Friday, August 20, 2010

Both sides fall victim to budget humbuggery

It's not just Tony Abbott who has been running from a debate on the economy. Both he and Julia Gillard have avoided serious discussion of the economy in this election.

Federal election campaigns usually focus on the economy, but this time both sides have been obsessed with something much narrower; the federal budget.

Managing the economy involves concern about inflation, unemployment, interest rates and - conventionally - what is needed to promote economic growth and further raise our material standard of living.

Promoting economic growth is about reforming government intervention in markets, reforming the tax system so it does less to discourage or distort economic activity, devoting sufficient resources to education, training and research, and ensuring adequate provision of infrastructure.

These days, it also involves taking steps to ensure the malfunctioning of the natural environment doesn't impose great costs and disruption on the economy - through climate change and other problems.

In that agenda, the federal budget is just a management tool, a means not an end in itself. And yet that's what it has become in this campaign.

Abbott's mantra has been his promises to ''end the waste, repay the debt, stop the new taxes and stop the boats''. The last of those is clearly non-economic, but the first three aren't so much economic as budgetary.

Why this diversion? Because, when you haven't thought much about the future or aren't game to broach in an election campaign the unpopular changes you know are needed (such as Gillard on climate change), all that leaves is the state of the economy.

Trouble is, it's going quite well. We have inflation and unemployment back under control. Interest rates are lower than they were at the last election.

Of all the developed economies, the one with the least cause for worry about the size of its budget deficits and the amount of its government debt is Australia. But the punters don't know that, and ''deficit'' and ''debt'' have such negative connotations they're an easy way to scare the untutored.

Most of the debate on deficits and debt has been silly and plays on voters' unsophistication. Both sides have solemnly promised what neither may be able to deliver: a budget surplus in three years time. Economists are hopeless at forecasting the economy, but projections of budget receipts and payments depend on those forecasts.

Though neither side is willing to admit it, should the world economy dip back into recession and China's demand for our exports falter, the budget will still be in deficit - as, in those circumstances, it should be.

Whether we return to budget surplus in three years or five matters little to the well-being of Australians. So great are the uncertainties that Gillard's promise of a surplus of $3.5 billion in 2012-13 and Abbott's promise of $6.2 billion are indistinguishable.

The squabbling over the costs of each side's promises is literally unreal. While, unsurprisingly, Treasury and the Department of Finance have a monopoly over the ability to produce costings they agree with, their record in predicting the ultimate cost of new policies is quite poor.

Both sides have made many expensive promises in this campaign, many of them involving waste. Both sides claim to have identified savings sufficient to cover the cost of their promises (and more in Abbott's case).

But if they were as worried about deficits and debt as they claim to be, they would have devoted all of those savings to reducing them.

What has passed for economic debate in this campaign has been dominated by narrow thinking, humbuggery, false precision and pseudo importance. Heaven help us.