Date created: 28 November 1996
Last modified: 18 November 1997
Maintained by: John Quiggin
John QuigginAugust 22, 1996
From the viewpoint of scientific economists, the 1996-97 Budget represents an unparalleled opportunity to test competing theories. For the first time we have a Budget that the economic fundamentalists in the policy elite can endorse almost without reservation. Expenditure has been slashed, with particular attention being paid to 'middle class welfare'. National savings have been boosted by cuts in spending in areas such as health and education. The burden of taxes has been reduced. The half-measures and compromises of the past have been done away with.
The remarkable discovery that promises come in two classes, 'core' and 'non-core', has allowed the government to introduce a charter of Budget honesty, while disregarding any commitments it finds inconvenient. (Since future 'non-core' promises will presumably disregarded by an ungrateful electorate, some further linguistic inflation is in store here. Presumably the next post-election period will see a distinction between 'hardcore' and 'softcore' commitments or something of the kind.) More fortuitously, the power of patronage has apparently converted 44 per cent of the vote into an absolute Senate majority, ensuring easy passage of the Budget bills and the proposed industrial relations reforms.
The only problem is that there is no reason to believe that the policies favored by the elite will lead to an improvement in economic performance. Although the pace of change has been accelerated, there is nothing here beyond a continuation of the policies of the past twenty years, policies that have consistently failed to yield either sustained strong growth or any relief from the upward trend in unemployment.
The response of the policy elite to evidence of their continued failure has been consistent in a general sense if not in the specific details. The policies of macroeconomic retrenchment and microeconomic reform have not been given a fair trial. Despite changes that would have been inconceivable in the 1970s, the labor market is seen as little more than a bundle of rigidities impeding progress towards the brave new world of the future. On the expenditure front, the Labor government failed to cut hard enough and deep enough. And so on. The policy program being advocated in Australia is based less on mainstream microeconomics and macroeconomics than on an ideological commitment based on dogmatic hostility to the public sector.
In microeconomic terms, the misallocation of resources away from areas of human capital investment such as health, education and community services, and towards general consumption expenditure will be made even worse by this Budget.The government claims that by cutting expenditure in areas such as education, the government is lifting a debt burden from the shoulders of young people. Leaving aside the fact that the HECS increase, whatever its merits, consists precisely of imposing a debt burden on yound people, the effect of the cuts will be to reduce the capacity of young people to acquire the skills needed for a modern economy. In the long run, the abandonment of the idea of the 'clever country' will place a far heavier burden on our children than any increase in public debt.
Because general consumption expenditure is heavily import-intensive, the current account deficit will be made even worse (those of my colleagues who argue that the current account deficit does not matter might prefer to say that the terms of trade will shift further against domestic production, but the adverse outcome is the same).
In macroeconomic terms, the government's strategy focuses on the second-order issue of public sector debt while ignoring the massive problem of unemployment. Apart from the human suffering and social breakdown it engenders, the persistence of high levels of unemployment is the main reason for our poor economic growth and for the government's fiscal difficulties. The previous government rejected proposals for a comprehensive assault on unemployment, opting instead to allocate around 2 per cent of its total outlays to Australia's biggest economic problem. Now even that paltry sum has been eliminated. The Howard government's strategy to fight unemployment begins and ends with a Bill making it easier to sack people. Not surprisingly, the target of 5 per cent unemployment by the turn of the century has been quietly dropped.
These arguments have been fought out many times in the past. The response of the economic fundamentalists has been consistent. Give us a free rein, have patience, they have argued, and prosperity will be restored. They have had a two decades of patience, and the last major obstacles to their policy program have been removed. It is time for the fundamentalists, in Australia as in the United Kingdom and New Zealand, to put up or shut up.
John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.
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