit is based on fundamental shifts in the composition of the economy and discretionary policy implementation.
Fixing the structural deficit is no simple task. It is imperative that discretionary elements of the budget are changed and new policy implemented however, fiscal policy is a tool to assist in improving economic performance over the long term. Reducing the deficit needs to fall in line with the long term priorities of achieving the five economic goals, especially during this period of readjustment from mining lead growth.
Where It Went Wrong
Beyond the complex issues facing Australia, the current predicament we face is a product of naïve leadership, driven by political gain at the cost of competent economic management.
What has fuelled the ineffectiveness of fiscal policy in recent years has been the inability to clearly communicate the economic narrative to the public. Without clear articulation of the issue, there can be no rational justification for any economic policy. Instead the current and previous governments have relied on rhetoric and superficial slogans to benefit those with vested interests for short term political gains. The public debate has been reduced to dribble and the meaningless repetition of convenient half-truths disguised as universal fact.
Examples of this include: “Debt and deficit disaster, working families, planet tax, it’s other people’s money, just another tax, it’s un-Australian, taking pressure off families”
The biggest failure of the political economy has been the lack of clear understanding and acceptance Australia’s economic position. By hiding behind the lofty headline indicators of economic growth during the mining boom, the government has failed to act accordingly from the warnings of the two speed economy. Without a clear, honest economic narrative, unpopular but necessary reform cannot succeed in being implemented. David Llewellyn-Smith summarises this up perfectly in response to the Abbott government’s first budget:
“First, you must build consensus around the need for [economic reform] the centre of the polity. Only that way will it survive the inevitable attacks that come from vested interests. The Abbott Government did not do this. It never mentioned the end of the mining boom. It never acknowledged its own party’s roles squandering the mining boom. It never described the competitiveness challenge that have arisen from twenty years of the borrow and inflate economic model. It has simply blamed Labor for rising debt and segued that with an attack on union power. It short, the Abbott Government has framed the Budget problem in political not national interest terms so it’s going to get a political response in return.”
In summary, the budget is a tool to help improve economic performance, not a benchmark by which economic performance is measured. We have not seen any government in the past decade clearly articulate the economic narrative of Australia during the mining boom nor currently as we restructure away from mining lead growth. We simply championed on the boom, believing that it could last forever without looking at the structural frailties of the Australian economy and the inevitable downfall of the mining industry.
This concludes the four part series on the story of the real Australian economy. Indeed, I have only scratched the surface by giving a broad overview of the current situation and the underlying macroeconomic problems which seem to be absent from the public debate. On a final note, whilst it is easy to criticise the government for their decisions, we should understand that politics is a complex game of power. For the quality of the public debate to improve, we the public must improve the quality of our own debates and think critically about key issues. Tim Colebatch captures this idea nicely:
“Why don’t we the public see this? Well, we’re all busy, and we don’t have time to think much about big public issues, particularly when the politicians focus us on short-term issues and try to score points off each other… It’s not just the politicians who need to lift their game. We, the public, need to do the same. We need to be sharper, and demand new, tougher policies to fit the new, tougher realities. We can’t have our cake and eat it too”.