There are full-Keynesians and there are half-Keynesians. Full Keynesians prescribe increased government spending during severe downturns in the economy to off-set reductions in aggregate demand from falling consumer spending, investment and/or net exports. Full Keynesians then insist that governments pay down the debt accrued during recessions by running surpluses normal growth, or faster than normal growth, returns . The budget must balance ‘over the cycle’.
Half Keynesians want big deficits during recessions and small deficits the rest of the time. For half-Keynesians fiscal policy is all about stimulating the economy — balancing the budget over the cycle is good in theory but not a first order concern. Debt can be paid down ‘later’. High levels of Government debt are not really a problem.
Yesterday Australia’s Labor Government revealed that they were only masquerading as full-Keynesians, they are actually half-Keynesians after-all.
In its first 4 years the Labor Government ran deficits, as percentages of GDP, as follows: 2008/9 = 2.2%, 2009/10 = 4.2%, 2010/11 = 3.4%, 2011/12 = 3.0%. That is, accumulated deficits of about 12% of GDP in its first 4 years.
The Labor Government didn’t actually promise to pay off this debt over the cycle, but merely promised to return the budget to surplus in 2012/13. Given the global economic background, that promise was enough to mollify a public that is concerned that we are becoming as fiscally dissolute as many other developed economies.
Now, the Gillard Government has announced that even though we are headed into a third straight year of at-trend growth the budget cannot be balanced. When the Treasurer Wayne Swan is asked how large the deficit will be he won’t commit. And, that’s the problem isn’t it. Now the Gillard Government can let it all hang out. That must be such a relief for them.
How large will the deficit be? Well, lets’s think, what happens when a dieter’s will breaks and they open the fridge door – is that first chocolate followed by a carrot and a stick of celery? When an alcoholic falls off the wagon, then what follows that first drink? You know what is coming next in terms of fiscal discipline in Australia – binge spending.
Many economists are forecasting a deficit of about 1% of GDP in 2012/13. I think that is hopelessly optimistic, now that the fridge door is open, but let’s go with that. Why will we have a 1% deficit. The Treasury Department projects that receipts (from taxes) will average 24.2% of GDP over the next 4 years. What about spending? In the 4 budget years before the GFC 2004/5 to 2007/8 spending average 23.7% of GDP. Then in the two years at the height of the GFC, 2008/9 and 2009/10, spending ran at 25.6% of GDP. Now the problem – in the following three years 2010/11, 2011/12, 2012/13, spending is running at 24.6% of GDP.
So, spending after the GFC is running at about 1% of GDP higher than before the GFC. That is the 1% that the Labor Government can’t find. Yes, it is true that Treasury receipts are considerably lower after the GFC than before, but if spending was running at the same level now as it was before the GFC then there would be no deficit. Government receipts will be about 23.7% of GDP in this fiscal year. If the base level of Government spending (after the extraordinary stimulus of the GFC) had not blown out by about 1%, then we would not have a deficit.
I admired the Prime Minister’s determination to maintain fiscal discipline. It is sad to see Julia Gillard’s Government surrender its economic credentials in this way.