Budget must keep the ongoing spend under control

Treasurer Josh Frydenberg. Picture: Philip Gostelow

One of the most annoying features of the federal budget these days is the inclination of the Treasurer of the day to leak all the key bits in the weeks leading up to the big day. Come the actual day, there’s often nothing much to write about.

Don’t get me wrong. I don’t think budgets should be full of pizzazz, replete with announcements of ill-conceived government programs with ridiculously ambitious objectives that will never be met. In many cases, the only beneficiaries of this spending are the providers, with those whose interests are intended to be served coming off second best. And, of course, the long-suffering taxpayer loses out again.

Josh Frydenberg has already made it clear that he doesn’t intend to embark on any material fiscal repair in this budget. Laughably, the green/left media refer to any slight tightening of fiscal settings as austerity — a description that is wildly inaccurate.

Just take a look at the figures. In 2020-21, government spending will increase by 20 per cent on the previous year, with payments as a percentage of GDP hitting over 33 per cent compared with 24.5 per cent in 2018-19.

That’s worth repeating: federal government payments will make up a third of the total output of the economy this financial year. Note here the high priest of anti-cyclical government spending, Maynard Keynes, regarded 25 per cent as the maximum sensible size of government spending. General government net debt will have increased from $374bn in 2018-19 to close to $700bn in this financial year. It is expected to reach $952bn in 2023-24. (Gross debt will exceed one trillion dollars.)

Don’t forget that these figures are the result of decisions made by a government that bragged about being back in black and expected net government debt to be eliminated by the end of the decade.

Using very old-fashioned and simplistic Keynesian analysis beloved by Treasury, Frydenberg is being urged to continue the spending spree. Because nominal GDP growth could exceed nominal interest rates, abandoning fiscal discipline is seen as OK.

Given some short-term political advantages, the Treasurer may find this advice irresistible. But he shouldn’t ignore the views of many Coalition supporters who prefer frugality over waste and balanced budgets over burgeoning government debt.

The core problem with Treasury’s analysis is that it ignores how the economy actually operates and how businesses and individuals respond to incentives. The micro-economy is ignored as is the quality of government spending.

And let’s be clear: we must always be worse off if government spending costs more than the benefits. There is also little doubt that as government spending ramps up, the quality of that spending falls rapidly.

The ostensible aim of fiscal policy now is to get the rate of unemployment under 5 per cent. In the context of low population growth caused by restricted international entry, this should be easy to achieve without substantial government spending.

This also applies to wage pressures that should rise as many businesses report worker shortages. The obvious answer for them is to bid up wages to attract workers from out of the workforce or from other jobs. Only if the government decides to resume the migrant intake to pre-COVID levels — net overseas migration of about 250,000 a year — will the wages pressures ease.

Over the medium term, the only way real wages can rise is if productivity can grow at a reasonable clip. No doubt the government will claim that some of its spending is productivity-enhancing, but there is scant evidence that this has been the case, with productivity growth sluggish for nearly 20 years.

There is also talk of a women-themed budget, although the economic case for this is weak. While it’s true women were slightly disproportionately affected by the COVID restrictions, their employment has bounced back more strongly than men’s.

Some of the mooted changes are in relation to childcare subsidies, although these may not be announced as part of the budget. Evidently, spending close to $10bn per year on childcare is not enough and we need to spend even more.

Take it from me, do not believe the figures that are being bandied about. Spend another $5bn on childcare and GDP will be $11bn bigger. These are essentially made-up figures based on unrealistic estimates of the supply elasticities — the response of women to lower childcare outlays and the removal of the annual cap.

The main beneficiaries of these changes will be highly paid women whose labour force behaviour is unlikely to alter much, but they will be happy to take the extra money from the taxpayer. In other words, the effects are essentially distributional rather than efficiency gains.

There is also something frighteningly Soviet-style to the proposition that we need to have more women working full-time and this has to be achieved from the time their children are very young. My guess is that many women object to the notion that they are mere cogs in the economic system.

There’s also the important question: if women work longer hours, are other workers, particularly young ones, disadvantaged? It’s not clear why a supply-side change would alter the overall demand for working hours, meaning that women with children could win at the expense of others.

That many women find it financially unattractive to put their children in long day care for five days a week may be no bad thing. It’s not clear that children actually benefit from this arrangement. Moreover, the Australian data on work and life satisfaction clearly shows that women are consistently happier than men.

The fact that the labour market accommodates so many women doing part-time work while caring for young children is a good thing, not a bad thing. It is surely a narrow perspective to expect every woman with children to work full-time and that this would be good for the economy. In this context, GDP is clearly a deficient measure of community wellbeing.

When the budget rolls around next week, it’s important that questions are raised about the wisdom of running ongoing budget deficits and piling up more government debt for future generations to pay off. It may seem like money is growing on trees, but there will be a day of reckoning, particularly if commodity (iron ore) prices collapse.