According to economists at the International Monetary Fund (IMF), Peter Costello was Australia's most profligate treasurer of the past 50 years. According to global doyens of fiscal responsibility, the man described by John Howard as Australia's greatest treasurer spent like a drunken sailor when the economy was booming. In doing so he poured fuel on the mining boom's fire, pushed up interest rates for those with mortgages and helped cause the current budget deficits that Joe Hockey was so worried about last year.
But wait, I hear you say, Peter Costello delivered budget surpluses. He must have been a good treasurer.
Econospeak is used to conceal, not reveal.
Anyone who has ever bought a house or a new car has run a "budget deficit". If you earn $100,000 per year and buy a $700,000 house, you will rack up a big deficit that year and, inevitably, a big debt. Is that reckless? Or irresponsible? Most people, and most financial planners, don't think so. Neither do most companies.
BHP has been in debt for most of its 130-year history and has no plan to change that. Indeed, during the mining boom, when coal and iron ore prices were at all-time highs, BHP was running budget deficits, and its total level of debt rose from US$16 billion in 2004 to US$66 billion in 201314.
Most treasurers choose their words carefully. Most people interpret deficit as a problem, and a surplus as a good thing, but it's not necessarily the case; a surplus of morphine, for example, could kill you. The following two statements convey exactly the same economic information but they have entirely different political meanings:
1. The budget deficit has grown rapidly in the past three years even as the economy has grown strongly.
2. Over the past three years the government has invested heavily in the new infrastructure that rapid economic growth requires.
Just as there is nothing "irresponsible" or "unsustainable" about an individual borrowing to buy a house or a company borrowing to invest in a profitable new project, there is nothing irresponsible about a government borrowing to invest in the infrastructure that a rapidly growing population and economy need.
Tony Shepherd knows that better than most. During his time as chairman of Transfield its debt ballooned from $282 million to $1606 million.
While Joe Hockey was claiming last year that debt was bad, he was simultaneously arguing that students should responsibly incur bigger HECS debts to help the government pay down its irresponsible debts. His message wasn't just mixed, it was pured.
Peter Costello played a simple trick on the Australian people during the Howard years. While economists see budget deficits and budget surpluses as tools to help manage the economy, "Profligate Pete" redefined the budget outcome as the ultimate objective of economic management. Put simply, he told us that surpluses were good and deficits were bad. So if he delivered a surplus, he must have done a good job. Right? Wrong.
Costello squandered a mining boom and convinced millions that he'd saved the country. And Hockey and Abbott have been trading on the myth of Coalition economic management ever since.
While budgets are an annual affair, economies respond to much longer cycles than the time it takes the Earth to revolve around the Sun. All sorts of unexpected shocks some good, some bad affect our economy. And as the unexpected boom in China's demand for resources clearly shows, there are often a lot of kilometres, and many years, between cause and effect.
The ups and downs of the Australian economy are known as the business cycle. While academic economists argue about definitions and measurement, the economy slows down around every seven or eight years. By the middle of the noughties Australia was about "due" for a recession. But we got lucky. Instead of a slowdown we got the biggest resources boom we had seen in a century. The prices for our biggest exports rose rapidly, and so did corporate profits and corporate tax receipts. The impacts were obviously good for the budget's bottom line.
Rather than stockpile the windfall, Costello and Howard introduced permanent tax cuts in response to a temporary increase in revenue. Costello cut by half the tax payable on income from capital gains. He trebled the threshold for the top tax bracket. He made income from superannuation entirely tax-free, even for those who earnt millions per year. He also handed out tens of billions of dollars worth of benefits to middle- and high-income earners, while arguing that the government couldn't afford to increase unemployment benefits, disability benefits or the age pension.
The windfall revenue was so great that, despite his largesse, the budget was still in surplus. With repetition, and with vocal support from a cheer squad of "business leaders", he convinced people that simply delivering a surplus proved that he was doing a great job.
The idea that a budget surplus is proof of good policy has no basis in economics.
Imagine an ice-cream shop in a small beach resort. In the summer months it does a roaring trade; in the winter months it's a nice quiet place for the staff to read. Now imagine that you are the owner of the shop. In the middle of a long and very hot summer you see an ad for the car of your dreams. With ice-cream sales at record highs, you would still be in surplus even after the enormous monthly repayments. Would you buy the car on that basis?
According to the pinko lefties at the IMF, Peter Costello hosed the mining boom up against a wall. Indeed, according to the Reserve Bank of Australia, Costello's tax cuts and middle-class welfare pumped so much money back into the booming economy of the late 2000s that he forced it to increase interest rates to "take the heat" out of the economy. (That's another nasty economic phrase that not enough people understand. When the RBA says it is increasing interest rates to "take the heat" out of the economy, what it really means is "increase everybody's mortgage repayments to lower their disposable income in the hope that they spend less money in the shops and cause a bit of unemployment".)
Tens of billions of dollars worth of tax cuts and new benefits were pumped back into an economy that was already booming. Virtually all economists agree that such a fiscal stimulus when the economy is already booming is the exact opposite of responsible economic management. Theory and history say such stimulus would push up inflation and interest rates. Which is exactly what happened.
Costello must have known his tax cuts and middle-class spending splurge was economically irresponsible. Treasury told him. The RBA told him. And the IMF told him. He wasn't doing economic policy; he was doing politics. He owned the ice-cream shop during a hot summer and gave away free ice-cream to all of his friends. The books looked OK during his tenure, but all the freebies meant that it would be a long and broke winter for the next owner.
Costello didn't want to manage the Australian economy; he wanted to permanently reshape Australian society to shrink the public sector and let the market provide more of our health, education and welfare services. All the things that Abbott and Shepherd have said we had to do. But to achieve his vision, he would have to cause budget deficits in the future, deficits big enough to scare the public into accepting big cuts to the services and safety nets that Australians are quite proud of. While it was easy for Costello to sell tax cuts in the boom, the big cuts in spending in the future would be a tougher sell. The task fell to Joe Hockey, and he failed at the first hurdle.
http://www.themonthly.com.au/issue/2015/july/1435672800/richard-denniss/clowns-and-treasurers
