- No, Australia doesn’t have a budget problem;
- There are no comparisons with Europe;
- Sure, fiscal consolidation in the medium terms is a good idea;
- But don’t go cutting if growth is below trend (which is itself endogenous).
These economists are not in business, they have no skin in the game and their pronouncements are so broad as to be asinine. And when cuts or savings are proposed or made, they will be the first to declare them ‘unfair’.
(See Eslake banging on and on about the uncontroversial deductability of costs associated with investment in an income producing assets [aka negative gearing] and superannuation ‘concessions.)
The real trouble for the government is that the rich and not so rich are paying all the income tax revenue, bracket creep is a real problem and entitlements are massively skewed towards those in the bottom half of the income distribution. It is not possible to take entitlements away from ‘rich’ people they don’t get in the first place and it’s not really possible to hit them with higher rates of income tax, lest work effort and location decisions be affected.
You can also see this mushy Keynesian ‘vibe’ infecting the press gallery (not a good time to be cutting the deficit is the standard line eg. LaTingle) and the government itself (eg. MYEFO remarks).
But here’s the thing: it is always a good time to commence the process of fiscal consolidation (bear in mind the automatic stabilisers are always in place) and without a determined plan, it will not happen. Let us not forget that those European countries that are now fiscal basket-cases were once where we are now, particularly in the immediate post-Maastricht era.
To sum up: you really might expect more of professional economists, even those trained in Tasmania.
ECONOMISTS have questioned Tony Abbott’s repeated warning that Australia risks “succumbing to the European disease” if the Senate refuses to pass the government’s controversial budget measures.
As financial markets braced for the fallout from Greece’s election on Sunday, which saw victory for the far-left Syriza party, the Prime Minister said that Australia faced Europe’s problems of debt and rising unemployment.
“If we aren’t capable of making tough decisions, this country, even this great country, could succumb to the European disease,” Mr Abbott said yesterday, reiterating similar remarks he made last week. “Without tough decisions, the risk is that we will become a second-rate country living on our luck.”
Saul Eslake, chief economist at Bank of America Merrill Lynch, and Ivan Colhoun, a chief economist at National Australia Bank, agreed the government had to repair the budget over the medium term, but suggested the analogy with Europe was misguided. “It’s drawing a very long bow — whether you’re talking about public debt, size of government, unemployment — I struggle to see much in common,” Mr Eslake said.
“There are parallels only in the sense that various European countries didn’t put their fiscal house in order, and Australia, for about 10 years now, has also not been doing so.”
Mr Colhoun added: “It’s an overstatement of the threat. Most economists don’t buy the budget emergency line. It would take a very long time for Australia to end up in Europe’s debt, deficit and growth situation.”
The European Central Bank launched an unprecedented €1.1 trillion ($1.5 trillion) bond-buying program last week in a desperate attempt to shake the eurozone out of chronically slow growth and high unemployment by weakening the euro and lowering interest rates.
Mr Eslake said that it would become more difficult over time for Australia to enact budget reform, and he was disappointed the government had not been able to sell its message of the importance of budget repair.