Opposition parties also failing to address economic orthodoxy

Opinion: Last week I was part of a group of economists who wrote an open letter to the Prime Minister raising concerns about the fiscal stance of the coalition Government and its impact on the current low level of and future prospects for economic activity. It got some media attention but had no more immediate impact on the coalition than the most cynical of us expected.
What was more surprising to me was that Opposition parties were slow to pick up on the initiative, preferring it seemed to focus on their quotidian personality and point scoring, ignoring key economic policy matters. I think that unwillingness to join the cause is partly because in their previous roles they had promoted, endorsed or accepted a local political orthodoxy about fiscal policy not far from the current stance. It is not an orthodoxy that has much intrinsic merit or much support from other economies or agencies. It was labelled “responsible” but in practice, and in the light of current conditions, it has turned out not to be.
I’m pretty sure among the economist group there is quite a range of opinion about whether capitalism is compatible with a good future. I have grave reservations about that which some colleagues will not share. What we can agree on is some basic orthodoxy about how the current system works and the various expectations that can be expected about key economic outcomes from various actions of Government.
Put very simply our observation is that the current fiscal stance, taking into account the monetary position taken by the Reserve Bank, has negative implications for the general level of economic activity, for meeting infrastructure and private capital deficits, for external borrowing, and for building resiliency and innovation. There are many other reasons to object to many current Coalition policies and actions but within the established confines of public economic management these very orthodox observations should not be controversial. It is certainly not radical.
If the coalition wishes to ignore them it should be an opportunity for others who aspire to replace them to gain economic credibility across a wide range of interests. For example Treasury’s advice for Budget 2024 included views that “a net Crown debt level up to 50 percent is prudent” and “very low levels of public debt can involve forgoing opportunities for productive investment”. Consistent with our observations.
Right now business and investment interests are craving a more certain and supportive fiscal stance in a stalled economy.
Of course, changing taxation levels and sources can add further opportunities for positive Government action but even without this we are missing opportunities. Where governments do not take these opportunities they lapse, or they are taken to private benefit by others.
I’m far from convinced that compounding economic growth forever is possible or desirable. Among the economist group and the population as a whole there will be a variety of views on that. But wherever you are on that issue, the approach we are advocating to fiscal policy is far more likely to provide a base for ongoing growth or simply sustainable stability than the restrictive stance of current policy. Either way there needs to be a positive and consistent and reliable fiscal position from Government as the largest political actor.
The Coalition is clearly promoting private spending through tax cuts. This is doing nothing to address infrastructure building, which is widely viewed as a key fault in the economy. It adds nothing to overall savings nor to productive investment. It will be contributing to an increasing external deficit for the economy as a whole. That deficit does balance (hence the name “balance of payments”) by borrowing from offshore, but it is costly in many direct and indirect ways.
The answer to all of this is not to simply spend more and increase the fiscal deficit as a goal in itself. It matters intensely where and how spending takes place. Just as it matters where and how taxes are raised. These will determine the outcomes in terms of necessary infrastructure and social equity. For myself I’m not too interested in a flash new motorway or bridge making my trips faster over increasingly polluted land and water. I would rather have better social housing for those without housing than better returns for those with lots of houses. But whatever your own preferences your chances of delivery are made worse by the current fiscal stance.
It would be different if there were such net benefit from government’s size in the economy shrinking that economic growth increases and is directed by the invisible hand of the market to the areas of infrastructure and sustainable economic activity most needed. But that is a matter of faith, not evidence, experience or economics.