Today’s announcement by the government that it has a $12 billion “black hole” had the status of a confession. It needn’t have. All talk of “black holes”, “revenue shortfalls” and “structural deficits” remains trapped in a rationalist approach to economics, which is being increasingly discredited around the world.
The rationalist, or neoliberal, approach assumes that budgets simply must be balanced – or preferably in surplus – most or all of the time. It’s an inherently conservative approach that denies governments the possibility of going into deficit to fund expensive, long-term infrastructure projects which will have overwhelming benefits for the community. It’s the approach taken by the Tony Abbott-led Opposition, which is telling everyone who will listen that Australia must “urgently” redesign its budget so as to “live within our means”. The two biggest problems, according to Mr Abbott, are Labor’s debt and high taxes.
Not only is this simply rubbish, but the experience of the rest of the world suggests that it is also economic madness. We can see the flaws in Mr Abbott’s arguments by looking at the figures. Public debt in Australia is not a problem. The ratio of public debt to GDP is about 27%, compared with an average of about 90% for developed economies. And Australia is well down the list of effective taxation rates among OECD nations.
Indeed, on standard economic measures, Australia is not only performing better than the rest of the world, but performing better now under Labor than it was when Labor took office from the Liberal-National Coalition in 2007. Since then, GDP per capita has climbed 13%. Real wage levels have increased 27%. Household savings have more than doubled. Labour productivity is now at an all-time high, and is a clear eight index points higher than in 2007.
Pension levels; superannuation; international credit ratings; the value of the Australian dollar; industrial production growth; foreign exchange reserves; the balance of trade; the current account as a percentage of GDP; the government ten-year bond rate: on all these measures, Australia has improved its economic situation since 2007, while the rest of the world has moved in the opposite direction.
Perhaps most strikingly, the national interest rate, which according to Liberal Party propaganda is always lower when it’s in government, is now 3%, compared with an average of 6% under the Howard government. And five years on from the global financial crisis, Australians are living with an unemployment rate of 5.6%, compared with well over 7% in Canada, the USA and Britain.
Anyone listening to Mr Abbott would assume that Australia is on the verge of economic ruin. In essence, Abbott has told us that we’re at real risk of going the way of Europe unless we elect him to “stop the taxes”.
The reason Mr Abbott’s strategy has worked to date is that problems do exist for people, but not in the way that he portrays them. Economic indicators might suggest that we’ve never had it so good, but the hardship felt in the suburbs tells a different story. The folly of three decades of free-market ideology is now obvious: families tethered to unaffordable mortgages; new suburbs underserviced by public transport and infrastructure; a public education system so run-down that it forces parents into the private system. It is the dissatisfaction with these outcomes that Mr Abbott is tapping into, but he’s proposing the wrong solutions.
We’re now seeing two consequences of neoliberal economic rationalism in practice. Firstly, there are huge structural deficits, not in the budget but in social infrastructure. The hollowing out of the public institutions favours the bottom-line profits of existing corporates, but relegates government to the role of mere manager. The privatisation we never talk about is that of risk, as our pension plans have now been opened to the vagaries of the stockmarket. Housing becomes less affordable. Public transport becomes less universal and less, well, public. Governments find it increasingly difficult to draw up meaningful budgets, as revenues are tied to fluctuating international demand for export commodities.
The gap between the richest and poorest in deregulated, privatised societies has grown wider, as it has in Australia since the mid-1990s. And the concept of a public sphere is all but gone, a whole generation growing up in a world in which they’re encouraged to think only about how to succeed for themselves in a game whose rules have been dictated by massive corporate interests.
The second, more immediate, consequence of neoliberal theory in practice can be seen in the effects of Europe’s embrace of the austerity doctrine in the wake of the GFC. First, in 2008, the consequences of too much “deregulation” in the global finance industry became apparent when thousands of low-income earners had to walk away from their homes after their so-called “low-doc” loans were revealed as toxic assets on the imaginary books of financiers. The subsequent collapse of globally significant companies led to a cessation in the flow of liquid capital, which then turned national debt into disastrous impending liabilities for countries across Europe and elsewhere.
Initially, proponents of the neoliberal orthodoxy tried to shoot the blame home to those who hadn’t properly listened to their prescriptive advice. The problem was not too much deregulation; it was that too much regulation remained in the finance and other industries. And if governments hadn’t tried to fund their expenditure with debt, they wouldn’t be in strife. Rather, governments should have pursued budget surpluses at all costs, to ensure that public spending remained less than public revenue. Given that the proponents of neoliberalism had also been arguing for massive decreases in taxation on corporate profits and personal income, the cuts to public spending they required had to be deep and dramatic.
By about 2009-10, governments had a stark choice: either accept the prescriptions for rationalisation and cut spending deeply, or try to tackle their looming fiscal crises with pro-growth strategies which would hopefully work to simply inflate the debt away. The choice was framed as the ultimate battle of the century between two dead economists: Milton Friedman and John Maynard Keynes.
Governments responded in one of three different ways. The first, which was the response of the European governments, was to continue to adopt the so-called “free market” mantra and impose severe austerity on their populations with the aim of bringing national debt under control. The second, which was the response of the Australian government, was to pour public dollars into key growth industries (such as construction), which would hopefully tide the economy over until consumer and business confidence recovered. The third, which was the American response, was to be caught hopelessly betwixt and between these approaches — a consequence of a Congress which wanted the former and a President who wanted the latter.
Five years on from the global financial crisis, we have the provisional results of these strategies. Europe has not recovered. Its public debt has crystallised into a real problem because, in an environment of structurally low economic growth and hence inflation, governments cannot rely on price increases over time to in part inflate that debt away. Europe is now facing another desperate choice: does it continue to attempt to repay the debt (which means more cuts and no more spending – and no more growth), or does it default on the debt, which would presumably cause havoc on the international money markets?
The United States is seeing a very slow recovery. Unemployment remains persistently high, and there’s not much more that can be done from a monetary perspective because the interest rate is about as low as it can go. That country also faces a choice: does it go the way of Europe and cut public spending, or does it risk the inflationary bogeyman and stimulate the economy with debt-funded public spending?
On any sensible analysis, then, the unorthodox approach by the Australian government has been well and truly vindicated. It’s worth pausing to ask why we’re about to turf the Labor Party out of government, in favour of the Liberal Party led by a man who continues to insist that the problems are debt and high taxes. Of course, Labor hasn’t helped itself: for years Wayne Swan was running around the country promising a surplus come hell or high water. Only recently has he begun to explain that cutting spending will only invite unemployment and a recession.
Politicians and other non-economists have for too long deferred to economists who insist that policy must be dictated by neoliberal “truths”. But the thirty-year neoliberal experiment is drawing to a close. The time is now well and truly nigh for a reinvigoration of strong institutions of state, to encourage common civic-mindedness in the population, to begin work on the massive backlog of neglected infrastructure projects, and to ensure that the most valuable of all 20th-century inventions – the welfare state – is not further corroded by more implementation of ossified economic theory.
In Australia, as the election approaches, we need to be asking all candidates just how they will respond to these new economic realities. Unfortunately, much of the discourse remains trapped in an empirically unsound regurgitation of neoliberal dogma about “structural budgetary deficits”. To the contrary, Australia should be using its AAA credit rating, the low price of money and its very sound public debt levels to borrow in order to fund much-needed social programs and public infrastructure.