Fiscal Policy and Pickles for the Economic Potato


Budget talk can be nauseating but it is important. Understanding what all the fuss is about is even more important.

Some of you may not care for politics. Some of you may not care for economics. Naturally a lot of you don’t care about the Government’s yearly budget announced last week. Even if you’re the kind of person who would rather spend their Monday evening removing their own kidney with a blunt piece of cutlery than have to listen to a politician justify themselves on ABC’s Q&A; even if you’re the kind of person who thinks to negative gear has something to do with a car’s reverse function; politics, economics, and the budget affect you. It effects the type of society you live in, what you collectively choose to value, who deserves what, and what means are justified to achieve said ends. So, if this paragraph has got you walking toward the cutlery drawer, tracing an outline to locate your kidney whilst also kinda sorta making you want to know more, then this article is for you.

Politics is about conflicts in ideology. Economics is about the allocation of resources. Neither are black and white or good and bad. It’s very rare that people agree in all things politics and all things economics.This is why you will so often find yourself rolling your eyes at some of the pointless argy bargy in popular debate while you continue scrolling in the eternal search for the next fresh meme.

The truth is the world is in a bit of an economic pickle. What we’re experiencing is a sluggish hangover from the excessive largesse that came to a grinding halt around ten years ago. The most notable halt being the Global Financial Crisis (GFC) that revealed itself in the financial system as a result of excessive lending. The ripple effects are still showing themselves today. Europe is grappling with government debt issues that make ours look about as scary as a miniature dachshund puppy. While even China is staring down the Y-axis of slowing economic growth.

Australia itself avoided such a debt crisis in 2007-09 thanks to a healthy government surplus to the tune of $20 billion. This is no thanks to the oft-touted ‘fiscally conservative’ Howard-Costello era (the short one with the eyebrows and his tall mate). It instead had everything to do with Chinese demand for the stuff we dig up out of the ground. The International Monetary Fund have since pointed out that of the periods of excessive spending by Australian government 2003-07 take home the meat platter for fiscal profligacy. Feel free to use that the next time your conservative Liberal Party hack uncle tries to tell you “Howard was the best thing to ever happen to this country”.

As income earners we keep the economy ticking through our consumption habits and our saving habits. Large chunks of household saving is put back into the economy in the form of investment that naturally then goes to the pocket of someone else who in turn consumes, saves and/or invests. During economic pickles however the certainty that we can consume and invest in the same way we did previously goes out the window. Households and businesses tighten their belts and incidentally the pickle becomes even more ominous.

Enter fiscal policy. Fiscal policy is the tool of government that allows it to adjust its spending levels and tax rates so as to monitor and influence the nation’s economy. The role of fiscal policy during a time like we are currently seeing is to bring the economy back to producing at its optimum level.

In times of economic downturn fiscal policy is the hero that steps in to replace loss of economic activity. The government should not be tightening it’s belt as Abbott and Hockey circa 2013-14 would have us believe. Job creation through infrastructure spending like Turnbull’s $20 billion pledge for an inland railway in last week’s budget is fiscal stimulus designed to make us humble consumers feel more comfortable waving our credit cards around.

Overdo fiscal policy however and the public spending crowds out potential investment from the business sector. The Howard era did not necessarily overdo fiscal policy but they did rely too heavily on consumption trends that came from an increase in household debt. They most definitely relied too heavily on the possibility of the mining boom continuing on forever and ever.

Enter politics. It is very difficult politically to wind back spending. Even with amazing brains such as Ross Garnaut warning us that the economy would soon be entering the ‘Dog Days’, Howard had elections to win. It is even more difficult to wind back tax breaks given to wealthy people during times of economic largesse as they are often the source of political power. Instead it is easier to pretend the future looks bright.

In 2010 Julia Gillard was facing the beginning of the government ‘debt emergency’ narrative you might remember. Labor governments had spent the surplus inherited from the Howard government on fiscal stimulus and the opposition were out for blood. The mining boom was predictably coming to a grinding halt so the worst days were yet to come. And yet, Wayne Swan as treasurer in 2010 claimed a government surplus was just three years away.

At the time Swan had incorporated a new assumption into the budgetary estimates. It’s a built-in optimism generator that assumes a period of below-trend growth will always be followed by a period of above-trend growth. The idea was not so crazy at the time as it was based on real figures of the 1990s. Rainbows, sunshine, lollipops and a surplus-riding treasurer beaming with pride was only a few years away. Turnbull himself has branded this years budget as “Better days ahead”. This assumption, along with a plethora of other overly optimistic truth avoiding predictions has remained each year since and each year it has been wrong.

The risk of political failure sees successive treasurers using such flimsy assumptions to encourage our trust and improve their popularity. The result is optimistic fiscal policy that is handed down on a false promise of fruitful returns. This in turn means the level of government debt is here to stay with a hefty net interest payment of $13.4 billion this year alone. To put this in context this year the government is spending more on the interest accrued from its debt than it is on the pharmaceutical benefits scheme at $12.4 billion. So you see like so many things in life fiscal policy and the resultant government debt is neither good nor bad but depends entirely on contexts and forecasts for the future.

Policies like the medicare levy that put an emphasis on healthy people and healthy workers have good returns. Funding students based on their level of disadvantage creates structural security with a long-term vision. These examples of Turnbull’s vision are promising. Demonising the unemployed through mandatory drug testing for the sake of political fodder is not promising (not to mention hugely costly). Consistently schizoid attempts at housing reform to protect the wealthy from losing precious tax breaks through negative gearing and the capital gains tax concessions are not promising. Ignoring the threat of climate change so as not to upset industry is not promising. Ironically a carbon tax that puts a price on the pollution that is set to be hugely costly to Australians in the future could in fact be the kind of policy that sets meaningful budget reform on track. When politics is involved the need for truth is bumped by the need to appease those with power. Our political leaders have asked us to trust them but why should we?

Betrayal erodes trust and for younger generations especially there is little cause for trust and a lot of evidence of betrayal. Australia in its current situation is not facing the economic trauma of other parts of the advanced economic world. We are relatively safe. To stay safe however we need to trust that our future is in good hands. This requires the truth from both sides of politics. It requires an educated and economically literate voting polity. It requires our political leaders to leave their differences at the door and make some attempt to co-ordinate and deliver the politically difficult outcomes needed.

The future lies in the hands of millennials. The most educated and connected generation yet, millennials face a future of uncertainty never experienced by their elders. In this uncertainty though is a chance to explore the future of ideas, economics and politics and do it better than predecessors. A future that is less divided and not dictated by bullshit argy bargy. A future that instead faces hard truths and political difficulty. A future where articles about potatoes and pickles can only be about potato salad and not the economic security of Australians.