State Budget: Prosperity rather than austerity is the focus
The State Budget's focus on prosperity is not only smart politics, it's smart economics.
Oh how our fortunes rise and fall on the back of fluctuating GST revenue these days. An $11 billion dollar loss nationally translated into a major hit to the South Australian Budget of over $2 billion. Treasurer Jack Snelling and the Premier had a problem and they faced some difficult choices. They were not alone. Governments around the world have been victims of declining revenue but few enjoy low unemployment, low debt and sustained growth. This is in extraordinary outcome in a world ravaged by economic crisis. Let’s look at the bigger picture for a moment.
There are two main reasons why Australia is in such a solid position relative to the rest of the world. While its effects have largely worn off now, the Rudd Government’s stimulus package and bank guarantee worked brilliantly. It bolstered the economy and it injected much needed confidence at a crucial time. The Chinese and Indian appetite for our energy and mineral resources did the rest. We were the beneficiaries of good policy and good fortune. The instability in the global economy remains but so do our underlying economic strengths, particularly our favorable terms of trade with the Asia Pacific region. Our climate change and mineral resource policy settings may not be perfect but they are right for the age.
What some see as policy mistakes will much more likely turn out to be master strokes – the foundations for transformation of Australia into a leading producer of environmentally responsible goods and services for domestic and global markets. The Carbon Pollution Reduction Scheme will help to drive this, as will the wider Clean Energy Package. Neither is perfect but they begin a process of transformation that will help Australia to be a green economy leader rather than a laggard. The Minerals Resource Rent Tax takes some heat out of the mining boom in WA and Queensland and provides an important future source of revenue to help share the benefits of the boom more fairly amongst Australians. Mining can add resilience to the South Australian economy but it can also hollow out our manufacturing capabilities. We must be much more than a quarry for the export of precious minerals, enabling nations to industrialise while we de-industrialise. Rather than export our jobs we need to add value to our mineral resources as part of a strategy of diversifying our industrial base, helping to insulate Australia against large commodity price fluctuations and the inevitable slumps that follow booms.
Back at home the contradictions of complex circumstances play out in the South Australian budget – a budget that is more about the pursuit of prosperity than austerity. Astute observers of global political events would realise that this is smart politics but it is also smart economics. The Weatherill Government understands that austerity policies induce and perpetuate recessions rather than deliver growth. It makes no sense to starve an ailing economy of public investment when private investment has stalled. This is the great lesson from the history of depressions, one that many more historians than economists appreciate and one that politicians would do well to study very closely. Government budgets are nothing like household budgets. You and I don’t have the capacity to tax and borrow that a government has. We can’t spread the costs of expenditure over generations. We have less flexibility available to us to deal with a sudden decline in income.
So how did the State Government respond to the collapse in revenue to the State Budget? In a relatively measured way actually, banking on an improvement in global economic conditions to bring about an improvement in revenue and growth. Treasury forecasts for economic and employment growth provided a foundation for this optimism. The short-term realities, however, did require some adjustments to expenditure, to enable the State Government to meet its debt liability threshold. It chose a combination of public service employment cuts (scheduled for 2013-14) and delays in the roll out of rail upgrade projects. From a strategic point of view it has given itself room to reverse these decisions if economic circumstances prove more favorable than forecast.
Having taken a hit to their long service leave entitlements, public servants were granted a retention bonus that largely compensated them for the loss. Political trade offs are an inevitable feature of State Budgets. The big-ticket infrastructure projects have been locked in and a larger deficit accepted. Slavish adherence to the AAA credit rating has been abandoned, not because it is unimportant, but because it makes no significant difference to the budget bottom line. As I have said here before, a credit rating downgrade from AAA to AA+ will only apply to new and rewritten government debt, increasing our interest payments by around $6 million. Weigh this up against the benefits that public sector infrastructure investment generates and you soon realise that the debate around small movements in credit ratings is farcical.
The time has come to talk transparently about the benefits and costs of public infrastructure investment, recognising that without it we will pay a much higher price for the services we demand. There is no better illustration of this than the outrageous escalation of electricity prices in South Australia, a product of the failure of privatisation to deliver what its advocates promised it would – lower prices and greater efficiency. Let’s explore this tragedy next month.