Oh no- we still have a deficit
Over the last few years, politicians have spent a lot of time talking about the budget deficit with varying levels of alarm. While deficit spending is common at both a household and national level there are times when it does need to be curtailed. I thought I would take a look at whether our economic outlook is as grim as Joe Hockey liked to portray it and offer some thoughts on what steps could be taken if it is.
Deficit spending
As most households would agree, there are times when you do not run your budget to a yearly surplus. Major outlays of expenditure for renovations, holidays or new vehicles or equipment can mean in some years our expenditure is significantly greater than our earnings. Similarly, unexpected events such as loss of work, illness and the like can push our yearly budget further into the red.
Very few people panic when this happens. Deficit spending is very common throughout the world. If it wasn’t, credit card companies would have no business.
What doesn’t work is running an annual budget that is always in deficit. If every year I spend more than I earn, at some point I will lose my house. So when this patterns begins to become obvious, I need to find ways to curb my spending habits. This might mean giving up one or two things and potentially lowering my standard of living for a few years. If I just keep doing nothing and hoping something changes by some miracle, chances are I will lose still lose my house. Complaining that it is not fair and that I can’t tolerate the loss of certain privileges does not fix my bottom line. Refusing to agree to any changes in my spending habits also does not address the problem. Nor does blaming my wife for her spending habits (hasn’t stopped me trying from time to time). If I don’t make some form of change myself, I’m going to be homeless.
In much the same way I am not too concerned by a national budget that goes into deficit when we add expenditure for major infrastructure upgrades such as the NBN (not that I am happy with the performance of NBN Co itself, but that is a different story) transforming our economy to focus on clean energy or unexpected humanitarian aid such as resettling refugees or providing disaster relief measures.
And in just the same way, when our national budget is in deficit for years on end, I start to worry about the debt that must be accumulating.
According to the recent MYEFO, the timetable to return to surplus is pushed out yet another year. In itself this wouldn’t really bother me. In fact, I am surprised so much attention goes to the yearly deficit or surplus (I still vaguely remember them) status of the budget, rather than the much more telling figure of our national debt.
National debt and what can be done about it
Currently our national debt is higher than our entire national budget, meaning even if we wanted to, we could not pay it off with an entire year’s revenue. While this is not as alarming as it sounds and there are a number of countries who are considerably more profligate than us, it is hardly desirable either. For this reason, I accept the thesis that steps need to be made to stop the pattern before it spirals out of control. A little bit of pain now is better than a lot of pain later. The challenge, of course is choosing what type of pain, the timeframe it is spread over and who bears the brunt of it. I would not want the government to go into panic mode and try to fix everything too quickly, as this can have adverse effects such as reducing economic activity and revenue. So everything would have to be done carefully, but a national debt approaching 500 billion dollars and an aging population means we would be well served by taking a few steps sooner rather than later. How would I do it? It’s hard to say without knowing a lot more about our national economy and macroeconomics in general, but I do have a few thoughts on the matter.
Cutting expenditure allowances to politicians seems an obvious starting point after Brownwyn Bishop, Barnaby Joyce and Julie Bishop made them soft targets in this area, but what else can be done?
With the revelations that most of the most profitable companies in Australia paid no tax last year, it is pretty obvious why they wanted the Tax Secrecy Act passed. I’m sure the argument will be made that taxing these companies will act as a disincentive to them doing business in Australia and could actually cost more revenue and jobs if they move operations to another country. I have read The Goose that Laid the Golden Egg and I realise that it can be advantageous to give companies support and tax breaks to secure employment for Australian workers, but I think there is a medium somewhere. If a company makes several billion dollars they can probably afford to pay some tax. This goes double for resource mining companies and I was disappointed that they were able to derail Kevin Rudd's attempt at a meaningful mineral resource tax with their media scare campaign.
I’m not actively against cracking down on welfare fraud and tax avoidance, as long as this actually makes economic sense. When you have to employ more people to chase these cases up, then you have to be reclaiming more money than you are paying to the people investigating and chasing the debts.
I have said elsewhere that I think there is both a moral and an economic case for closing the detention centres in Manus Island and Nauru and I would love to see that happen.
Any suggestions that aren’t populist?
None of the ideas I have discussed so far have actually been ones that would impact on me directly, but I would accept measures that did if they were necessary and I could see it was part of an effort to ensure future national prosperity. I think if governments are going to be serious they need to get away from the rhetoric that no one will be worse off and start talking about the fact that everyone will be a little bit worse off for a short while.
An increase in the GST has been being discussed for much of the year and I suspect it will happen in the next few years. While I never like paying more tax, if that is what has to happen to continue to maintain our roads, hospitals, schools and so on, then I can live with that. The concern that policy makers need to wary of with the GST is that if they get too greedy and increase it too much, increased prices could act to stifle economic activity as people try to reduce their spending. I’ll leave that to those who are more knowledgeable about macroeconomics to decide, but I’m not philosophically against it.
A bit like increasing the GST, short term public service pay freezes would provide significant savings, but would be obviously unpopular with those affected. Still it does provide another option for the government, but it would probably need to be offset somehow or matched by other measures that would affect other sectors of the economy.
Much as I love sport, if we had to make some cuts to actual spending, I think the Australian Olympic Committee (well the Olympics themselves) and other publically funded national sporting bodies and teams are of questionable importance. I don’t think there would be much downside to cutting funding there for a few years. Anyone that says it will lead to increased obesity because kids won’t play sport doesn’t know kids. I would be a little more careful with cuts to the ABC, and institutions such as NIDA, as they actually drive a national industry and cuts would most likely be reflected in decreased economic activity.
A common temptation for policy makers is to downsize agencies to reduce expenditure on wages, but this is not always well thought out. Often many more redundancies are given out to people who were going to retire anyway. Then it becomes apparent that the staff left cannot achieve the required output without putting in expensive overtime or outsourcing additional labour. However there is often a fair amount of dead wood in a large public agency so there will be times for this approach. It just needs to be done carefully and thinking ahead.
So what will happen?
I like to think that our elected representatives are considering these among a range of options to improve the nation’s fiscal position. While they don’t need to panic, I would like to see some progress towards reducing our debt in the near future. Something else that is important is that when they do come up with a plan, that it is implemented with more or less full fidelity. Every year we see budgets pulled to pieces going through the senate so that only parts of them are approved, leaving holes which inevitably increase deficit and debt. This is also the kind of thing that angers those who have agreed to accepting some form of budgetary pain, when they see those who complain the loudest avoiding their share of it.
The short election cycle and the shrillness of interest groups contribute here, adamant that the cuts come at someone else’s expense. I get it that sometimes there really are bad policies that governments need to change, but a lot of the time these groups will make a lot of media commotion and exaggerations about anything that will adversely affect the people they represent. This is again why governments need to get away from the line that no one will be worse off. It is also why I get so frustrated by the partisan nature of our political system. I would really like both major parties to sit down and sort out some kind of negotiated long term plan they both can agree on, instead of coming up with a new direction every time the government changes and blaming the previous one.
Deficit spending
As most households would agree, there are times when you do not run your budget to a yearly surplus. Major outlays of expenditure for renovations, holidays or new vehicles or equipment can mean in some years our expenditure is significantly greater than our earnings. Similarly, unexpected events such as loss of work, illness and the like can push our yearly budget further into the red.
Very few people panic when this happens. Deficit spending is very common throughout the world. If it wasn’t, credit card companies would have no business.
What doesn’t work is running an annual budget that is always in deficit. If every year I spend more than I earn, at some point I will lose my house. So when this patterns begins to become obvious, I need to find ways to curb my spending habits. This might mean giving up one or two things and potentially lowering my standard of living for a few years. If I just keep doing nothing and hoping something changes by some miracle, chances are I will lose still lose my house. Complaining that it is not fair and that I can’t tolerate the loss of certain privileges does not fix my bottom line. Refusing to agree to any changes in my spending habits also does not address the problem. Nor does blaming my wife for her spending habits (hasn’t stopped me trying from time to time). If I don’t make some form of change myself, I’m going to be homeless.
In much the same way I am not too concerned by a national budget that goes into deficit when we add expenditure for major infrastructure upgrades such as the NBN (not that I am happy with the performance of NBN Co itself, but that is a different story) transforming our economy to focus on clean energy or unexpected humanitarian aid such as resettling refugees or providing disaster relief measures.
And in just the same way, when our national budget is in deficit for years on end, I start to worry about the debt that must be accumulating.
According to the recent MYEFO, the timetable to return to surplus is pushed out yet another year. In itself this wouldn’t really bother me. In fact, I am surprised so much attention goes to the yearly deficit or surplus (I still vaguely remember them) status of the budget, rather than the much more telling figure of our national debt.
National debt and what can be done about it
Currently our national debt is higher than our entire national budget, meaning even if we wanted to, we could not pay it off with an entire year’s revenue. While this is not as alarming as it sounds and there are a number of countries who are considerably more profligate than us, it is hardly desirable either. For this reason, I accept the thesis that steps need to be made to stop the pattern before it spirals out of control. A little bit of pain now is better than a lot of pain later. The challenge, of course is choosing what type of pain, the timeframe it is spread over and who bears the brunt of it. I would not want the government to go into panic mode and try to fix everything too quickly, as this can have adverse effects such as reducing economic activity and revenue. So everything would have to be done carefully, but a national debt approaching 500 billion dollars and an aging population means we would be well served by taking a few steps sooner rather than later. How would I do it? It’s hard to say without knowing a lot more about our national economy and macroeconomics in general, but I do have a few thoughts on the matter.
Cutting expenditure allowances to politicians seems an obvious starting point after Brownwyn Bishop, Barnaby Joyce and Julie Bishop made them soft targets in this area, but what else can be done?
With the revelations that most of the most profitable companies in Australia paid no tax last year, it is pretty obvious why they wanted the Tax Secrecy Act passed. I’m sure the argument will be made that taxing these companies will act as a disincentive to them doing business in Australia and could actually cost more revenue and jobs if they move operations to another country. I have read The Goose that Laid the Golden Egg and I realise that it can be advantageous to give companies support and tax breaks to secure employment for Australian workers, but I think there is a medium somewhere. If a company makes several billion dollars they can probably afford to pay some tax. This goes double for resource mining companies and I was disappointed that they were able to derail Kevin Rudd's attempt at a meaningful mineral resource tax with their media scare campaign.
I’m not actively against cracking down on welfare fraud and tax avoidance, as long as this actually makes economic sense. When you have to employ more people to chase these cases up, then you have to be reclaiming more money than you are paying to the people investigating and chasing the debts.
I have said elsewhere that I think there is both a moral and an economic case for closing the detention centres in Manus Island and Nauru and I would love to see that happen.
Any suggestions that aren’t populist?
None of the ideas I have discussed so far have actually been ones that would impact on me directly, but I would accept measures that did if they were necessary and I could see it was part of an effort to ensure future national prosperity. I think if governments are going to be serious they need to get away from the rhetoric that no one will be worse off and start talking about the fact that everyone will be a little bit worse off for a short while.
An increase in the GST has been being discussed for much of the year and I suspect it will happen in the next few years. While I never like paying more tax, if that is what has to happen to continue to maintain our roads, hospitals, schools and so on, then I can live with that. The concern that policy makers need to wary of with the GST is that if they get too greedy and increase it too much, increased prices could act to stifle economic activity as people try to reduce their spending. I’ll leave that to those who are more knowledgeable about macroeconomics to decide, but I’m not philosophically against it.
A bit like increasing the GST, short term public service pay freezes would provide significant savings, but would be obviously unpopular with those affected. Still it does provide another option for the government, but it would probably need to be offset somehow or matched by other measures that would affect other sectors of the economy.
Much as I love sport, if we had to make some cuts to actual spending, I think the Australian Olympic Committee (well the Olympics themselves) and other publically funded national sporting bodies and teams are of questionable importance. I don’t think there would be much downside to cutting funding there for a few years. Anyone that says it will lead to increased obesity because kids won’t play sport doesn’t know kids. I would be a little more careful with cuts to the ABC, and institutions such as NIDA, as they actually drive a national industry and cuts would most likely be reflected in decreased economic activity.
A common temptation for policy makers is to downsize agencies to reduce expenditure on wages, but this is not always well thought out. Often many more redundancies are given out to people who were going to retire anyway. Then it becomes apparent that the staff left cannot achieve the required output without putting in expensive overtime or outsourcing additional labour. However there is often a fair amount of dead wood in a large public agency so there will be times for this approach. It just needs to be done carefully and thinking ahead.
So what will happen?
I like to think that our elected representatives are considering these among a range of options to improve the nation’s fiscal position. While they don’t need to panic, I would like to see some progress towards reducing our debt in the near future. Something else that is important is that when they do come up with a plan, that it is implemented with more or less full fidelity. Every year we see budgets pulled to pieces going through the senate so that only parts of them are approved, leaving holes which inevitably increase deficit and debt. This is also the kind of thing that angers those who have agreed to accepting some form of budgetary pain, when they see those who complain the loudest avoiding their share of it.
The short election cycle and the shrillness of interest groups contribute here, adamant that the cuts come at someone else’s expense. I get it that sometimes there really are bad policies that governments need to change, but a lot of the time these groups will make a lot of media commotion and exaggerations about anything that will adversely affect the people they represent. This is again why governments need to get away from the line that no one will be worse off. It is also why I get so frustrated by the partisan nature of our political system. I would really like both major parties to sit down and sort out some kind of negotiated long term plan they both can agree on, instead of coming up with a new direction every time the government changes and blaming the previous one.