Right-wing governments are falling into the austerity trap of raising taxes to cut their predecessors’ deficits, harming growth and jobs. What is really needed is a growth-first, supply-side solution and a resounding ‘No!’ to the politics of austerity.
Ronald Reagan and Margaret Thatcher have gone down in history as the two greatest right-wing leaders of the free world since WWII, and every right-wing activist will have read at least one biography about the Gipper or the Iron Lady. Historians can almost run Reagan-Thatcher together as a single political entity that embodied the strategic/economic renewal of the West in the 80s, and the cultural confidence that went along with it. However, that tends to obscure the very real differences between the two leaders, and I think aspects of Thatcherism deserve critical scrutiny.
Thatcher was the original austerian, a hard-line monetarist and deficit-cutter, and an argument could be made that her first-term macro-economic policies caused political damage to her far more successful deregulation/privatisation agenda that followed. From 1979-1983, taxes rocketed from 33.1 to 38.2% of GDP, an astonishing increase that, along with other measures, knocked the stuffing out of the economy and caused the number of unemployed to soar over 3 million by 1983. The woman who campaigned against long dole queues in 1979 on the slogan “Labour isn’t working” ironically left Britain with an unemployment rate 2% higher than when she took office 11 years earlier. This is part of the reason that the Tories are now unelectable in Northern England and Scotland, areas which bore the worst effects of 1980s austerity.
Reagan’s strategy was almost diametrically opposite. Influenced by supply-siders like Art Laffer, the Gipper believed that growth and low inflation were reconcilable so long as supply-side policies were adopted via slashing taxes and regulations first, with initial and temporary demand side measures (interest rate rises) being applied in order to kill off inflation. Reagan cut taxes from 19.2% to 17.3% of GDP in his first two budgets and kick-started a defense build-up without much care for the deficit. Accordingly, the US came out of the recession of 1981-2 (caused by the Fed’s interest rate hikes) just as quickly as it went in, and net 15-16 million jobs were created during Reagan’s remaining six years, a remarkable record.
In this, there are some important lessons. The economic lesson is that austerity is no good economically, and a political trap for right-wing governments. In an entrenched low-growth, anti-business environment, politicians need to focus on the immediate problem at hand by repealing the low-growth policies that are holding back business, rather than the secondary problem which is the deficit. Taxes must come down, impediments to investment must be abolished, and unnecessary labour market regulations should be scrapped. In short, we must legalise prosperity first, and worry about fiscal retrenchment later. Thatcher’s approach caused unnecessary social strife because her real supply-side measures came later in the game and, by then, millions of people had already been made irrelevant to the British economy. It could be argued that the “chav” culture of entrenched welfare dependence and hooliganism is very much a product of Thatcherism.
Unfortunately, the Abbott government is repeating the errors of Thatcher although on a far less drastic scale. Firstly, there are unnecessary spending cuts that are hitting the weak instead of the strong and powerful enemies of the government (e.g. highly-paid ABC propagandists, and human rights commissioners whose job description is mainly to restrict liberties), without having any significant impact on the deficit. Secondly, there are tax hikes on the very skilled workers that Australia needs to attract for the country to prosper. No one should be surprised if the net revenue take from the high-income tax hike will be zero or even negative. Third, the real supply-side measures that this country needs are still lacking. The “develop the North” mantra we heard during last year’s campaign seems to have gone nowhere. Freeing up land, cutting penalty rates, and yes, slashing taxes across the board, should all be the first business of the government prior to any reductions in welfare entitlements. If the government are not sure where to start, they could simply issue a survey to a couple thousand small businesses across different sectors asking them how much time they are wasting on compliance issues, and in what ways.
The politics of austerity, where conservative governments risk short-to-medium term recessions in order to clean up the fiscal mess of their Left-wing predecessors, should be abandoned. Labor never take responsibility for their irresponsible spending and it is maddening that the Liberals always get suckered into bearing the political costs of being the “mean party”, the tax-hikers and the penny-pinchers. What is needed instead is an unapologetically belt-loosening pro-growth agenda of the kind that carried Reagan to the biggest electoral landslide since WWII, the supply-side economic policies to match, and a simple slogan to knit the whole thing together – such as “Legalise Growth!” or, better still, a resounding “No to Austerity!”
*with apologies to the late P.P. McGuinness