A Budget for the Lucky Country

"The budget was unashamedly directed at helping the rich get richer."

"It is not a budget that has judiciously used the massive terms of trade economic windfall to rebuild national savings, alleviate capacity constraints or inject funds into human capital initiatives. [It] is incendiary, providing little hope of rebalancing the economy away from the consumer."

These comments are not from the chardonnay-socialist left wing commentariat. The first was made by John Durie of the Financial Review, and the second by Goldman Sachs J B Were in its post-budget newsletter.

Governments always claim credit for good economic outcomes which occur on their watch, but the frightening aspect of Costello's Budget speech came towards the end when he said "Australia's sustained economic growth is the result of the Government's strong economic management and ongoing economic reform".

It was frightening because his appearance and demeanour suggested he really believes the Commonwealth Government is economically competent. Delusion is much more frightening than political spin.

Australia has enjoyed a record fourteen years of economic growth, but little of the credit should go to the present government. It is mainly the result of earlier reforms in the 1980s, strong demand for our commodity exports, a wealth illusion created by high house and share prices (aggravated by government taxation policies), and the diversion of public revenues into consumption rather than investment.

This run of good luck and short-termism has masked serious structural weaknesses in the Australian economy. Our economic structure is coming to resemble that of an oil-rich sheikdom (coal and iron ore in our case, rather than oil), rather than that of an industrialized nation capable of competing in a world where success rests on the more enduring assets of human capital and a supporting infrastructure.

This government and its advisers have settled into complacency — the "she'll be right" complacency Donald Horne warned about when he wrote The Lucky Country forty years ago. The budget forecasts continued GDP growth of at least 3.25 percent for the next four years. Inflation is forecast to be less than 2.75 percent, while wages will rise by at least 3.75 percent.

The only way these forecasts can be reconciled is if there is a boost in productivity, and if there is no external shock to the economy. As Saul Eslake, the Chief Economist of the ANZ Bank points out, however, there has been a sharp fall in Australia's productivity. There is no explanation in the budget documentation of how a recovery in productivity is going to occur. (The changes in labour laws will if anything worsen labour productivity.)

Thanks to Paul Batey

We might expect to find some acknowledgement of the fragility of Australia's economy in Budget Statement 11, "Statement of risks". We might, for example expect to see a mention of the risk of long term climate change, a slowdown in China, a collapse in the Australian dollar when the rest of the world tires of financing our profligate consumption, an enduring rise in oil prices to $US100 or $US120, a fall in commodity prices, a recession in the USA, a steep rise in interest rates, a sustained fall in consumer confidence as people bump up against their credit limits, or an inflationary breakout in wages as firms bid for scarce skills.

The "Statement of risks", however, is confined to minor risks, mainly to do with possible litigation. The only mention of climate is a reference to possible "adverse seasonal conditions", but climate change is not "seasonal".

A paltry $2.3 billion for transport (which still won't even complete the highway between Sydney and Melbourne) and $0.5 billion for the Murray-Darling are celebrated as a major surge in investment. To put these figures into perspective, the Commonwealth's Auslink program spends no more than $3.0 billion a year on surface transport — the same as is spent on subsidizing health insurance funds. In the 1970s the Commonwealth was devoting about one percent of GDP to funding for surface transport, mainly roads; a similar proportion now would see funding at three times its present level.

Conservative estimates of Australia's infrastructure deficits are $20 billion for interstate transport (not including deficits within cities and local roads) and $60 billion for environmental repair. The task facing Australia goes beyond nation-building; it is national reconstruction.

One may give some credit to the Commonwealth for not frittering away all the surplus; it is budgeting for an ongoing surplus of around one percent of GDP. It makes sense for a nation, enjoying a temporary surge in prosperity, to make provision for the future.

But instead of investing in human capital, environmental restoration and physical infrastructure, the Commonwealth is sequestering its surplus into the "Future Fund".

That involves high risk, for the "Future Fund" invests in financial instruments, subject to the whims of financial markets, and the contributions being made now are into an overvalued stock market. When the hard times come, and a future government has to draw from the fund, it is almost certain that those will be times of depressed share prices; that's the nature of the business cycle.

By contrast, investment in public assets would not only increase the nation's productive capacity, but would also provide more secure ongoing dividends. Unlike the volatile financial dividends of the Future Fund, these dividends would be the enduring economic benefits of a more nurtured natural environment, improved health and safety, lower inflation, higher productivity, improved international competitiveness and less dependence on welfare. Our national balance sheet would be far stronger, and we would have greater resilience to cope with future shocks.

Our Treasurer, like Oscar Wilde's cynic "who knows the price of everything but the value of nothing", has confused financial management, a bookkeeping task involving the generation of impressive fiscal statements, with the much harder task of economic management, which involves developing policies to ensure we have the infrastructure, skills and resilience to attend to our future prosperity. It's a harder task because it may require some short-term sacrifices for the longer term good. It requires leadership — the hard task of being truthful with the electorate, so they can understand that Australia's present prosperity is built on a transient resource boom, asset speculation and an unsustainable dependence on foreign debt.

The longer we continue with populist handouts rather than confronting that hard reality, the tougher it will be when the boom ends. We cannot keep on churning public revenue, using welfare payments and tax breaks to compensate for worsening inequality and poor economic performance. Budget outlays for "Social Security and Welfare" (an understatement because they exclude generous superannuation concessions) are now ten percent of GDP; in the early 1970s, when Australia had full employment and more equality in private incomes those outlays were only five percent of GDP. If we had a stronger economy and could cut that demand by just a tenth we would have another nine billion dollars a year to spend on health, education, infrastructure and other much-needed public goods.

Fortunately, after many years of yielding economic management to the Coalition, the Labor Party is finally starting to draw attention to the Coalition's economic weaknesses. It even managed to get the Debt Truck started up — it did one lap of the Parliament House ring road before security guards ordered it off. (Security is about feeling “relaxed and comfortable”; we don't want to be reminded about horrible things like foreign debt.)

As the 2007 election approaches, will Labor keep up this pressure, or will it once again succumb to the populist temptation to pretend to match the Coalition's profligacy?