We all want to avoid budget pain

One of my favourite novelists, Ross Macdonald, has his detective, Lew Archer, tell a woebegone probation counsellor, who has just killed a man who might have been threatening his pregnant wife, ‘There is a kind of economy in life. You don’t spend more than you have, or say more than you know, or throw your your weight around more than necessary.’ (It’s from The Instant Enemy. Macdonald, for those who don’t know, inherited the mantle of Raymond Chandler, and his novels are just as good.)

I happened to come across that line just after I heard yet another group argue that their concerns simply had to be superior to any imagined necessity to deal with any imagined budget deficit. I’ve heard these pleas before, and I’ll hear them again in the future, I’m sure. Years ago the tips for the approaching budget would be ‘Cigs, beer up’. Last week we learned that petrol would be up, maybe also a ‘debt levy’ that wouldn’t somehow be a tax.

To an old fellow, this is all pretty much par for the course for a ‘horror’ budget. I would have to say that in my opinion the Abbott Government has not explained the problem of the forthcoming budget in the most professional and sensible way, but maybe it is the spin of the media which makes me think so. But for those who might be as puzzled as me, here is my take on the budget problem, with the warning that there is not a single figure in it, and that I am not an economist, an accountant or a former Treasury official.

All of us have budgets, even if they’re implicit ones. Governments and most organisations distinguish between capital and recurrent funding. We and they borrow money for big items, in our case for houses and cars, but we try not to do so for groceries or other staples. The assumption is that we should make our expenses a bit lower than our income. It’s just less embarrassing all round that way. Mr Micawber has a famous saying about it.

Governments make major decisions that have long-term consequences, so they budget ahead so they know how much revenue they’ll need to pay for them. It’s important for them not to make too many of these major spending decisions, and even more important that their forward estimates of revenue are pretty accurate. The last Labor governments, in my opinion, made too many major spending decisions, and their estimates of future revenue, provided by Treasury, proved increasingly to be awfully optimistic — awfully, because the outcome is a huge shortfall between actual revenue and agreed expenditure, leading to great deficits in the Commonwealth Government’s budget, and a rapidly growing national debt problem.

The present Government has to deal with it, and the Labor Opposition would have had the same problem had it won the last election. Heaven above knows what it would have done. Governments have choices. They can borrow, they can cut, and they can raise taxes — and they can do all of these things in almost infinitely different proportions. If they cut too much, or tax too much, many people might go into a complete risk-avoidance strategy, which will reduce the performance of the economy, meaning that economic growth will decline, more people will be out of work, tax revenues will fall, welfare payments will rise, and so on. That would give the Government an even worse problem.

Governments can borrow, and Australia has a high credit rating at the moment, so borrowing is easy and relatively cheap. But each time you borrow, you soon have to pay some interest on the borrowing. In time the interest bill ramps up. In 1932, the interest bill of the NSW Government, at the heart of the Depression, represented around one quarter of its expenditure. Borrowing is bad for you, unless it is for something like infrastructure that is intended to improve productivity generally, and thus in some sense pay for itself, or for wartime emergency.

In either case, unless you default, and that is the absolute last resort, you have to pay off not just the interest, but the principal as well. To be able to do that, your economy has to be be strong and improve steadily over time — and you need to reduce spending on other things so that you can pay the interest and put something aside for the principal. Oh, and we are an electoral democracy, which means that the Government has to have some eye on the next election as well.

So there it is. There is no obvious solution to the Government’s present predicament. There is no doubt that this will be a difficult and unpleasant budget. There is no doubt that we will be worse off in a number of ways. There is no doubt that promises will be broken. There is no doubt that whatever the Treasurer proposes there will be able people pointing out that he could have done this or that instead. The Conversation offered the opinion the other day that the budget would show the Abbott Government’s ‘vision’ for Australia. I’d have to disagree: the budget will show us how the Abbott Government proposes to get itself and us out of the mess it and we are currently in.

And I hope that there is at least some widespread understanding that to go on as we have been going is not only morally indefensible, but will simply provide us with even worse problems in the future. Joe Hockey’s first Budget will, at least for a few days, make him the most generally disliked person in our country. But if he does a good job in finding the right mix of measures, he may in time be seen standing up to receive his Award as the Best Treasurer in the World, according to someone, somewhere. It has happened to Australian Treasurers before…

 

 

Join the discussion 8 Comments

  • BoyfromTottenham says:

    Good post, Don. Plain English, no weasel words or phrases, just the honest facts that when you are in a (deep) financial hole, digging your way out is (really) hard yakka. But the alternative is far worse…just ask Mr Micawber. But some folks apparently don’t read books by old dead authors. Not trendy.

  • Dasher says:

    I agree, may I add that if nothing else the conversation has started. Labor and the Greens have opted out for now preferring a more populous stance. As essentially an party of activists who will never have the responsibility to lead, the Greens will probably stay out of the serious conversation, but Labor does have sensible ideas if they could get past their sulking and they will not be able to play this game for ever….in the meantime they are letting their side and the country down.

  • Gus says:

    Let the US Sequester be a valuable lesson. The government (the US one) was forced to swallow uniform budget cut all across the board. Everybody, including the opposition that did the forcing (even though it was Obama’s idea initially, but he never thought they’d take him up on this) expected doom and gloom.
    And… nothing happened! Only one, just one person, lost the job on account of the Sequester (everybody’s excited to find out who). The departments economized here and there, as they have plenty of margin to do so–it transpired–and the cuts were met without bloodshed. Without any pain whatsoever, as it turned out.
    The US government is unquestionably the most wasteful institution on Earth, this on account of great wealth it manages and its size. But all governments are wasteful, by the very definition of what a government is. Perhaps the governments of Switzerland and Singapore are less so, as both societies are veritable examples of civic virtue.
    I’d make a bet, that whatever the size of the forthcoming budget cuts in Australia, and however loud the howls of outrage, they’ll be met without ado and the ordinary people of the streets will barely notice.

  • margaret says:

    Have no heroes, people like Joe Hockey and Tony Abbott are not especially gifted – they love power and have big egos. They can’t get us out of any mess that may well (did?) have begun its path with the Howard government (even if exacerbated by the Rudd/Gillard era.)

    • Don Aitkin says:

      My own view is that the only criticism that can be levelled at the Howard Government with respect to the current budget mess (which is real) is its use of tax cuts late in its term. But that is being wise after the event.

  • margaret says:

    I would agree that we are in a mess and that profligacy has to be reined in. Household debt, superannuation concessions for the already well off, and negative gearing which hasn’t helped the out of control rise in home affordability that has either shut many young people out of home ownership or saddled them with the household debt that is a millstone for their foreseeable future – these things constitute the mess. How does this government’s budget help those major problems is what I want to know.

    I’m sure it’s easy to say tighten the belt when you can puff on havana cigars, eat out at the best restaurants, buy the best ingredients in your grocery shopping, own a second home without stress, plough your excess salary into super, send your kids to the “best” schools etc. etc.

    I’m not seeing how Mr Hockey’s budgetary measures are helping to address that mess.

    I believe if you are fortunate enough to have a good job with non discriminating employers and workmates (ageism exists) and your health is intact, that working until or past 70 is great – how many are in that position by the time they reach their sixties?

    • Don Aitkin says:

      Margaret, these are good questions, and I don’t have an answer to them. Nor, I think, would the treasurer have — he would simply say that his first priority is to stop things getting worse. It may be that there were better ways to economise, but the alternatives I’ve heard don’t have any figures attached to them.

      • margaret says:

        Thanks for responding. I just have to wonder whether if Ms Gillard had not been subjected to a witch hunt and had miraculously won another election (and yes, it would have taken a miracle), whether the circumstances of the country we live in would really have been so much more hideous than the reigning government’s solutions to the ’emergency’. It’s a rhetorical wondering and has no answer because this is what we’ve got. (And I’m not moaning about my circumstances, just completely sceptical about the ‘hope and opportunity’ on offer).

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