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…