Wednesday, December 7, 2011


One way of looking at the governments current problems is to focus on the overarching "narrative" pushed out by the leadership.

Currently, this is absent. Because of that everyone focus' on the economic story, which, as this column suggests, is going to pieces . . .


So. No need to worry then. Wayne Swan’s pledge to the financial markets is to have the budget in surplus by 2012/13. The government’s still promising (awards for creative writing, anyone) a tiny surplus; $1.5 billion. That’s out of outlays of around $370 billion. It's not so much a surplus as a rounding error. Swan is pretending he's so on top of this economics caper that he can predict the future down to (roughly) one quarter of one percent.

Perhaps after he retires from politics he might like to go into futures trading. Surely that’d have to be a doddle for someone who's so on top of their game; World’s Greatest Treasurer (EuromoneyÓ, 2011) and all that.

The only thing that might provide pause for thought is that the boffins in Treasury have just reduced their predictions for economic growth in that same year down by 13 percent. Now that’s a fairly significant change in the period of less than six months. But revisions of this magnitude are useful because they demonstrate the key factor that underlies these forecasts. They are, essentially, extremely careful calculations based almost entirely upon complete and utter guesswork.

Good conjectures, certainly, but speculation nonetheless. Like predicting the winner of the Melbourne cup or whether interest rates will rise or fall. And, in time, the underlying fundamentals will almost certainly change again. And this will make the forecasts what they were all along: demonstrably rubbish.

As trashy and worthless as confident assertions that the Euro could never possibly fall apart, that the stock market will keep going up forever or that marriage can only ever be between a man and a woman. Given the numbers, anything can happen.

The reality is that with the ongoing European crisis and US economic slump its no wonder gloom is enveloping the world. Our housing market’s down, people put a brake on their spending before Christmas, and the next thing you know is you've got Gerry Harvey demanding that the government keeps shovelling money into people's pockets so that they can quickly spend it at his shops. A cash splash to keep our struggling multi-millionaires going.

Quite suddenly, there he is. “I don't quite get", Harvey said last week, "this business (about the surplus)". Particularly, apparently, when it means his operations are reduced to “treading water". His model for the economy can be summarised in three simple words. “Spend, spend, spend!"

The problem is Harvey's model is broken. Just look at the other developed Western economies. At the same time as Swan was reducing the size of his surplus the UK Chancellor George Osborne was admitting the extent of carnage in the UK. Welfare spending up (£15 billion), tax receipts down (£156 billion). His autumn statement was so miserly it made Swan look positively profligate. In the US debt is back (slightly) from its peak a couple of years ago, although private-sector debt is still well over 160% of GDP. Wherever you choose to look around the world it's evident that a seismic change is already beginning to enter the mix. Ordinary people understand that our current pattern of exponential development with bigger houses, more televisions and more consumption is coming to a grinding halt. This is providing challenges for the future.

That's the challenge for Swan. To use this period to drive us into the future. But that seemingly requires a degree of imagination that the careful, thorough, political apparatchiks that guide Labor are lacking.

A normal government should be able to use all this as an excuse for further stimulating the economy, rather than cutting expenditure. Unfortunately, perceptions of waste surrounding Kevin Rudd’s period in office have so tarnished Labor’s economic credentials that this is just not possible.

The imperative behind the economic statement was politics. The only essential element is to prevent the coalition from claiming Labor had never achieved a surplus. Swan's promise –made so casually just 18 months ago–has now become a millstone.

Under Paul Keating net debt (as a percentage of GDP) went above 20 percent. Treasurer Peter Costello, aided by benign economic conditions brought it back into surplus in 2004 (before the demand for give-ways reasserted itself). Now our public debt is predicted to peak at a comparatively tiny 8.9 percent, yet even this is too much in the new orthodoxy.

And how will this surplus be achieved? Well, slashing $640 million from higher education for a start. And this is the point about the cuts. They are so needless. So miniscule. The government is correct: the removal of the HECS reduction for maths and science students probably won’t significantly affect the number of people applying for these courses. But that’s exactly what makes these cuts so ridiculous – they are so very marginal. They don’t “do” anything in terms of spelling out priorities or setting Australia's course for the future.

Underneath all last weeks spiel and spin lay an unspoken reality. This government has no agenda beyond attempting to appease the markets and appeal to the swinging voters – if any of these are still left. Governments have two ways of balancing the budget. One is to slash spending; the other is to raise more revenue. This government is relying on the third, Micawber, option: the desperate hope that “something will turn up".

Wilkins Micawber is that chap with the large family in Dickens's Great Expectations. Seemingly perspicacious, he recognises that as long as a family’s expenditure is less than their income the result is happiness. Yet, despite his honesty and uprightness, he remains forever unable to get the books to balance. That's why he's left desperately hoping to be rescued. The irony is (and this is obvious to the reader, even if he is completely oblivious to the fact) that he doesn't require great wealth to live contentedly. But he's so trapped in the paradigms of the moment that he can't see the obvious.

In the end, Micawber emigrates to Australia and succeeds, becoming a bank manager. Dickens doesn't say if one of his descendants later became Treasurer.

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