Budget 2017: forget the fake patriotism and get working on debt

Each year we enter the budget twilight zone. In this realm of make believe, governments enjoy unlimited money supply, the state is benevolent, politicians are ­expert economists and debt ceilings exist to be broken. Like all treasurers before him, Scott Morrison is spinning like Rumpelstiltskin in the lead-up to next week’s budget. But there’s only so much “good debt” he can squeeze out of a bad debt cycle.

National net debt is $317.2 billion and rising. Last year Australia was ranked 43 on the IMF’s debt to GDP list. Gross government debt to GDP measures a nation’s capacity to pay its debt. Like many Western nations, Australia is deep in the red. Our debt to GDP is 36.8 per cent. By contrast, Hong Kong’s is 0.5 per cent. We perform well below leading ­Islamic ­nations and several state beneficiaries of Western foreign aid.

The free trade agreements brokered with our Asian neighbours have driven the standard of living upwards for the first time in several years. However, Australia’s foreign debt has blown out to more than $1 trillion. The cost of living is high, household debt is staggering and savings are low. Last year the Bank for International Settlements revealed that Australia’s household debt to GDP is 125 per cent — the third worst result in global rankings.

Western governments are ­addicted to debt and Australia has caught the disease. The debt cycle corrupts governments as politicians try to promote fiscal repair without slashing expenditure to prevent a backlash among voters. It is an impossible task. If ever there were a need for bipartisan political accord, it is in the interest of government debt reduction. But as debt grows, so too does the greed of the political class and the economic illiteracy of voters. Both empower self-interest against the national interest.

Numerous polls demonstrate Australians’ desire for debt reduc­tion and fiscal repair. However, when government tries to reduce spending, the ABC’s fake news pushers frame spending cuts as unneeded or ideologically ­driven. The public broadcaster is often criticised for bias but it is ­unconscionable to mislead the public about the desperate need to reduce government spending and pay down debt. Last year the Treasurer revealed that gross government debt had blown out to $430bn with $16bn in monthly repayments. At the time, the ­Coalition had reduced projected debt by $55bn and planned a further $6bn in omnibus bill savings. But after another scare campaign led by Labor, the Greens and the ABC, the bill was defeated.

The Senate’s aversion to debt reduction leaves the Coalition with limited options for fiscal ­repair. The government is losing the battle for hearts and minds on economic policy. The emerging solution is “Australia-first” economics. Indications suggest the coming budget will be patriotic. In recent weeks, Malcolm Turnbull and ministers have been using Australia-first rhetoric more frequently. Patriotic appeal has ­underscored several economic ­reforms. Examples include the Treasurer’s crackdown on real ­estate illegally acquired by foreign nationals, and the diverted profits tax legislation, which prevents multinationals shifting profits made in Australia offshore to avoid paying tax. The Prime Minister’s move to block gas exports when energy bosses don’t meet domestic supply was framed as an Aussie-first reform also. And the mooted upgrade of citizenship rules is clearly patriotic.

In the din of Australia-first bluster, the government’s sudden backflip on debt reduction was unexpected. The Treasurer’s new bestie, “good debt”, looks like a poor man’s easy virtue. It is a bad sign that fiscal restraint is out and big spending statists are back.

Like all governments launching a pre-emptive defence of a big spender budget, the Coalition claims increasing debt is in the ­national interest. “Good debt” will protect Australia’s AAA credit rating and produce a growth dividend. The claim that government spending on infrastructure constitutes “good debt” echoes New Deal rhetoric. Last year IMF deputy managing director Zhang Tao advocated higher government spending to protect Australia’s AAA credit rating. Speaking to the ABC, he advised the government to borrow more money for new infrastructure projects and slow down spending cuts. The government appears to have taken Mr Zhang’s advice.

Margaret Thatcher was not for turning, but she might turn in her grave upon learning the Liberal Party has adopted fiscal policy backed by a former People’s Bank of China executive. As British PM, Thatcher praised the Australian Liberal Party’s economic policy as “the right approach”. She pointed to the Liberals’ fiscal conservatism made manifest by prudent government spending as its core strength. The conservative ­approach she admired was “getting rid of socialist programs”, ­removing indiscriminate subsidies, rooting out waste and ­extravagance, and applying cash limits while maintaining vital ­defence and welfare support.

If the government drifts away from fiscal conservatism and ­engorges itself on the elusive promise of growth, it risks driving Australia off the fiscal cliff. It must downsize to reduce debt and ­repair the deficit. It could begin by cutting the morbidly obese ministry down to size. If the Coalition’s patriotism is more than mere rhetoric then it must make plain the case for an Australia-first budget by simplifying the taxation system, dropping the spin and putting the national interest first.

Whatever your view of his politics, Donald Trump has mastered the art of plain speak and ­accessible economics. He is dedicated to simplifying financial systems and fiscal policy. That creates a sense of trust among people disempowered by supranational organisations like the IMF dictating economic policy in bureauspeak. His recently published budget blueprint, America First, is an exercise in clarity, simplicity and accessibility. While Trump too is planning to spend big on infrastructure, he argues for a growth dividend that delivers economic returns to American citizens primarily. Time will tell if he can deliver.

The Australian government will forge its own path to fiscal ­repair but it would do well to ­remember that every dollar at its disposal belongs to citizens. An Australia-first budget must put Australians first.