The budget challenge ahead

The Austrian economist Joseph Schumpeter, of ‘creative destruction’ fame, once said that ‘the budget is the skeleton of the state stripped of all misleading ideologies.’

Schumpeter’s words certainly ring true today, with the bare bones in the federal fiscal closet well and truly laid bare by the Abbott government’s mid‑year budget update, to be released soon.

There can be no denying that Australia’s budgetary circumstances are in a parlous state, providing for a less than beautiful set of numbers that no amount of political spin can rationalise out of existence.

If leaked reports are anything to go by, the expected budget deficit for this financial year may have further blown out to $50 billion, compared with $30 billion about four months ago.

The government and the Greens (unwisely, in my view) bunker busted the statutory debt ceiling into smithereens, just before the fine print of the mid‑year budget could reveal that federal gross debt will now certainly break the $300 billion barrier.

It is true that the Abbott government has played some role in the budget deterioration, including a handout to the central bank, doling out additional school funding to three jurisdictions, and deferring some spending cuts in the face of an extremely hostile, pre‑changeover Senate.

But the greatest attribution for the horrific state of the books should be accorded to the policies of the previous government led, at various stages, by Kevin Rudd and Julia Gillard.

The basic policy idea was that, in the midst of a panic whipped up over financial market stability, arguably largely misplaced at the time, the public sector should borrow and spend to cover for any slowdown in private sector activities.

In 2008‑09 alone it had been estimated that about $80 billion was spent on fiscal stimulus measures which would supposedly save the economic structure of Australia, at the temporary cost of a modest budget deficit and slight debt increase.

But the cost of Keynesianism is often far greater than what politicians wish to confess to the public, or even truly comprehend themselves.

The stimulus programs did not save Australia’s economic structure, but distorted it in favour of pet political projects of questionable economic value, such as overpriced school halls and flammable home insulation.

As official documentation during the stimulus period admitted, the government went on a borrowing spree to cover for tax and other revenues, which did not grow as quickly as the greedy political executive initially expected.

But with much of the modern commonwealth budget dedicated to consumption and redistributive spending activities, the increase in public debt has effectively entailed an erosion in our long term productive capital stock.

These problems, all other things being equal, will persist for as long as the budget remains in deficit, which in turn driven by the perverted bipartisan political logic insisting that increasing wasteful spending, rather than cuts to unproductive spending, delivers stronger electoral support.

Now the responsibility for fixing the federal budget emergency ultimately rests in Prime Minister Tony Abbott’s hands, who reassuringly tells us that the mid‑year budget update is a line in the sand.

If the reassuring words are true, what that should mean is that the government will return to living within its means on a daily basis, and that the intergenerational plunder of indebtedness will not become a way of life for Australians.

Soothing words that appeal to the political base are one thing, but action to engage in fiscal consolidation is far more important. Not much has been seen on the spending reduction front, as yet, but much needs to be done, and quickly.

Abbott must become his own Man of Steel on the domestic front, battling against the throng of vested interests to deliver sound finances for the benefit of all Australians. The looming festive season aside, he would be best advised to don the cape, and graft out his own legacy as fiscal saviour, sooner rather than later.

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30 Responses to The budget challenge ahead

  1. blogstrop

    Much needs to be done and quickly. Yes.
    But how many in the media will continue to denigrate the government for every attempt it makes to right the ship? Unless the government is prepared to be unpopular for at least two terms, their goose will be cooked in a firestorm of negativity.

  2. H B Bear

    Abbott is not the Man of Steel.

    I’m not even sure he is a Ninja Turtle.

  3. james

    But how many in the media will continue to denigrate the government for every attempt it makes to right the ship?

    You know the answer to this.

    All of them.

  4. stackja

    Julie: battling against the throng of vested interests

    The Australian people need to expect a lot less from government. Industry needs to cut wage expectations.
    I heard a 2GB interview of Volvo Australia Trucks representative. Volvo Australia Trucks does not get any government handouts. They are able to make their business profitable. The Volvo Australia Trucks representative was careful not to become involved in any political discussion.

    blogstrop
    #1112498, posted on December 16, 2013 at 12:12 pm
    a firestorm of negativity.

    TA was elected Liberal leader and we got a firestorm of negativity.

  5. Robert O.

    We all know that Rudd/Gillard outspent their revenues on pink bats, boats, BER, climate change etc., but you would think that honourable members desist in holidays in Europe (Combet), cookery classes (Crean) and trips to Bali (Thomson ), and New Zealand (Slipper), all on the taxpayes expense. No, that is why politicians are not held in high esteem by the public.

  6. Andrew

    Don’t give oxygen to that BS about the RBA. The govt moves money into the RBA, It (by definition) adds nothing to the underlying deficit or the net debt. It’s as budget neutral as me moving money between my cash and TD accounts.

    The rest of it is an unmitigated disaster, and the filthiest are accusing Hockey of lying! Apparently in their world, a desire to lift the debt ceiling means the govt wants more debt and there isn’t enough debt.

  7. Baldrick

    As usual, no politician will be held to account for this over-spending of ‘our’ money. The bastards should have their pensions sacrificed to help pay for ‘their’ debt!

  8. david hadley

    Obviously the budget is not in such a bad shape. As a conservative donor and voter, I feel betrayed by the Govt. in that they have given an avowed Abbott hater like Spot Despoja, already on a cushy pension paid for by you know who, a junk[et] job paddling around the pacific enlisting other lefties in the fight against common sense. I donated hundreds of dollars to get rid of Gillard/Rudd. This is a position any proponent of smaller government could have disposed of and no-one would miss it apart from the rent seekers. No more dough from us until thet eschew socialism.

  9. Mr Rusty

    As usual, no politician will be held to account for this over-spending of ‘our’ money. The bastards should have their pensions sacrificed to help pay for ‘their’ debt!

    It would even better to have all election votes recorded so that until the debt is gone, anyone who voted Labor in ’07 and ’10 has their pensions and entitlements cancelled, Super funds frozen and interest paid direct to the Government and they also pay an extra 5% on income tax (aka the ‘Fuckwit Levy’).
    All Labor pollies pensions are forefeited and current Members that served under the previous Government are paid half salaries until repayment of all debt.

    Don’t see why I should be be made to pay for the fuckwittery of others.

  10. JC

    Julie

    Great post. I have one issue though. I believe the government did the right thing re- anchoring the RBA’s balance sheet by replacing the funds Shane Wand stole in order to pay for Liars mis-spending. Furthermore it’s merely an accounting entry as the government has the authority to pull the funds any time it wants.

    The RBA balance sheet was too leveraged.

  11. candy

    In five easy steps though what should the government do immediately?

  12. Anthony

    Great post. I have one issue though. I believe the government did the right thing re- anchoring the RBA’s balance sheet by replacing the funds Shane Wand stole in order to pay for Liars mis-spending. Furthermore it’s merely an accounting entry as the government has the authority to pull the funds any time it wants.

    They had to borrow the money to do this though, and interest must be paid on that debt.

  13. JC

    The one major step, candy would be for the government to provide a strong signal and plan on the way they are going to cut spending and bring the budget back to balance ASAP. The plan needs to be credible so that the RBA and the markets believe it. The impact should then give the RBA to opportunity to signal easier monetary policy going ahead thereby potentially weakening the Aussie dollar.

    Because of our inflexibilities a weaker currency is the only way we can adjust.

  14. Token

    I have one issue though. I believe the government did the right thing re- anchoring the RBA’s balance sheet by replacing the funds Shane Wand stole in order to pay for Liars mis-spending.

    Re-stocking the balance sheet of the RBA was something that had to be done, WTF do people give oxygen to the lefties and allow their talking points to stand?

  15. candy

    The one major step, candy would be for the government to provide a strong signal and plan on the way they are going to cut spending and bring the budget back to balance ASAP.

    Rationalising the disability pension sounds like a good start then? Tony Abbott is just going to have to get used to being hated whatever he does. As long as he breaks no pledges, he’ll be okay. No more Gonski shambles!

  16. O Dear

    You Right Wing Fruit Loops Have Such Short Memories

  17. AH

    The number 1,2,3,4,5 things to do now are to deregulate.

  18. ralph

    “horrific state of the books” – what Australia with one of the lowest levels of debt to GDP in the OECD and triple AAA rating? some horror. All that money was spent in 2008-09, GDP still fell, but no recession unlike the rest of the OECD. and equal focus should be spent on revenue forgone – FBT and leased vehicles – why should I be subsidising someone’s private car use? there is a billion or two – easy.

  19. Alf

    Ralph and O Dear, how right you both are. I don’t think many of the glass jaw fringe dwellers here will welcome you though.

  20. Tel

    Re-stocking the balance sheet of the RBA was something that had to be done, WTF do people give oxygen to the lefties and allow their talking points to stand?

    This makes no sense whatsoever. The RBA prints money, they are the primary issuer of debt to the banks. What does it even mean “restock the balance sheet”? Literally, what does that mean?

  21. Tel

    I believe the government did the right thing re- anchoring the RBA’s balance sheet by replacing the funds Shane Wand stole in order to pay for Liars mis-spending.

    Re-anchoring now? What there was a fiscal chain flopping loose through the tide of currency?

    The RBA is simply a wing of the government anyhow, transfers back and forth between them are accounting shenanigans, not real any way. FWIW I believe that Hockey transferred in more than Swan transferred out, but that’s largely irrelevant.

  22. A H

    The concept of ‘stimulus’, ie. deficit spending, ie. Keynesianism, has long ago been disproven. If you arenot a troll and genuinely disagree, then try to understand the Austrian Economics theory of the business cycle before you post again.

    All that has happened is that the recession that would have happened during the GFC has been deferred. It is baked into the cake, sooner or later it will come. And the later it comes, the more severe it will be.

  23. blogstrop

    Troll spill in aisle three.

  24. stackja

    Liberty Quotes
    “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” — Ronald Reagan

  25. stackja

    Liberty Quotes
    “The essence of capitalism’s foreign policy is free trade—i.e., the abolition of trade barriers, of protective tariffs, of special privileges—the opening of the world’s trade routes to free international exchange and competition among the private citizens of all countries dealing directly with one another.” — Ayn Rand

  26. JC & Candy,

    All could become clearer after July.

    There are a few PS Certified Agreements up next year, there might be no PS pay rises for three years as a ‘show of solidarity with taxpayers’. It would only be a drop in the bucket but good PR.

    Unfortunately there is likely to be a ‘mortgage broker’ scandal, or some NSW factional stuff up to derail things.

  27. crocodile

    The concept of ‘stimulus’, ie. deficit spending, ie. Keynesianism, has long ago been disproven. If you are not a troll and genuinely disagree, then try to understand the Austrian Economics theory of the business cycle before you post again.

    I’d be interested in studying some real world examples of this theory that have worked and delivered.

  28. crocodile

    Austrian theory that is.

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