Wednesday, November 26, 2008

On the QT: "Faux outrage Day"

Before Question Time today, Kevin Rudd made a Ministerial Statement on the Global Financial Crisis. He spoke for 22 minutes, but all that really mattered was the 30 odd seconds it took him to say the following:

"If Australian economic growth slows further because of a further deepening of the global crisis then it follows that Australian Government revenues will reduce further. Under those circumstances it would be responsible to draw further from the surplus and if necessary to use a temporary deficit to begin investing in our future infrastructure needs, including hospitals, schools, TAFEs, universities, ports, roads, urban rail and high speed broadband. Such action would support growth would support families and jobs and would be undertaken in the national interest."

The key phrase was "temporary deficit". When he uttered that line, the Opposition howled as though Rudd had said he intends to legislate against small puppies and kittens. It was actually a fake howl, because, as Malcolm Turnbull pointed out in his reply, the Government had given the opposition a copy of the speech 45 minutes before hand, so they knew it was coming.

Now I have to say the Government has handled the whole "deficit" prospect rather poorly. It's been obvious for a while that there is a strong likelihood that next year the budget may go into deficit. But instead of admitting as much, the Government has been dancing around saying everything except the word "deficit". It enabled journalists to start talking like it meant something, and using dopey phrases like "the D word". It also allowed Turnbull to go around laying the foundations that running a deficit is a bad thing, and proof of economic irresponsibility.

It is of course no such thing.

I don't give a damn whether the budget is in deficit or not, so long as being in deficit means Australia avoids going into a recession, and so long as being in deficit is not creating high inflation.
Now 10 months ago, running a deficit would have fuelled massive inflation. In fact, if in May Swan had put down a deficit budget he would have been the dumbest economic hick of all time.

When growth is strong, the Government doesn't need to step in and help increase demand. What it should do is spend the money on non-growth areas such as hospitals, education, roads etc and, most importantly (in an economic sense), long term infrastructure. But when demand disappears, the Government needs to step into the breech. Provided not all of this is just throwing money away (I don't think we need anymore increases in first home buyer grants...), there is nothing wrong with a deficit. Nothing. Zip. Zilch, Nada. (Heck even the 'great' Peter Costello ran a deficit in 2001-02 (he just didn't tell anyone about it until afterwards).

Saying we must stay in surplus is like telling someone they have to keep living in a house with a hole in their roof rather than extend their mortgage and repair the hole. If keeping a surplus means a recession and high unemployment, ask yourself if you still want it.

But don't tell the Liberal Party this; for every question today was focused on how the PM "has signalled he is driving the Australian budget into deficit". Oh geez! Run for the hills Ma Baker, the deficit's coming!!!

Joe Hockey, for one declared that today was "Deficit Day", which perhaps did not come out sounding as catchy a phrase as it sounded when he was practising it in his office beforehand... His confected indignation perhaps was due to the fact that Turnbull's wonderful tactic against the Government was now out of date. The deficit possibility had been acknowledged, now the debate was down to whether or not that was good or bad. And the Liberals are locked in to saying it's bad.

The big problem for the Libs is that virtually no one outside of the Liberal Party room thinks going into a deficit is bad. Let's take a vox pop of financial people around the traps:

Solomon Lew said on Tuesday "massive" government spending programs were needed to prevent a jump in unemployment. "The government will not survive if it doesn't go into deficit," Mr Lew told journalists. "There is no doubt they will not be able to manage the economy without going into deficit ... the government is kidding themselves if they let this go too long," he said.

Access Economics' Chris Richardson observes that it's not economists who draw the line between surpluses and deficits — "it's politicians". Richardson believes this is "a taboo we've got to break fast. The Government shouldn't be afraid of a deficit — we need one."

Ross Gittens: All economists believe that whether deficits or surpluses are good or bad depends on whether they're appropriate to the economy's circumstances at the time.
It's appropriate (and desirable) for budgets to fall into deficit when the economy is entering or leaving recession (or a serious downturn), whereas it's appropriate and desirable for the budget to move into surplus when the economy recovers from recession in the expansion phase of the business cycle.

Luckily for Rudd, despite having been too wimpy on suggesting the deficit might happen, he has been saved by Turnbull's need to always go over the top. His desire to make the deficit the big issue, rather than employment or growth means now he has to argue that the Government should stay in surplus. It gives Rudd the chance to say Turnbull is for caring about dumb economic numbers, and against real numbers - growth and employment.

Turnbull says that he won't give the Government "a leave pass to go into deficit", and that a deficit would be a sign of "lazy economic management".

Well given he thinks it fair enough to say former ALP governments are addicted to deficits, I say let's judge Rudd's economic management against that of the brilliant Howard and Costello. That should be fair - though probably a bit of a hard ask for such lightweights as Rudd and Swan. But oh well, let's ask Chris Richardson what he thinks of Howard's and Costello's budgets:

"We pissed the good years up against the wall in the usual ill-disciplined blowout of tax cuts and big spending during the boom.''

Ouch, ok, what about their economic policies:

With the days in which China was handing the federal government enough money to pay for any crappy piece of policy now receding fast..."

Hmmm. "pissing up against the wall"... "crappy piece of policy"... Maybe Turnbull would do best to forget referring to the past, he doesn't want to make it too easy for Rudd and Swan.

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