Do austerity the Estonian way

Lobbecke Albrechtesen

I THINK we're sort of coming to an end of an economic era. The austerity thing is finally pretty much debunked everywhere. I think we're looking for something new.Mike Seccombe, ABC1's Insiders, April 28TEMPTING though it is to dismiss dreamers such as Mike Seccombe as outdated economic dinosaurs, the prevailing sentiment in this country still favours far too much government spending.

Witness Julia Gillard's Gonski school funding and the national disability insurance scheme and support for these policies even before funding was explained. Look, too, at voter support for Tony Abbott's absurdly generous paid parental leave policy funded by a tax rise. Witness also the inevitable chorus of outrage any time any form of government entitlement is shaved back.

That said, Wayne Swan's search for savings in what looks to be his final budget is of no consequence. It is too little, too late. After six years of spending too much and extending the reach of government, the Treasurer's budget carries no credibility.

Given the polls, of far greater importance is the Opposition Leader's budget reply speech tomorrow night and his first budget in May next year. And given that the next federal government can get our fiscal house in order only if there is political will inside government and political support outside, it is critical to debunk the dangerous attempts to portray spending cuts as a form of unwarranted austerity.

Alas, you have to hand it to warhorses of the Left such as Seccombe. They know how to appropriate a word and sanctify or desecrate it. In the way the Left has used the word racist to shut down debates ranging from the teaching of history to immigration policy, they have transformed austerity into a dirty word to win economic arguments based more on emotion than cool-headed evidence.

The aim is to present austerity as some kind of medieval affront to modern human dignity. And when, a few weeks back, Abbott declared: "Austerity is not a word that will escape my lips," members of the Left gloated that a new economic era had begun. Happily, the "austerity thing" is not pretty much debunked everywhere. While the word may have lost appeal (let the Left enjoy that hollow victory), the need for fiscal discipline is more certain than ever. "I call it balancing the budget," German Chancellor Angela Merkel said last month. "Everyone else is using this term austerity. That makes it sounds like something truly evil." A week earlier Merkel repeated her oft-repeated theme that Europe was living beyond its means. It has 8 per cent of the world's population, 25 per cent of its gross domestic product and 50 per cent of its social spending. "That money has to be earned," she said.

The German Chancellor spoke with envy about Estonia's lower debt (6 per cent of GDP compared with Germany's 81 per cent, Greece's 165 per cent and the US's 100 per cent) and higher growth model. After following the rest of the world with early stimulus spending in 2008, the Estonian government rejected the Keynesian push to keep spending and by 2011 its economy grew by 7.6 per cent (five times the eurozone average). The government cut ministers' salaries by 20 per cent, public servants' salaries by 10 per cent, pared back bureaucracy to make way for private investment, raised the retirement age and clamped down on those who could claim government handouts.

"It's not right to spend at the expense of future generations," Prime Minister Andrus Ansip said. If only that message could be tattooed on the back of every politician's hand.

Economic Affairs Minister Juhan Parts said: "Everybody had to give a little bit." If only that message could be tattooed on the back of every voter's hand. Explaining the reason for Estonia's success, Peeter Koppel, investment strategist at the SEB Bank, said: "I can answer in one word: austerity."

And as Forbes magazine noted last month, rather than riot like the Greeks, Estonians re-elected their government. The other Baltic tigers, Latvia and Lithuania, also opted for fiscal prudence over an orgy of spending, delivering economic growth by 2011 of 5.5 per cent and 5.9 per cent respectively. When The New York Times' resident Keynesian Paul Krugman derided Estonia on Twitter last year, Estonian President Toomas Hendrik Ilves replied sarcastically: "But yes, what do we know? We're just dumb & silly East Europeans."

Not so dumb. The Baltic tigers know what US president Harry Truman knew in 1945 when he too chose austerity measures over spending to lift a sagging economy after the Depression and World War II. Spending as a percentage of GDP was cut from 44 per cent in 1944 to 9 per cent in 1948 and the economy thrived. By 1947 real US output was 17 per cent higher than it was in 1941. By contrast, the modern Keynesian call for more and more government spending from economists such as Krugman even after the failure of the $US830 billion US stimulus encapsulates why the US can only dream of a growth rate like Estonia's.

While the austerity word may never leave Abbott's lips, he can choose to follow the Baltic states rather than the basket-case economies of France, Spain and Italy; using words such as cutting non-value adding expenditure, structural reforms, fiscal discipline, deficit reductions, sustainable public budgets and, yes, let's hear about a federal government getting its house in order. This is austerity by another name.

Austerity means ridding Australia of the irrational notion that there must be "no losers". It means looking at every item of expenditure and checking for waste, cutting industry subsidies in the foolish belief that government can pick winners, paring back entitlements that should never have grown in the way they have.

Start with entitlements to the rich. Cut back non-means-tested childcare rebates. Impose a means test. Let the rich squeal first about losing handouts. Look at other entitlements, too. Then let's get serious about determining the neediest and therefore those most deserving of increasingly scarce taxpayer dollars.

Seccombe may be right about the end of an economic era but let's hope that it is big spenders such as Swan whose time is drawing to a close.