Economic History Lesson: The Howard/Costello Era

Along with Peter Martin, my favourite economics journalist is The Australian's George Megolagenis.

He is consistently unbiased. He'll call it like he sees it, and isn't afraid to bag either side. Generally on his blog he gets criticised for being a left winger - this is because right wingers hate anyone who does not bow down before the supposed greatness of Howard and Costello.

His article in yesterday's Oz is a great case in point. He absolutely skewers the argument that Howard and Costello were good economic managers:

We were told there would be surpluses into the next decade. In fact, the budget was shot at the time of the election because too much of the revenue windfall from the resources boom had been handed back as tax cuts and increased spending.

"The structural budget balance deteriorated from 2002-03, moving into structural deficit in 2006-07," Treasury said in budget paper No1 on Tuesday night.

The Coalition will resist this reading of recent history. It will want to argue that a larger surplus on paper in the good times would have been untenable because the electorate wanted its money back.

It should give up now. Peter Costello left a trail of clues in the extensive interviews he gave to authors before and after the election that John Howard's mania for spending was damaging the integrity of the budget.

What he is stating when he means the Budget in 06-07 was in structural deficit, is that if tax receipts were at average levels rather than mining boom levels, then the budget would be in deficit. The reason for this is the tax cuts upon tax cuts given out by Howard and Costello, and the masses of middle-class welfare that they put into the system.

It is truly damming (though I'd suggest most people won't grasp the facts).

To illustrate his point, Megalogenis works out what the Budget situation would be if the Govt had done what Turnbull (and Costello) have been arguing - ie not do the stimulus package - the "cash splashes" and the infrastructure spending:

A stimulus-free budget would have faced deficits of $25.6 billion in 2009-10, $38.4billion in 2010-11 and $31.3 billion in 2011-12. That was, in effect, the Costello trajectory. It would have been worse, of course, because no spending would have made the recession deeper and crunched revenues by even more.

So we're still in deficit, but we're in a worse position economically because there has been no stimulus, no lift in retail sales, no lift in housing, and no lift in building works.

But just to show he's not a Labor hack, Megalogenis turns the torch onto Rudd and Swan as well:
Swan understood the problem before Treasury did. Yet he dodged the logic of his revelation by increasing government spending in the years of the recovery.

Swan's second budget delivered in deficit what Howard and Costello were not prepared to secure in surplus: a massive pay rise for pensioners.
...
Swan's budget is gambling that our long boom won't lead to a long bust. Recovery is assumed to be around the corner, and the surplus is meant to follow, eventually. The journey to surplus is expected to be completed six years from now, roughly the same timeline it took to balance the books after the last two recessions.

But those two fiscal repair jobs required horror budgets: Paul Keating's in a series of statements between 1986 and 1988, and Costello's in 1996.

Swan didn't deliver a horror budget on Tuesday, although the savings on the part-pension, on the health insurance rebate and family payments should not be underestimated. They are meaner than they appear on paper and do their work in the next decade. But Swan did bring the Government one baby-step closer to the breakthrough reform the thinkers on both sides of politics are quietly willing him to embrace.

So yes Swan did OK in the Budget, but he and Rudd have a long way to go to get the Budget into structural surplus. To do that is going to be really tough.

However the ALP's cause isn't helped by the fact that the Liberal Party is still living in Budget fairy land. Their decision to vote against the means testing of the private health rebate suggests they still think the mining boom years are going strong.

But that is how it always is. No opposition is going to come out in support of big spending cuts - it's up to the Government to do them, and it's up to the Government to sell them.

Good luck with that.