More than anything, the current crisis has revealed the paucity of logic that has dominated economic debate for far too long. The obsession over debt and deficit was always silly, and it sure as heck made for easy analysis: deficit bad, small deficit less bad, surplus amazing. But it needs to be thrown in the bin.
Less than a year ago the government was boasting how glorious was its economic management because it took the budget deficit from $10bn in 2017-18 to just $690m in 2018-19.
Awesome! Wow! I guess the economy was surging?
2018-19 saw both GDP and GDP per capita growth slow by the largest amount in six years and both measures overall posted their third worst results since the 1990s recession:
In that year productivity fell for only the third time in 30 years, and the growth of domestic demand was only marginally above the pathetic post-GFC average.
But pfft, look at our budget balance!
The budget balance gets far too much coverage. So unimportant is it that it should barely be mentioned – except to highlight that any boasting about it generally reveals its lack of connection with the economy.
You might think after the GFC smashed the heck out of the small government, low taxes and lower regulation economic system that we might have seen some changing of minds.
Out of fear of stepping outside the pack, mediocrities always stick with the rote lessons they have been force-fed. And our political and media class truly have within them a confederacy of the mediocre.
We still see the worries about government deficits and debt despite enduring a period of the weakest ongoing economic and income growth since the 1970s.
You would think that more than six years of flat household income growth would cause some to think something was wrong with the desire to keep reducing the deficit:
You might think that a massive pandemic that has seen deficits surge to previously unknown levels would shock the commentariat and politicians to realise that deficits don’t matter anywhere as much as they once believed.
The Coalition government will, with little pushback, still argue we were fortunate to enter the pandemic in such a strong budget position. The Labor party will still suggest that growing levels of debt are a sign of mismanagement.
And still we hear worries about how too much spending, too many deficits, and too much debt is unsustainable because ... [insert platitudes about future generations and hyperinflation].
Last week’s statement on monetary policy by the Reserve Bank showed just how big a hole we are in and how the government and the RBA are failing to do all they can to aid the recovery.
As I noted on Sunday, even with hopes of very strong growth in 2021 and 2022, we will still be some 4.6% below where we expected we would be before the pandemic hit.
Even with very solid 3.5% annual growth from 2023 onwards, it would take us till the end of 2026 to get back level with pre-pandemic expectations.
And even with that strong growth, large deficits and increase in debt, the Reserve Banks expects underlying inflation to remain below 2% until at least 2023:
That would mean seven years of inflation growth below the RBA’s target band of 2% to 3% – surely long enough to suggest either a massive failure or that the band is not really a target at all.
The Grattan Institute’s Brendan Coates and Matt Cowgill have argued the RBA needs to do more – including considering negative interest rates.
But the low inflation growth points to just how broken the deficit bad/surplus good arguments are, and how equally fraudulent is the line that we can’t keep going into debt or inflation will take off and we’ll be Zimbabwe or the Weimar Republic.
The government currently expects the budget deficit in the 2021-22 to increase by 5.4% pts to 9.7% of GDP. By comparison, during the GFC the biggest deficit increase was “just” 3.8% pts of GDP.
Government net debt is expected to rise from 24.6% of GDP to 35.7% of GDP.
And despite all of that, the Reserve Bank still expects underlying inflation growth in 2022 to be just 1% – a level which, if achieved, will actually be a record low.
And at the same time the RBA predicts the growth of public demand (essentially the level of government input into the economy) will be just 3% in the 12 months to June 2022 – a mere 0.2%pts higher than the RBA expected would be the case before the virus hit:
Does anyone now think 2022 will be as good as we thought it would be six months ago?
If not, why then is public demand not expected to be significantly larger?
We ask the wrong questions about budgets. The headline should not be the deficit or surplus but the forecasts for GDP, employment, inflation and household income growth, changes in income equality, poverty, and access to and provision of services.
And we should judge the recovery by similar measures. After the past decade and especially the past six months, anyone still worrying about deficits and debt deserves laughter and scorn.