Monday, December 5, 2011

Business economists play politics over budget surplus

Business economists have been surprisingly critical of Julia Gillard's efforts to keep her promise to return the budget to surplus next financial year, but if I were her I'd have done much the same thing.

She, her cabinet and her econocrat advisers turn out to have a much better understanding of real-world macro-economic management than the know-it-all business economists.

Their repeated statements that the government's obsession with achieving budget surplus in 2012-13 is a ''purely political'' objective show how little they understand political economy. Paradoxically, it's they who are playing politics in making such a claim.

In an ideal world - a rational world - it wouldn't be necessary for Wayne Swan and Penny Wong to turn the fiscal somersaults they did last week just to keep the budget's forward estimates pointing to a laughably microscopic surplus.

(All the ''reprofiling'' - read creative accounting - to which the budget ministers needed to resort is explained not so much by the economy's now weaker-than-expected strength of recovery, but by the extent to which the carbon tax package was, predictably, revenue negative in its first year.)

In such an imaginary world, it wouldn't matter if the budget's return to surplus was a year or two earlier or later than the year first projected. In such a world, the punters wouldn't imagine a surplus of $1.5 billion was a totally different animal to a deficit of $1.5 billion, instead of the same thing: a near-as-dammit balanced budget.

In such a world, voters would not set the bar higher for Labor treasurers than Liberal treasurers.

In such a world, voters would laugh to scorn the efforts of such reliable witnesses as Tony Abbott, Joe Hockey, Andrew Robb and Barnaby Joyce to convince them all budget deficits are bad and Australia's public debt is mountainous.

But the business economists so freely accusing the government of being ''purely political'' are guilty of more than naivety. Their political double standard is showing.

Where were they with their accusations of politicians being ''purely political'' when, almost from the first fiscal stimulus package, the Liberals began trying to inculcate their pre-Keynesian nonsense in the minds of an economically illiterate electorate?

I don't remember hearing from them. In fact, with the honourable exception of Saul Eslake, I can't remember ever hearing a business economist dare to criticise a Liberal government or opposition.

Under Abbott the Libs are at their most populist, protectionist and anti-rationalist in decades. They've been working overtime to exploit and frustrate any attempt by Labor to implement unpopular reforms. The notion of Abbott in government is frightening.

But do we hear a breath of criticism from the business lobbies or the business economists? Gosh no. The Libs might take offence.

But take a shot at a Labor government, especially one that's out of favour with big business and looks on the ropes? Sure, why not. How could the boss object to that?

Labor's problem is not that it's had bad economic policies - its response to the global financial crisis was almost too successful for its own good; its carbon price scheme was compromised more by the reneged-on deal with Malcolm Turnbull than by the subsequent deal with the Greens - but that it can't explain itself, can't educate the electorate.

Is it surprising politicians adopt less-than-pure policies when they know that, were they to be more courageous, the nation's economists - academic and business - would be missing in action when the guns were firing?

But this episode doesn't just reveal the business economists' partisanship and their dereliction in helping to educate a gullible electorate. It reveals that, even after our experience with the global financial crisis, they don't understand the central role of psychology - confidence - in any government's efforts to manage the economy through the business cycle.

The present low levels of consumer and business confidence are a consequence of various factors, not just forebodings about the turmoil in Europe. Other factors would be fears about the devastating effects of the carbon tax and, after years of propagandising by the opposition and the Murdoch press, a lack of confidence in the government's ability to manage the economy.

In such circumstances, would it really be of no consequence for the government to be seen to have broken its promise to return the budget to surplus? Can you imagine how the opposition would carry on? Do you really think that would have no effect on confidence?

There may even be some truth in the government's argument that, in view of the global financial markets' concerns about sovereign debt, this is no time for our government to renege on promises to stop adding to government debt.

So much for the naive belief the government's concern to protect its reputation as an economic manager is ''purely political''. But wait, there's more.

If there's one lesson to be learnt from the problems in the United States as well as Europe, it's the difficulty governments have in keeping the two sides of their budget within cooee. We, of course, are exemplary by comparison.

Why have we exercised so much fiscal discipline? Because of our tight ''framework'' of rules and targets to guide fiscal policy. Rules and targets governments of both colours have adhered to.

In an ideal world, governments would have no trouble exercising discipline over their spending and taxing. In the real world, governments have to give discipline a helping hand by drawing essentially arbitrary lines in the sand, then sticking to them.

Gillard's promise to achieve a surplus in 2012-13 is just such an arbitrary line. That line could be washed away by a tidal wave from Europe, of course. But sensible economists think twice before urging governments to cast aside their self-imposed pre-commitment devices.