IMF Report Shows Old-Time Fiscal Religion Is Needed To Counter The New Mediocre
The latest annual IMF Australia Consultation might have passed unnoticed but for this highly damning statement: "the new mediocre". Perhaps they were being polite - Australia's lacklustre fiscal performance has become the new normal or just mediocre. There is nothing new about the increasing debt and ongoing deficits we have experienced since the Rudd government panicked in 2008 and went on a never-ending spending spree.
A stable and predictable fiscal policy creates a sound environment for business decision making. Investors who trust that governments can and will manage their own affairs wisely are more likely to engage in long-term economic projects to their benefit, and that of the community at large, and the government too.
As it turns out Australia has a reasonably well-defined fiscal policy framework. It was articulated by Peter Costello in 2007: "Our tax system exists to fund the decent services in health, education, aged care, and other services that Australians legitimately expect and are entitled to receive. If after we provide for those services, invest for the future, and balance our budget, we can reduce the tax burden, we should do so." The federal government budget should be balanced. In practice - and as articulated by the Rudd government - that means the budget should have a positive balance of about 1 per cent of GDP.
ALL TALK AND NO ACTION
No government in the last 10 years - since the Howard government was voted out of office - has managed that task. Politicians give themselves wriggle room by arguing that the budget should be balanced, on average, over the cycle. That can be described as being the budget anchor: the policy statement that anchors expectations of budgetary movements. If and when the budget is in deficit, government will move towards surplus. If the budget surplus is too large government will reduce it by either spending more or cutting taxes.
Australian governments have failed utterly to achieve this policy goal. Rather helpfully the IMF have recommended another policy that will mask this ongoing failure. They suggest a debt anchor. Rather than target a 1 per cent of GDP budget balance, the government should target some or other level of debt in the long run. This proposal was critiqued in these pages last week. It is even more vague and non-binding than our existing budget anchor.
Worse - Australia already has a debt anchor. Observed in the breach, but also established by Costello: Australian federal government net debt should be zero. In essence then, it is unclear what the IMF truly proposes other than to relax the already quite lax fiscal constraints that bind politicians.
It is, however, well worth having a debate on politically binding fiscal constraints. Just as Australia has a political constitution that spells out the rules of political decision making in the Parliament, so too we should have a fiscal constitution that spells out the rules of fiscal decision making. Right now politicians tax as much as they think they can get away with, spend as much as they can, and borrow to make up the difference.
THAT OLD-TIME FISCAL RELIGION
Many Australians subscribe to what the 1986 economics laureate James Buchanan described as being "the old-time fiscal religion". The notion that budgets are balanced, that government spending is frugal, and debt used sparingly and responsibly. Instead we have "the new mediocre".
It's not entirely fair to blame the government - of either persuasion - for this state of affairs. All politicians of all parties are to blame. The budget is brought down every year and should be voted on every year. By convention, however, a lot of existing budget measures go through on a nod and a wink and many spending policies are legislated to be ongoing. This is an abrogation of responsibility. Furthermore politicians - and many bureaucrats too - have absolutely no skin in the game. Their salaries and pensions are not dependent on economic growth or paying customers, but rather on the ability to tax and borrow. Putting the budget onto automatic pilot with a debt and deficit trajectory and then borrowing to pay their own salaries is symptomatic of the new mediocre.
Australians pay top dollar for their government and public services and can expect better. Holding politicians to account for poor fiscal outcomes is a good place to start. Re-legislating the debt ceiling should be a priority. Unfortunately out of sight is out of mind and removing the debt ceiling (introduced by the Rudd government and repealed by the Abbott government) has allowed debt to spiral out of control with little public debate.
So while the IMF proposal itself is trivial, we should use this opportunity to drive a harder fiscal bargain in Canberra.