Big and getting bigger

Bookmark and Share Economics & Deregulation and The Global Financial Crisis | John Roskam
Australian Financial Review 3rd April, 2009

Kevin Rudd would have felt right at home at the Group of 20 summit. He was in the city where political spin was invented. And he was joined by the likes of French President Nicolas Sarkozy, who was elected two years ago proclaiming his belief in free markets and economic liberalism. Now he's complaining about the evils of "Anglo-Saxon" capitalism and demanding crackdowns on bonuses for "traders and speculators".

Chopping and changing political ideologies as the occasion suits is clearly not the exclusive preserve of politicians from the antipodes.

What would have pleased Rudd most of all was that he was surrounded by people who like spending other people's money. British Prime Minister Gordon Brown has spent so much that a few days ago, on the eve of the G20 meeting, the Organisation for Economic Co-operation and Development told him he had run out of money. If the recession is somehow even worse, or goes on longer than expected, there'll be nothing more for the British government to spend. Meanwhile, US President Barack Obama has passed into legislation the biggest budget deficit in American postwar history.

Rudd can now mix it with the best of them. He's just resided over a government that's got 20 per cent bigger. According to the Treasury's own calculations, spending by the federal government will have gone from just over 23 per cent of gross domestic product in 2007-08 to about 28 per cent in this financial year. Saying this growth is of Whitlamesque proportions is not hyperbole. It's a statement that's literally true. Indeed, depending on how you measure it, government is now growing faster than it did in 1972-75.

There are a few reasons why no one seems to have woken up to how big and how fast government is growing.

For one thing, Rudd is simply not as scary as Gough Whitlam. A lot of people were taken in by the Prime Minister's pre-election line about him being a "fiscal conservative". Whitlam, on the other hand, never pretended to be something he wasn't. When in his policy speech at the Blacktown Civic Centre on November 13, 1972, he said, "We can recreate this nation", people knew he meant it. These days, to work out what the Prime Minister is saying you first need to know where he's speaking, to whom he's speaking, and the time of day the speech is given.

Whitlam had Jim Cairns, Rudd has Lindsay Tanner. When Tanner as Finance Minister goes on talkback radio, as he did this week, and says he's keeping the budget as "tight as possible" and "tough decisions" are looming, he sounds entirely believable.

As one of the government's smartest and most articulate ministers he knows what he's talking about. What's more, people know he knows what he's talking about. The problem is that there's nothing tough about giving voters $900 cash and increasing the size of government by 20 per cent.

The Prime Minister is operating a very smart "good cop, bad cop" routine. He runs up the deficits, while Tanner promises fiscal frugality and prudence.

"Neo-liberals" have lately been blamed for lots of things, but they can never be accused of disguising what they want. One of the deliberate and explicit policy aims of neo-liberals is to shrink government. Opponents of neo-liberalism are not quite so forthcoming with their intentions.

The public has the impression that the stimulus measures are temporary and short term. But this is only half true. The economic effect of the measures may indeed be temporary, but they have long-term consequences. It will take years for the budget to return to surplus, and the increase in the size of government is as good as permanent, given the difficulty of cutting government spending.

One of the reasons why Lawrence Springborg and the Liberal National Party lost the Queensland election was because of his promise to cut the size of the public service. It seems that public service jobs are now untouchable. It will be a brave state opposition leader who promises efficiency
dividends from public servants.

The rhetoric of Obama, Brown, Rudd, and indeed everyone else preaching the mantra of stimulus packages, has been masterful. They haven't said "our solution to the gravest economic crisis since World War II is to make government bigger". Nor have they said "the reason we're in this mess is because government is too small". Instead they've talked about things like "targeted measures" and "one-off fiscal injections".

But no matter how it's phrased, the result is the same. Government will be bigger after the global financial crisis than it was before.