Those terrible “d” words

There is no denying that the rhetoric that the Prime Minister has employed to describe the current global economic situation is strong, and the Rudd Government’s actions so far have been tailored accordingly. Over a month ago, when announcing his government’s $10 billion package of stimulus handouts, Rudd described the current crisis as “the greatest global financial crisis since the Great Depression”. This assertion is not entirely unjustified when one considers the extraordinary ramifications we have observed so far, but on the other hand, the Prime Minister was walking on shaky ground by linking the current financial crisis to the word “depression”. It’s something like rhetorical guilt by association. Depression? Did he really say depression? As in, the Great Depression? And, so on.

In short, Kevin Rudd’s personal approach to the economic situation as Prime Minister seems to revolve around straight talking, with a cautiously pessimistic bent. If things could get worse, then the Prime Minister seems to want to make it clear to everyone that they should be prepared for things getting worse. Rather than trying to create an oasis of blissfully ignorant confidence at the head of government – something the Howard Government probably would have done in the same position – the Rudd Government seems hellbent on highlighting the uncertainty that does exist. Nobody really knows just how events are going to play out. Just like other governments and indeed commentators, Federal Labor does not really know if the current crisis is going to take several months or several years to peter out.

It is in this sort of environment that the Prime Minister has elected to finally entertain that great Australian shibboleth for economic “incompetents” – the dreaded budget deficit. Samantha Maiden has the details in The Australian, and the full statement delivered by Rudd to parliament is here:

Kevin Rudd has conceded for the first time that Australia’s budget may have to go into “temporary deficit” if the global financial crisis worsens.

“If Australian economic growth slows further because of a further deepening of the global financial crisis, then it follows that Australian revenues will reduce further,” Mr Rudd said.

“Under those circumstances, it would be responsible to draw further from the surplus and if necessary to use a temporary deficit to begin investing in future infrastructure needs including hospitals, schools, TAFEs, universities, ports, roads, urban rail and high speed broadband.”

“In fact, failing to do so would irresponsible – and would sacrifice growth and jobs. But any such action would need to be consistent with the discipline of maintaining a surplus across the economic cycle.”

It is probably well past time for one of the most misguided economic conventions of the modern era to be buried. Anybody who owns a home or invests in property will be able to tell you that it often makes sense to borrow money in order to invest for the future. Anybody who runs a business can tell you that it sometimes make sense to borrow in order to grow the business, even if the current bottom line is not healthy enough to support such a step. The doctrine that suggests that budgets deficits are always “bad” effectively is also suggesting that investment for the future should be mercilessly limited, and that important projects too big to be funded by governments should be dumped.

As long as the Rudd Government takes care to ensure that any funds borrowed are spent wisely and on measures that are effectively certain to benefit the national economic situation, I personally see no problem with the government going into deficit. It would obviously amount to poor governance to consistently deliver budget deficits, but the odd one, if put to proper use, can definitely work to the greater benefit of the nation.

11 thoughts on “Those terrible “d” words

  1. The Rudd government appears to have broken their promise of being economic conservatives.

  2. To be honest I am not sure whether “economic conservatism” necessarily implies “consistent budget surpluses regardless of the conditions”.

  3. Keynesian social democrats shouldn’t have had all that much of a problem with Rudd being an economic conservative – at the top of the economic cycle, that is.

    There seem to be two reasons to have a surplus. When the economy is humming along, not injecting money into the economy and adding to inflation makes sense (although apparently there’s no clear-cut link between running a deficit and inflation). Second, the government doesn’t have to pay interest on its bonds and so saves money if it can pay for things out of a balaced budget (though governments should be paying tiny amounts of interest at the moment as investors flood into safe goverment bonds).

    The third reason seems to have something to do with Liberal ideology/Protestant frugality and self-denial – that is, the sense that a balanced budget means a good government running a tight ship whereas a deficit means sloppiness and permissiveness.

    Why don’t business people and commentators – who are all over the media saying running a deficity is absolutely the right thing to do – put aside their Tory prejudices for once and say the Libs are talking utter nonsense. After all isn’t capitalism supposed to be on the precipiece?

  4. Should the Australian situation be confused with the global situation and does very tiny positive growth warrant a deficit budget?

  5. GB, you’re right there, the Libs are a complete jumble at the moment on economics. They’re being undermined by Julie Bishop’s lack of authority in the Shadow Treasury role as well.

    Matthew, I think the Rudd Government should continue to assess things on a month-by-month basis in relation to the state of the budget and indeed the global situation. I am not convinced we are there yet, but depending on how things develop, I agree with the government that spending measures that take the budget into deficit may well be justified.

  6. Sorry for my long-winded post – I just ramble on when I’ve had a beer. One index today records a big drop in the rate of inflation. So there’s really no economic reason not to spend. Paul Krugman has a good piece in the NY Times today.

    When are people going to see Malcolm Turnbull for what he is – a big bag of wind. He knows the government has to spend as much as we do.

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