Thursday, July 17, 2014

The budget crisis is real, it’s serious, and we ignore it at our children’s peril

Henry Ergas

WITH Clive Palmer, Labor and the Greens combining to destroy the government’s budget, it is important to understand just how serious our fiscal crisis is.

In the recession that began in 1974, which lifted the unemployment rate to 6.5 per cent, there were 6 years of consecutive budget deficits with a cumulative deficit amounting to 7.9 per cent of GDP.

The even more severe ‘recession we had to have’ of 1990-1992, in which the unemployment rate rose to 11 per cent, caused 7 years of consecutive budget deficits and a cumulative deficit of 17.2 per cent of GDP.

Now, despite an unprecedented period of low unemployment and continuous expansion, by 2017-18 we will have run deficits for 10 years in a row.

And if the government’s proposed savings measures are not implemented, the cumulative deficit to 2017-18 will climb to 20.5 per cent of GDP, exceeding that incurred in every previous downturn, including the great depression.

The legacy of cumulative deficits will be rising gross debt, which, even with the savings measures, is expected to increase from $360 billion in 2014-15 to $450 billion in 2017-18.

As well as shifting on to tomorrow’s taxpayers the burden of paying for today’s benefits, greater debt will limit the borrowing capacity of future governments, reducing their scope to use fiscal policy to cushion the impact of adverse shocks.

Moreover, with the Reserve Bank’s cash rate already close to zero, the ability of monetary policy to pick up the slack will itself be constrained.

As a result, when an adverse shock comes, the cuts will have to be deeper and the hardship more widespread and prolonged. And such shocks are not merely possible; they are probable.

The historical record is clear: deep falls in output may be unpredictable, but they are hardly uncommon.

A recent study by John Williams, president of the Federal Reserve Bank of San Francisco, examines the 17 advanced economies (including Australia) for which good-quality data is available from the 1890s on. Williams concludes that on average, a contraction as drastic as that the US experienced at the peak of the global financial crisis occurs about once every 19 years. Yes, Williams notes, the sustained expansion that preceded the GFC suggested recessions had virtually been abolished; but like dreams of eternal peace, that illusion was soon shattered, and with a vengeance.

To Australians, basking in the sunshine of seemingly unending growth, the warnings of economic history will appear remote.

But recent decades are an unreliable guide to the challenges that lie in wait.

Rather, the stellar performance of the last 23 years at least partly reflects a series of one-off factors. To begin with, the depth of the recession ‘‘we had to have’’ meant there was a lengthy period in which the economy was simply climbing back towards its trend level. In 1992, national output was nearly 3 per cent below trend; it took until 1998 before the ‘‘output gap’’ (the difference between actual and trend output) was largely closed.

At the same time, structural reform, including labour market deregulation, lifted the economy’s productive potential, extending the growth spurt into the early years of this century. As that momentum faded, the aftermath of the ‘‘tech wreck’’ saw activity dip slightly below trend from 2001 to 2003; but the investment phase of the mining boom then came to the rescue, pushing output and incomes above trend in every year except 2010 and 2011.

However, at least as far as Australia is concerned, heaven may be running low on manna. For sure, the spectacular growth the boom has allowed in our capital stock, which increased by 60 percent in a decade, will permit durably higher levels of production; but the growth rate of that production could well taper off within five to six years.

Additionally, at the turn of this century, barely half of our exports went to Asia; now, four-fifths do. The scope to expand exports by redirecting trade from slowly growing to very rapidly growing markets is correspondingly smaller, with China’s eventual transition towards less dependence on resources
accentuating that effect.

And last but not least, the Rudd and Gillard governments saddled our economy with labour market regulations that punish the young and unskilled, raise unemployment, reduce labour force participation and limit the level and growth of incomes.

None of that condemns us to sackcloth and ashes.

But it does make the current policy paralysis, which entrenches roadblocks to growth and increases our vulnerability to downturns, particularly costly; and it means that counting on ever greater prosperity to redress the nation’s fiscal predicament is not mere complacency but outright recklessness.

The parallels to the experience in Britain should make the situation all the more disturbing. After a recession in 1990-91, a sustained recovery, combined with tighter controls over public expenditure, allowed a sequence of budget surpluses.

Unfortunately, by 2002 the Labour government had lost its fiscal discipline, and surpluses gave way to red ink; but with the deficits only 2 to 3 per cent of GDP, Labour steadfastly dismissed them as inconsequential, especially since the financial boom gave Tony Blair’s “Cool Britannia’’ an aura of invulnerability.

So when the crisis emerged with the collapse of the Northern Rock bank in September 2007, mounting public debt made drastic spending cutbacks inevitable, pushing the unemployment rate to 8 per cent and resulting in a prolonged ­period of slow growth.

Putting Australia’s house in order now, when the economy’s continuing strength can help absorb the costs of orderly fiscal consolidation, is therefore nothing more than prudent risk management.

And there is no mystery about what needs to be done.

Projections for public spending tell the story.

On average, commonwealth government payments have been about 24.9 per cent of GDP.

But unless reductions are made in the growth of public expenditure, cumulative payments to 2024-25 will exceed that benchmark by over $250 billion, corresponding to nearly $10,000 per man, woman and child.

To fund those payments, the tax burden would need to rise to well above its long-term level, with the typical full-time worker on average weekly earnings facing an income tax rate more than five percentage points higher than that in 2014-15.

And as they will be paying payroll taxes, compulsory superannuation contributions and the GST on top of that, average wage earners would therefore be losing well over half of any additional income earned in tax, reducing the incentives to work and save.

But in addition to being economically distorting, intense political competition means high levels of taxation will be hard to implement and sustain.

Rather, if spending is not brought under control, the likelihood is that the run of deficits will continue — until, that is, a severe downturn forces us into far-reaching retrenchment, just as has occurred in every previous bout of debt ­accumulation.

It is absurd to claim, as the visiting American economist Joe Stiglitz has, that a proposed gradual return to fiscal sustainability will worsen inequality.

On the contrary, the greatest threat to the living standards of the poor and vulnerable would come from forcing Australia into a European scenario, where drastic austerity has greatly increased poverty in every country that has felt its effects.

Far from being a recipe for fairness, allowing our fiscal woes to fester can only ensure the ultimate pain is both greater and more inequitable.

Indeed, this is why Norway, whose egalitarianism Stiglitz holds up as an example for Australia, has pursued the most fiscally conservative policies in Europe.

Even more exposed than we are to the commodity price cycle, it has guarded against recurrent deficits and strenuously avoided public debt.

The difficulty, therefore, does not lie in knowing what should be done; rather, it is in finding a way to do it, and for the government, to do so at a manageable political cost.

Labor lacked the willingness and ability that requires; the Coalition, which does want to tackle the problems, risks finding it impossible.

After all, chaos is Palmer’s best friend, while Labor’s sole concern is to prevent Abbott succeeding at what it so spectacularly failed to do.

Averting an eventual fiscal crisis hardly figures in the goals of those who do not make policy, but nonetheless have the power to break it.

Confronted with those dangers, the words of Joseph Schumpeter, the great economist who served as Austria’s finance minister in the trauma that followed the end of World War I, come to mind.

The ‘‘fiscal constitution’’ of a country, Schumpeter wrote, encapsulates in its highest form ‘‘the spirit of a people, its cultural level, its social structure, the deeds its policy may prepare’’.

‘‘He who knows how to listen’’ will discern in its ability to deal with fiscal difficulties ‘‘the thunder of its history more clearly than anywhere else’’.

With that thunder rolling, Australians have every reason to fear the storms that lie ahead.


The high risk of terror is hitting home: Bali-style terrorist attack ‘inevitable’ on Australian soil, says Labor MP Anthony Byrne

A SENIOR member of parliament’s high-powered intelligence and security committee has warned a Bali-style terrorist attack is inevitable on ­Australian soil and the risk of an incident is “accelerating”.

Unless ASIO and other spy agencies were given the sweeping new powers they were asking for, but were being denied, security forces would be limited in trying to prevent it.

Labor MP Anthony Byrne raised the alarm in parliament yesterday, revealing the view of the intelligence community was that an attack on home soil of the magnitude of the 2002 Bali bombing — which claimed the lives of 202 people including 88 Australians — was not only possible but now probable.

In an extraordinary caution to the parliament, the senior MP and former chair of the Joint Committee on Intelligence and Security said he had a “deep concern that eventually and inevitably in this country, an event will occur on this soil … on the magnitude of a Bali event or just a terrorist event.

“That event will be there to cause immense damage to the psyche of the Australian community. That will be its purpose, its intent.

“I don’t want to be part of a parliament that reacts to an event. I want to be part of a parliament that puts laws in place to prevent that event.”

Mr Byrne’s warning came ahead of a private briefing tomorrow with the heads of all the spy agencies and the Attorney-General George Brandis ahead of the introduction to parliament of legislation to grant new powers to ASIO.

The Daily Telegraph revealed last month Mr Brandis was planning to adopt up to 41 of 43 recommendations from a bipartisan report last year of the JPCIS that called for greater surveillance powers for ASIO.

But the government has stopped short of the more contentious data retention laws, which would force telecommunications and internet companies to keep metadata for two years.

Spy chiefs are concerned the government is moving too slowly at a time when there were heightened warnings about domestic terrorist events and links to Australians fighting with ­jihadists in Iraq and Syria.

Mr Byrne claimed that, without the data retention abilities — similar to laws granted to spy agencies in the UK last week — our spy agencies would be hamstrung at a time when ­Australia was at greater risk than ever before.


Bridges program proving a powerful key to higher education access

The percentages below are suspiciously high

A program aimed at increasing higher education participation for students from under-represented communities is having a profound impact, according to a new report.

Compiled by KPMG, the interim assessment of the $21.2 million Commonwealth Government program Bridges to Higher Education shows the initiative is delivering highly positive results for families from Greater Western Sydney and rural NSW, as well as those from Aboriginal and Torres Strait Islander backgrounds.

The report showed that in two years Bridges programs have engaged with schools and TAFEs in Greater Western Sydney and rural areas, achieving interactions with over 143,000 students, over 12,000 parents and carers, and over 8,500 teachers.

“Increasing access to higher education for sections of the community who traditionally miss out on this invaluable opportunity is one of the most pressing issues facing contemporary Australia,” says Bridges Chair, Annette Cairnduff.

“That means we first have to change some prevailing attitudes around higher education, build an awareness of the opportunities available, and improve academic outcomes in the years leading up to university.”

“The Bridges program is achieving all these goals, having had a major impact not only on students, but also on teachers, parents, carers, and community members who provide such an important support network.”

Commencing two-years-ago, Bridges to Higher Education is a collaborative project involving five universities (University of Technology, Sydney, Macquarie University, University of Western Sydney, The University of Sydney and the Australian Catholic University). It encompasses 88 projects including student-mentoring initiatives, summer schools, tutoring and preparatory programs, and community engagement programs.

Key interim report findings show that:

· 98% of participating students demonstrated improved academic performance

· 88% of students showed improved learning progress

· 84% of students reported improved motivation to continue to year 12 and greater confidence in their academic abilities

· 87% of students reported an increased awareness of alternative pathways to university

· 98% of participating teachers reported being better supported to engage students in learning

       · 91% of parents and carers reported an increased capacity to support their child’s higher education goals

 “Bridges work encompasses all aspects of increasing higher education awareness and access,” said Cairnduff.

“Our programs not only help prepare students for the challenges they’re likely to encounter throughout high school and university, they also help schools to enrich classroom practices and motivate their students to learn. Bridges programs have also broadened families’ views around the availability and value of higher education opportunities, and even increased many students’ confidence to challenge cultural or gender-specific expectations around their future.”

Press release from Medianet.

Joe Hockey warns he will bypass Senate to push tough budget measures through

Treasurer Joe Hockey has warned the Labor Party and the Greens to pass tough budget measures through the Senate or the government will find other ways to push through savings.

But the opposition says if the government wants to "sneakily" avoid the parliament it will have a case to answer with voters.

As the government prepares to front an extended Senate sitting to pass the mining and carbon tax repeals, Mr Hockey said he was prepared for "a marathon" negotiation to win the new Senate's approval for unpopular budget measures, such as a new GP fee.

He said Labor and the Greens risked dealing themselves out of any political influence if they did not approach talks with an open mind.

"I say to Labor and the Greens if your instinct is to say no immediately and to stick with that, you are dealing yourself out of having an influence on public policy," Mr Hockey told ABC radio on Wednesday.

"Because if the immediate reaction is no with no opportunity to open discussion . . . then there are other alternatives that we can take."

Mr Hockey said there were already budget measures that the government did not need legislation for.

He said if the government could not clinch the votes it needed on the Senate floor for proposals that would be presented as separate legislation, it would have no choice but to find alternatives.

Mr Hockey added that the warning was not "retribution" against an increasingly unpredictable Senate, and the government remained open to discussions.

''If the Senate chooses to block savings initiatives then we need to look at other savings initiatives that may not require legislation," Mr Hockey said.

''I would ask the Greens and the Labor Party, who between them hold 35 votes on the floor of the Senate, to understand that there are alternatives through government.''

Shadow treasurer Chris Bowen said the opposition was happy to negotiate with the government, but the Treasurer's approach was all ''bluff and bluster''.

''If the Treasurer thinks he can sneakily get his changes through by somehow avoiding the parliament well he should explain to the Australian people what he's planning instead of the normal bluff and bluster we're get from this guy,'' he told ABC radio on Wednesday.

''What we're seeing is pretty much a Prime Minister and a Treasurer who just think, well, we'll arrogantly say what's going to happen and we'll just say that it will pass the Senate and saying it will pass the Senate means it will pass the Senate.

''Well that's not how parliaments work.''


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