In case you haven’t worked it out, I’ll put my cards on the table: I want bigger, not smaller, government. There’s no end to the services the government could provide for us, rather than some of us paying the private sector to do it while those who can’t afford it miss out.
It follows that there need be no arbitrary limit on how much government spending may be done, whether as a proportion of the economy (gross domestic product) or anything else.
But my training as an accountant tells me there’s no magic fairy who pays for all this spending. So a bigger spending government is one that needs to raise taxes. Fine by me – so long as the well-off (including yours truly) pay more than those whose pockets are less well-lined.
I don’t delude myself that the burden of additional government spending can be covered by taxing the James Packers of this world – there aren’t enough of them.
Although the economy is hardly growing fast, the Reserve Bank is worried that the production side of the economy – the industries, businesses and workers producing goods and services – is close to full capacity. That, unless we stop growing or even go backwards for a bit, demand will exceed supply, causing the rate of inflation to worsen. It’s already above our target of prices rising by only 2 to 3 per cent a year.
So there’s a big chance that, next Tuesday – Melbourne Cup Day – the Reserve will raise interest rates another notch for the fifth time this year. And that means we’re likely to hear another round of suited worthies blaming the rate rise on the Albanese government’s profligate spending and demanding it be cut back immediately.
This really annoys me, even though it carries more than a little truth.
It’s true that, in working out the spending side of the growth in GDP, we take spending by the private sector (households and businesses) and add spending by the public sector (governments at all levels, not just the feds).
It follows that not all the growth in spending that’s worrying the RBA can be blamed on Albanese & Co. And not surprisingly, since the private sector is much bigger than the public sector, the growth in private sector spending has contributed more to overall growth than the public sector has.
So why put all the blame on Albo and his mate, treasurer Jim Chalmers? For one good reason and one bad one. Let’s start with the bad one. The suited worthies banging on about profligate government spending are heavily implying that all government spending is a waste. But most government spending goes on healthcare, education, aged care and defence.
How could anyone delude themselves all that was just a waste of money? Because they’ve been deluded by a corrupted version of the formerly fashionable fad now called neoliberalism. It ended up boiled down to private good/public bad.
That was always nonsense, but it’s encouraged by the assumptions behind the economists’ foundational neoclassical model of the economy. And it’s popular with people who push for smaller government because they hope it will mean they pay lower taxes.
These are well-off people who are confident they could fend for themselves without much help from the government – private schools, private hospitals and so forth – as long as they weren’t being required to subsidise “those less fortunate than themselves”. Lazy loafers, the lot of them. I’ve worked hard all my life etc …
That’s what’s wrong with putting all the blame for higher interest rates on government spending. What’s right about it is that the federal government is supposed to be using its budget to help smooth the ups and downs in the economy, keeping both inflation and unemployment low and interest rates also on the low side.
It’s when the budget is adding to demand while the Reserve is using higher interest rates to dampen demand – in the jargon, when fiscal policy is adding to demand at the same time as monetary policy is trying to reduce it – that the two arms of economic management are pulling in opposite directions and it’s up to the federal government to resolve the contradiction.
Remember that what adds to inflation pressure is not total government spending (as the suited worthies imply), but spending in excess of taxation. That is, a budget deficit.
Because the Reserve acts independently of the elected government, if the government allows a growing budget deficit to add to inflation pressure, the Reserve will step in with higher interest rates to counter the effect.
Voters who don’t like higher rates will blame the politicians, not the bureaucrats. Rightly so. All the more reason why it’s the government that will have to change tack.
Of course, contrary to the smaller-government ideologues, the problem can be fixed not just by cutting spending but also by increasing taxes.
We could start by using higher taxes to ensure that the foreigners who buy our exports of minerals and energy aren’t getting a better deal that we, the owners of the stuff, are.
And I don’t want to imply that none of our present spending is wasteful, even if cutting most of it would be crazy and create more problems than it solved.
A glaring example of wasteful spending is the government’s decision to delay the effect of the Iran war on energy prices for three months. What has it proved? Nothing. What has it cost the budget? A bomb.
Only someone who wasn’t keeping an eye on the budget bottom line could have done something so profligate. Even if the war-caused rise in oil prices had gone away during the three-month delay – as, presumably, the government was hoping – it would still have been a waste of taxpayers’ money.
But now, when the pressure is on, there’s no way to cut the deficit by asking motorists to give their saving back.
Guess what, Jim? Now you know why all your predecessors were obsessed by the budget deficit.
Ross Gittins is the Herald’s economics editor.
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