Two Sides of Politics - A Fiscal Tug of War

Two Sides of Politics - A Fiscal Tug of War

swan hockeyWith the September Federal election looming, both Labor and the Coalition are expected to use every political weapon in their arsenal, aimed at capturing every possible vote. Undoubtedly some of the most lethal are fiscal policies offering the highest possible marginal political benefit. Already, treasurer Wayne Swan’s decision to rescind the long held promise of a budget surplus has captured headlines in almost every major print newspaper in Australia. In contrast, the Coalition remains loyal to a surplus even though the budget’s automatic stabilisers are dragging it into a deficit. Juxtaposing these two budgetary stances, it is important to ask: which of the two is the better policy?

The benefits of a surplus, if any at all

From a political perspective, it is bizarre to see the Coalition still pursue a surplus with such vigour when a large part of the business community already supports Wayne Swan’s decision not to disrupt the budget’s counter cyclical movement against economic activity. Even worse is the failure to acknowledge its attack on Swan’s back flip. The emotional impact of an attack highlighting the Labor Party’s inability to stand by a promise has duly been exhausted in its influence on voters.

If we put aside broken promises and politics and focus on the economic welfare of the country for a moment, it seems there may be little economic benefit from the Coalition’s budgetary stance. The most obvious and widely used argument in favour of maintaining a budget surplus in a post mining boom economy is that this will require significant increases in tax receipts, accompanied with a decrease in spending. At a time where tax receipts are declining and economic activity is slowing, such restraint could have a harmful impact on the economy.

Back to politics, pursuing a surplus will definitely not yield the highest marginal political return, especially as a large proportion of voters are concerned about the health of the economy and job security. This is especially reflected in the minds of voters in Western Sydney, where Julia Gillard is currently fighting an inevitable historic loss to the Liberal Party.

Whilst a surplus is an undesirable outcome, the Labor Party has failed to make the case that it can go into deficit responsibly. Allowing the deficit to grow without any restraint can possibly lead to a spiral in government debt. Lack of confidence in the ability to set limits could lead to polarisation in the lower house of Parliament on how to reduce this debt in the future, similarly to the case of Europe and the US.

An alternative path for budgetary policy

Instead of focusing solely on a stance for the budget, both parties should incorporate a more specific objective to underpin the use of budgetary policy. The most relevant and important objective is to maintain Australia’s economic prosperity as the heights of the mining boom pass, rather than leaving the task primarily to the RBA.

An attractive way of achieving this – although likely too radical for centre-left and right politicians – would be to move away from short term objectives and gradually reduce public spending as a proportion to GDP. The Economist provides an apt example of the success of this strategy in countries such as Norway, Finland and Sweden as a means to increase economic activity since the 90’s to present.[1]

Australia could begin a path towards smaller government in this respect by decreasing the company tax rate and repealing others taxes, helping trade exposed industries and attracting non related mining investment into Australia.

In respect to expenditure, the government should work on a cost effective model for providing essential public services. This could be achieved by following the Nordic countries by incorporating private bodies in running essential public services such as hospitals, whilst providing publicly available records of their performance.[2]

Unfortunately the political discourse in Australia seems unable to move from ‘surplus’ or ‘deficit’ and to actually discussing the type of budget that would facilitate growth in Australia. Whichever party has enough conviction to take the rhetoric out of fiscal policy, will surely see a budget that yields the highest economic benefit. Doing this in a country where a growing amount of voters are concerned about their economic wellbeing, it may be discovered that political decision making driven by economics, rather than economic decision making driven by politics may yield a better overall outcome.

[1] The Economist, “The next supermodel, Why the world should look at the Nordic Countries”, volume 406 number 8821, p 9, special report 3-6

[2] Ibid. p 9