Time for a hard-nosed discussion on spending

The shocking fiscal performance of the Australian government in 2013-14 is now coming home to roost.

The shocking fiscal performance of the Australian government in 2013-14 is now coming home to roost.

As the world wakes up to the failure of monetary policy to stimulate economic growth and inflation, and attention moves to the need for fiscal policy to take over, Australia is in no position to do it — because of what happened in that year.

In 2012-13, the last year of the Labor government, the deficit increased from $18.8 billion to $48.8bn.

That was then compounded by the failure of the new Coalition government to do enough to repair it in 2014 — not because prime minister Tony Abbott and treasurer Joe Hockey didn’t want to, but because they sprung the solution on an unsuspecting public and the parliament and mucked up the politics so badly that they were both sacked.

Up to 2013-14, the deficit was coming back under control after the GFC blowout. The budget had gone from a surplus of $19.7bn in 2007-08 to a deficit of $54.5bn in 2009-10 because of the global recession and although we can argue about whether a $75bn fiscal expansion in two years was absolutely necessary, Australia did avoid the global recession and unemployment only got to 5.7 per cent, when in the US it hit 10 per cent.

By 2012-13 that $54.5bn deficit had been cut to $18.8bn, because of the final burst of China stimulus leading to the last leg of the resources boom, plus some spending restraint: in the three years between the 2009-10 and 2012-13 budgets, receipts grew at a compound annual growth rate of 7.2 per cent a year while expenses grew a rate of 2.9 per cent a year.

In 2013-14 that was forcefully reversed, especially on the payments side of the ledger: government revenue increased $9.3bn in 2013-14, or 2.6 per cent, but payments increased $39.3bn, or 10.6 per cent.

In short, that was the year of Australia’s great budgetary shot in the foot — Labor’s last budget and the year of the election.

That was Australia’s fiscal turning point, not 2008-09: it was when a desperate Labor Party threw fistfuls of cash at the electorate to try to stay in power and the new Coalition government followed up by not using its first budget to fix it quickly, as the previous Coalition government did in 1997.

This week the outgoing governor of the Reserve Bank, Glenn Stevens, said in his last speech, referring to the budget: “We are kidding ourselves.”

That is, we are kidding ourselves if we think there is not a “hard-nosed” conversation about the budget coming up. “That will occur should there be a moment of crisis, but it would be better if it occurred before then.”

He then went on to discuss — again — the limitations of monetary policy and to tentatively make the case for government borrowing for “the right investment asset”, not “to pay pensions, welfare and routine government expenses”.

For Stevens’ advice to be followed without ruining the slow progress back to budget surplus, there would have to be a change to the way investment spending is accounted for, by putting it outside the budget.

That’s possible but politically difficult, because whoever was in power, the other side would carry on about it.

There is now a discussion that’s taking place around the world about whether, how and when fiscal expansion could take over from feeble monetary policy, especially in Japan and Europe.

But while there is plenty of talk, the potential for any serious fiscal stimulus is limited, for the same reason it’s limited in Australia: too much debt and deficits already.

Of the 200 or so countries competing at the Rio Olympics, only about 10 are running budget surpluses — places like Norway, Switzerland, Iceland, Germany and Malta.

In fact, Glenn Stevens’ suggestion that “we are kidding ourselves” about not facing this problem applies to more or less every country that sent a team to Rio, and none more so than the host country, Brazil, with a deficit last year of 10.4 per cent of GDP, and likely to be much more this year.

“Hard-nosed conversations”, as he puts it, are due in many countries, and not just about budget deficits.

Eight years after they caused the crisis, banks everywhere are being squeezed to the point of dormancy by two sets of regulators: central bankers trying to get inflation back up are squeezing interest margins, and prudential regulators are making ridiculous demands for more and more risk-weighted capital.

The result is that at the same time as government spending has collapsed, so has bank lending to business.

Happily there is a lively venture capital industry around the world now which is filling the gap at the start-up end, but existing businesses looking to expand need real estate security.

Alan Kohler is publisher of The Constant Investor.