Danger of big government is lesson for the new year

As the new year begins and focus shifts to a federal election in the first half of 2025 there is a recurring theme of missed national opportunity. The latest instalment comes from former prime minister John Howard and his treasurer, Peter Costello, to mark the release of cabinet papers from 2004, when the federal government was being forced to consider many of the issues that continue to dominate political minds today. They include war in the Middle East, immigration, aged care, access to medical services and Indigenous disadvantage.

The stark difference was the financial discipline imposed by government and watched over by Treasury. In 2004-05, the budget recorded a $13.5bn (1.5 per cent of GDP) surplus, the seventh of 10 budget surpluses Mr Costello would deliver between 1996 and 2007, and net debt fell to $11.5bn (1.3 per cent of GDP) and was on a trajectory to zero.

The budget still delivered tax cuts and boosted family assistance and maternity payments and funding for childcare places. Mr Howard said the contemporary lesson was that governments could still provide initiatives while being prudent overall with the budget.

The contrast today is stark, with Jim Chalmers projecting a sharp rise in borrowings and a string of deficit budgets into the future. When off-balance sheet borrowing for energy projects, student debt relief and other measures are included, the situation is more dire. Emergency measures introduced by the Coalition during the height of the pandemic can explain some of the deterioration.

But the Albanese government has overseen a rise in spending and borrowing that cements a structural budget deficit when our terms of trade as a nation have been at a historical high.

Mr Costello says tax per capita is rising and spending per capita is rising even faster. “We are progressing to a higher-tax, higher-spend, higher-debt country and this is at the same time that we are becoming a less productive country,” Mr Costello says. Former foreign minister Alexander Downer warned on Monday that we were following the bad example of Europe and losing our global reputation for exceptionalism.

The Treasurer acknowledges 2024 was a tough year economically for voters but says a better future is in sight. But there is no shortage of potential dangers on the horizon. Chief among them is what a re-elected Donald Trump means for the global economy and Australia’s place in it.

As Judith Sloan wrote on Tuesday, Mr Trump’s election was the most consequential event of 2024 from a global political, economic and strategic perspective. Australia is exposed to the US president-elect’s threatened trade war with China.

The bigger lesson, however, will be in how successful Mr Trump is in what Sloan described as a Schumpeterian disruption. Economist Joseph Schumpeter’s theory of creative destruction is described as the process of industrial mutation that revolutionises the economic structure from within, destroying the old one and creating a new one.

Mr Trump’s flirtation with reform on tax, tariffs and government spending could unleash the sort of animal spirits that will only sharpen the difference between the US and the European experiment of a big-government, high-social-spending economic model that Australia is following. In the absence of any plans for serious tax reform, Australia’s business leaders are calling on the Albanese government to overhaul research-and-development incentives to help them compete.

The Business Council of Australia says lifting the cap on tax benefits to $250m would help push R & D spending from 1.7 per cent of GDP to 3 per cent. The US has an R & D spend of 3.5 per cent of GDP. BCA chief executive Bran Black says private sector investment in R & D is critical to lifting productivity and creating more economic growth and jobs.

The BCA has correctly identified the danger of the current approach that puts government at the centre of decision-making on business investment. This is reflected in the renewable energy push and the Albanese government’s Future Made in Australia policy, which has got off to a poor start in its attempts to pick industry winners.

The choice for voters could not be more serious. A minority government in which the Greens hold a balance-of-power sway over Labor would cement and deepen the anti-productivity trajectory we are on.

The challenge is to acknowledge, as Mr Howard and Mr Costello have said, that the pathway to big government has put upward pressure on inflation and interest rates, worsening cost of living, while the economy has lost competitiveness and productivity is in decline.