Want to be like France and Japan? Spend up big

False stimulus of the economy will return nothing except growing mountains of debt.

Advocacy for spending other ­people’s money and racking up government debt for future generations to pay it off is depressingly still widespread.

Take these two headlines from newspaper articles published this week — I hasten to add, not in this newspaper: “Scott Morrison’s surplus obsession is hurting the economy” and “The balanced budget fetish belongs to another era. It should go.”

Evidently, it’s an obsession, even a fetish, for governments to seek to live within their means by ensuring government receipts at least cover government payments.

It’s bad for the economy and outdated thinking, according to some economic gurus.

But let’s just take a look at the facts. The Australian government has not delivered a budget surplus since 2007-08 — more than a decade ago. In 2018-19, the budget was essentially balanced and this fin­ancial year the expectation is a small surplus of about $7bn or 0.4 per cent of gross domestic product will be delivered. That’s if everything goes to plan.

When it comes to Labor governments, the last time a budget surplus was delivered was in 1989-90, when current opposition Treasury spokesman Jim Chalmers was in primary school — something Josh Frydenberg has pointed out. During the years of the Rudd-Gillard-Rudd government, six whopping deficits were delivered, ranging from 1.2 per cent of GDP to 4.2 per cent.

Having inherited negative net debt when Labor assumed office, by the end of its tenure net debt had soared to more than $200bn, or 13.1 per cent of GDP. To be sure, subsequent Coalition governments have found it difficult to repair the budget, in part because of recalcitrant senates blocking significant savings measures. Moreover, Labor left several spending poison pills — think Gonski school funding, the National Disability Insurance Scheme — that drove essentially uncontrolled spending growth.

The proportion of government spending that is discretionary, in the sense it can be controlled by the government, has shrunk during the past decade. This explains in part why it has taken the Coalition so long to repair the budget.

While net debt has peaked according to the budget papers — it was about $373bn, or 19.2 per cent of GDP, in 2018-19 — what the past six or so years clearly demonstrate is that it’s hard work to return the budget to balance and then surplus. Slow and steady is really the only game possible.

So let’s return to the argument that the government should simply forget about the state of the budget and spend up big because the economy is weak. The line is stimulus is required because economic growth is below trend and unemployment is higher than we may like. The central assumption here is that stimulus spending actually works and there are no unintended consequences.

It’s the reason I don’t use the term stimulus because it presumes an outcome that is not supported by the evidence. Wasteful sugar hit is an alternative term.

Just this week, newly appointed Treasury secretary Steven Kennedy endorsed the view that counter-cyclical policy is essentially the preserve of monetary policy.

He made the point before Senate estimates that the economic outlook would have to be much worse than it currently is to justify fiscal policy intervention. He also referred to the automatic stabilisers that operate in a counter-cyclical way, with government receipts naturally dropping off and government payments rising when economic conditions are weak.

Let me turn to some overseas examples to debunk the myth that running budget deficits leads to better economic outcomes.

Take the case of France. This country has not run a budget surplus since 1974 — it’s coming up for nearly a half-century. Now with all that deficit spending, the French economy must be in tip-top shape if you believe those railing against surplus fetishists.

In fact, the reality is quite the opposite. Between 2001 and 2010, real GDP in France grew by only 1.3 per cent a year on average. Its economic outlook is poor, with growth expected to come in at 1.2 per cent this year and 1.3 per cent next year.

The rate of unemployment in France is 8.5 per cent, having fallen from a peak of 10.6 per cent in mid-2015. Note unemployment across the Channel is only 3.8 per cent. Youth unemployment in France is also extremely high — close to 20 per cent.

The reasons for France’s economic malaise are complex, including a highly regulated labour market, but the supposition that deficit spending will stimulate the economy is simply not supported by this example.

An even clearer example is Japan. It used to be called the lost decade; it’s now lost decades. The Japanese economy first began to falter in the early 1990s after a sizeable asset price bubble burst.

For nearly three decades, economic growth has averaged well under 1 per cent a year. Next year it is expected that Japan’s economy will grow by 0.5 per cent.

But here’s the real rub: during that time various Japanese governments have thrown absolutely everything in to stimulate the economy and lift the inflation rate.

The principal tactics have been more government spending and accommodative monetary policy, including the use of quantitative easing. The most recent budget in Japan recorded a deficit of 3.8 per cent; it has been as high as 8.3 per cent. The country’s government debt is 236 per cent of GDP, the highest among developed economies. It is only because Japanese citizens themselves provide much of the debt financing that it is possible for government to continue with such high debt levels.

And what has been the nature of Japan’s stimulus spending? Everything has been tried, including large wads of infrastructure spending. Bridges that don’t go anywhere and roads that aren’t used have been particular favourites. This example should serve as a warning to local stimulus addicts that infrastructure spending is some sort of cure-all.

One of the fundamental problems with the Japanese economy is that amid its world-competitive manufacturing sector lie significant sectors littered with restrictive practices, over-regulation, subsidies and inefficiencies.

It was the plan of Prime Minister Shinzo Abe to use what he called the “third arrow” to lift the economy by removing barriers to better performance in these sectors. But in practice little has been achieved to improve the supply side of the economy.

Back in Australia, the government is right to be wary of engaging in an unplanned spending spree. Not only would some of the spending be inherently wasteful and drive up costs, some types of spending are difficult to reverse when economic conditions improve. Moreover, the evidence on the effectiveness of the stimulus measures undertaken by the Rudd government during the global financial crisis is extremely ambiguous. Large chunks of the cash hand-outs were saved rather than spent by recipients. And wasteful spending was rife; recall the pink batts and school halls programs.

Ultimately it was the Chinese who saved Australia from entering a period of recession.

My advice to the government is simply to ignore the hysterical calls for more government spending and to stick with its plan to repair the budget. In addition, supply-side reforms such as making it easier for businesses to set up and operate, as well as encouraging private sector investment, would complement the approach.