Managing the political deficit

Thursday, 27 November 2008 

All the Government really has to do is make sure it doesn’t blow the budget.

P Keating Lateline 7 June 2007

On one hand the fuss being made about going into deficit seems strange. Especially when in all likelihood, given the economic downturn, the government will go into deficit anyway no matter what it does. Whether a deficit is good or bad for the Australian economy naturally depends on how the money is raised and how it is spent, and given there is little argument over that, it would seem a non-debate.

Yet while there is no real economic debate, there is a political one. It is what the media keep nibbling at when they question why the government has been so cautious about saying the D-word, as Kerry O’Brien did with Swan last night.

Let’s start with the facts. We are in the middle of a profound financial crisis that is threatening to become an economic one. A crisis means that the old ways cannot carry on and a major restructuring is necessary. Yet all we have had so far is global photo-ops with no accompanying course of action to solve the crisis. The only thing the governments have managed to do is throw money around (if they have it) to stave off its effects for as long as they can.

To call such spending an economic strategy or even ‘Keynesianism’ is a joke. It is to forget that the label Keynsianism was applied to a profound restructuring of market economies around the world in the 1930’s and 1940’s that fundamentally changed the relations of the state to the market and labour. It resulted in not only major infrastructure projects but the nationalisation of key industries and the creation of the welfare state. All of this was within a new global economic order underpinned by the US and the Bretton Woods agreement. It entailed a little bit more than some cash hand-outs and world leaders getting their photos taken in ponchos.

The governments of the day may have been battered about by the economic crisis and the Great War, but they had still had the authority to implement real Keynesian restructuring (indeed some managed to find imaginative new ways of getting the authority to bring in Keynesianism). The problem we have today is that the political classes don’t have it.

When Keating said that all the governments had to do was balance the Budget, he may have meant that after the deregulation of the global markets and liberalisation of industrial relations, all the problems have been solved, so there is little left that governments need to do. But even when it is now clear they all the problems have not been solved, what he said is still true in that there is little left that governments can do.

The major parties have spent a century representing key segments of society, organised labour, business and rural interests and taken their economic positions accordingly. The fact that they no longer represent these interests in the same way means 1) they are just as likely to support one position as another and 2) if something needs to be done, they are unable to call on sections of society to help in it happening, as Hawke and Keating called on organised labour to take the strain through the deregulation of the 1980s.

Why we have such a fuss over deficits now is that Howard and Costello, stuck with this vacuum, were desperate to look as though they still had a political/economic strategy. So they presented their budget surpluses as a consequence of their political views and those ‘tough’ right-wing decisions in that first 1996 budget, rather than simply riding an economic boom during which government spending rose to record levels in a very un-right-wing way.

That boom is over so now we have the New Sensitivity, first a political tactic to show how in touch governments are, now posing as an economic strategy. This is what the government is relying on for the time being. The danger for the Liberals is that they could end up on the wrong side of this debate. But only for as long as the money lasts. As NSW has shown, it is hard to be Sensitive when it runs out, if recessions were this much fun we would have them more often. What the Liberals are hoping for is that sooner or later the government will have to make some tough decisions and it will not have the authority to do anything. They may have a point. But on current form, the Liberals are internally obsessed enough that they will probably take this tactic too far and stuff it up.

Posted by The Piping Shrike on Thursday, 27 November 2008.

Filed under Tactics

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