Friday, May 15, 2009

Labor Economics: An Armchair View

Labors economic credentials have always been questionable and nothing it has done in recent times will change this.

I thought it wise to let some dust settle before commenting on Tuesday night’s federal budget. However, as I began writing, I soon veered away from the well-documented criticism of the Swan budget realizing that our economic woes have been made far worse by the flawed judgment of our present Government which goes to the heart of classic ALP economic philosophy.

It is oft peddled that the Labor crowd have a greater propensity to spend their way out of trouble or otherwise spend to gain an electoral advantage over the political opposition; some 18 months into Kevin Rudd’s first term we note the accuracy of this broad premise. To this end I, and I suspect many others too, were highly dubious upon hearing news about the purported “tough budget” ahead of Tuesday night’s speech by Wayne Swan. Put mildly, the ALP is incapable of delivering a tough budget especially given that this budget came around during what is by all accounts, the toughest global financial landscape since the Great Depression.

I remain inclined to shy away from the coalitions favored terminology when referring to Labor spending. While we certainly do understand, the intent behind the phrase “reckless,” to say the Kevin Rudd and Wayne Swan have been reckless is to suggest that they are unconcerned about the likely consequences of their spending, are negligent and perhaps even mindless. Fact is, they are neither, on the contrary they a simply following classical labor script. More accurately, I would venture to add, Labors spending ways have been vastly excessive to the tune of around $30 billion though ill-conceived stimulus packages and senseless decisions e.g. New school halls and pink bats.

We are now faced with an unacceptably high deficit figure that, contrary to Wayne Swans assertions, will not be reined in within seven short years. Expenditure increases have been an essential part of many a Government since the 1970’s but to gain a better grasp of the issue we can begin by noting the level of expenditure as a share of GDP over the period.

Gough Whitlam’s Government saw spending growth up 5 percent to 24 percent of GDP. The Fraser and then Hawke periods saw Commonwealth outlays reach 27 and then 26 percent respectively. Then came the Howard Government that through market and in particular, labour market reforms shaved spending down to 26 percent by late 2007. True to form, Rudd’s Labor Government has reversed the trend and we now have a new record of Commonwealth spending at 28 percent of GDP.

To exacerbate matters further, we now have a Treasury, led by Ken Henry that actually encouraged irresponsible fiscal measures in the form of cash handouts as opposed to infrastructure spending in the early months of the year. Here then is the danger for the Australian economy, a Prime Minister who believes at the core that increased expenditure is the best way to protect the economy from any buffeting due to the global downturn and a Treasury Department that actually encourages this; the result is a classic Keynesian response. Prime Minister Rudd’s assertions of being a proud economic liberalist when in opposition are now laughable. With the Public Service now clearly onside with the Rudd Swan formula in favour of spending, restoring the budget back into some balance is little more than a pipe dream.

What is also apparent is that the Governments early smugness soon turned to outright panic, a needless alarm that led to the first and subsequent stimulus measures of late. Despite the fact that Australia went into the global downturn in relatively good shape, and that the IMF and World Bank projected a comparatively mild downturn for us, our fiscal response has been arguably the highest in the world. Actually, our response has been double the OECD average and matched only by the United States, go figure.

Labors economic credentials have always been questionable and nothing it has done in recent times will change this.

Reckless no, excessive most definitely.

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