Some macroeconomic issues

by David Richardson

The macroeconomics of this budget must seem a bit messy to many. On the one hand the Treasurer’s speech assures the audience that “only the Coalition can responsibly manage the budget and strengthen our nation’s finances.” The Coalition has always tried to present itself as fiscally conservative and pursuing sound money doctrines.

Further into the budget papers we read about the projections that deficits and debt will be back on track. Debt will peak and deficits will reduce. There may be no suggestion of a return to surplus which had been the war cry of most Treasurers over recent decades, but there are certainly nods to fiscal conservatism. Yet these sit very oddly with the rest of the rhetoric in the Treasurer’s speech when he says things like:

  • Funding for our health system has increased every year under our Government and is at a record high.
  • NDIS funding grows in every year.
  • Since we have come to government, funding for aged care has doubled.
  • Record funding for education.
  • We must invest more in the defence of our nation. This is what we are doing…

It would appear that the government is quite happy to be associated with big spending, especially on some of the items on the above list.

The Treasurer was happy to say “Australians remain strong. We have overcome the biggest economic shock since the Great Depression. Our recovery leads the world.” Yet apart from vague references to sticking to the “plan” the Treasurer seems loathe to spell out the features of the plan that allowed Australia to “remain strong”. Put simply, the features that allowed Australia to overcome the economic shock were increases in government spending and accepting the accompanying government deficits and debt. As part of that was the emphasis on encouraging household spending. Much of the plan was a sound textbook approach to downturns using fiscal policy. More discussion here.

A good deal of the reaction to the fiscal data prior to and following the budget expressed concern at the implications for Australia’s deficits and debt. These concerns are misplaced as is evident from Australia’s recent experience. Elsewhere it was shown that debt and deficit fears are misplaced. No-one has been able to point to specific adverse consequences of high debt. Nobody can point to anyone who has suffered specific damages as a result of recent government deficits.

We can however point to many instances internationally where austerity programs motivated by fear of debt and deficits have been associated with mass unemployment, bankruptcies and the inevitable consequences of those. The IMF, for example, has warned against austerity programs. Fortunately, this government has forsaken austerity programs.

Many people who are still concerned about the size of the future deficits might be comforted by knowing that the projections are for lower deficits which should soon settle down to the sorts of levels common under the Menzies and Fraser Governments. The latter at least is confirmed in the historical section of the budget papers, for example, table 10.1 in Budget Paper No 1.

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