Why Wayne and Julia are hooked on ‘deficit fetishism’

“And then children, we returned the budget to surplus…” AAP

If pre-budget statements by Julia Gillard and Wayne Swan are an accurate guide, this year’s Federal Budget is shaping up as marking a change in the direction of Commonwealth taxing and spending priorities for the foreseeable future.

It appears the government is preparing the public for a tighter rein on expenditure in order to move the budget from deficit, which many agree was necessary in the circumstances of the global economic crisis, to surplus.

The argument most usually relied upon is this: now that the effects of the crisis are behind us, we should move the budget back to surplus as quickly as possible.

Julia Gillard’s statement: “we have an economy that is strong … and the right thing to do with an economy that is moving towards full capacity and full strength is to deliver a budget surplus” needs to be looked at in context.

A disease called deficit avoidance

For the past three decades, a period termed the neoliberal era, Australia has suffered increasingly from what some economists and various commentators have called “deficit fetishism”, a disease manifesting itself in a stated belief that a deficit is (almost) always to be avoided, while a surplus is (almost) always to be preferred.

Despite the valiant efforts of some authoritative people to kill off this idea, it lives on.

While there is room for legitimate disagreement among economic and social policy commentators about the degree and nature of budgetary shifts needed at any one time to take account of changing circumstances, deficit fetishism is simply mindless.

But what about Gillard’s statement? It appears to avoid the extreme version of the fetishism described. A closer look at her statement is needed. One fundamental problem with her view is that if the economy is moving towards full capacity or full strength, it is doing so very slowly.

This will be most obvious to the unemployed, the underemployed, and, most acutely, to the long-term unemployed.

“Derided by the ignorant”

It is a shocking indictment of the neoliberal generation of politicians that we have come to see a rate of unemployment of 5% as somehow acceptable.

Yet there is so much more that can be done in our society.

From infrastructure provision to the improving of services, government is in a position to move the economy to actual full employment (and full capacity).

Deficits are nothing more than forward spending, and they can play a very useful role when the economy is in danger of a slump or in times of significant unemployment.

They only cease to be useful when an economy is at full employment and meeting its capacity constraints.

During the economic crisis of recent years, the figure of John Maynard Keynes, derided by the ignorant during the neoliberal period, was belatedly returned to the category of respectability.

After wheeling Keynes in to assist in the crisis, Wayne Swan seems keen to get rid of him as soon as he can.

Consistently Keynesian

Swan would no doubt protest by saying that he is only being consistently Keynesian: if we are Keynesian in the downturn (by being prepared to run deficits), Swan says, we must be Keynesian in the upturn (by speedily returning to surplus). But more context is again needed to get to an authentic Keynesian position.

Even if returning to budget balance or surplus was the appropriate policy objective, and we have already noted that there are circumstances in which this will be the case, cutting expenditure is not the only way to get there.

Indeed, an authentic Keynesian position is to increase taxes when an economy is in the position that Gillard and Swan claim ours is in.

Yet to increase taxes – arguably the right policy in the present circumstances – contradicts one of the central tenets of neoliberalism.

Timid, and cornered

Too timid to confront neoliberal ideas, the government has cornered itself — unless, perhaps, it is willing to reduce particular kinds of expenditures that overwhelmingly favour the well-off and wealthy.

Called ‘tax expenditures’, a massive one in every five government dollars is spent in the form of a favourable tax treatment of one kind or another.

This vast amount of money, now exceeding $100 billion, or even a section of it, could be used partly to improve the budget bottom line — if that is what excites you — at the same time as doing genuinely important things: providing the funds to improve our hospitals, schools, universities, dental health, research and development, addressing regional unemployment.