Debt and Deficits

Debt and deficits aren’t the end of the earth, but we need a plan.

The bad news in this week’s budget update by the Treasurer Josh Frydenberg came as no surprise.

The estimated budget deficit of $85 billion this year (2019/20) and $184.5 billion by June 2021, because of the necessary additional COVID-19 related measures and an unprecedented loss of revenue, is the biggest since World War 2. All of this is in the context of global economic contraction of 4% this year and US contraction of 8%.

My view is not to criticise the Morrison Government for that deficit. They have done what needed to be done – to pump money into the economy, to support businesses and workers and bring forward infrastructure spending. Early in the pandemic the Government were reluctant to intervene. Income support through JobKeeper and JobSeeker only came about after Labor’s insistence and after the social security system was on the verge of collapse.

But Labor would have done something similar. The debt leaves us worse off, but not as badly as many other developed countries. Our net debt as a proportion of GDP was 24% at the end of June 2020 and Treasury expects it to be 35% by June 2021. But to put it in perspective, most developed countries have debt of over 100% of their economy.

I have views about how misdirected some of that stimulus money has been. From my perspective:

• JobKeeper should have included a broader range of workers and been better targeted
• The rescue packages would have been more balanced in focusing on female dominated industries as well as male-dominated industries
• HomeBuilder would have focused on social housing as much as private homes
• A rescue package would have been made available for our university sector – our fourth biggest export earner – which has been woefully neglected throughout the pandemic
• Childcare and early education would not have been treated so terribly with ‘free’ childcare ending on 13 July and access to JobKeeper ending on 20 July
• There should be more support for our struggling tourism sector, especially here in Corangamite along the Surf Coast and Great Ocean Road

These are just some of the ‘mistakes’ made by this Government over the last five months.

But I’m willing to concede that no matter who was in government mistakes would have been made in the rush to stimulate the economy.

The great irony is that Labor will be far more charitable to this Government over this deficit than the Coalition was to Labor, which played the same crucial role during the Global Financial Crisis (GFC). During the 2008-09 GFC Labor stimulated the economy quickly - remember the one-off payments to pensioners and welfare recipients, the home insulation subsidy programs, building 20,000 units of new social housing and the new buildings at every school.

We were the only developed country to avoid a recession during the GFC. PM (then Treasurer) Morrison has been merciless over the last decade in his criticism of Labor’s rescue program and the $40 billion of debt it created. Now they expect voters to accept that Labor’s debt was inherently ‘bad’ or wasteful and that their debt is inherently ‘good’ or necessary. In both cases the stimulus was absolutely necessary.

There is a great myth that having debt as a country is like a household spending beyond its means. It simply isn’t the case. No-one likes debt. However, governments have an ability to borrow cheaply and to repay debt that households don’t. In these extraordinary times we must keep investing in our people and businesses if we are to build a platform for renewal. 

Beyond the debt and deficit though one thing is clear. We urgently need a plan for the next decade and beyond. That will really separate what each of the major political parties stand for.

The Coalition’s first instinct will be to implement an austerity program, to cut services and support over the next few years in order to get the budget back to surplus as quickly as possible. Just like they did in their horror budget of 2014.

I believe that Labor will take another path.

A path that is less about austerity and more about rebuilding and growing our economy.

The last thing we need now is to cut childcare, health, education, community and other services where there are millions of jobs. An austerity path will deepen the recession, even turning it into a depression.

It is better to live with the debt and deficit for longer to give us time to build revenue and jobs by investing in our economy. Things like:

• Expanding our advanced manufacturing base which has slumped from 30% of GDP in the 60s to just under 6% last year. The Centre for Future Work has recently estimated that of the 36 developed OECD countries Australia ranks last in self-sufficiency in manufactured goods with Australia only producing two thirds of the manufactured goods it consumes (compared to Germany at 118% and Sweden at 112% for example). Other rich, high wage countries do manufacturing very well. We should too. COVID-19 gives us that opportunity. See this article.
• Expanding our research and development capacity and ensuring the intellectual property is owned and developed here in Australia
• Transforming our energy system into 100% renewables, including hydrogen, as well as rebuilding our crumbling energy grid
• Using green energy to transform manufacturing, like green steel production and hydrogen for export, creating thousands of new jobs and to build a circular economy
• Revitalising our agriculture by investing in high intensity agriculture and value adding as well as getting out of hugely inefficient crops. The tiny Netherlands exports over double Australia’s agriculture exports because they have been strategic and energetic.
• Ensuring we have a Jobs Guarantee that provides a real job and new skills, not just a minimal income without hope
• Allowing our huge superannuation sector to invest in off-market manufacturing and infrastructure developments more easily
• Ramping up ‘buy local’ campaigns and mandated local procurement policies which make it clear that if the price and quality is competitive then Australian goods should be used, especially by all levels of Government and in projects funded by taxpayers.

Other countries have been doing all of this and more. We can too.

But we need clear plans for each of these areas, as well as investment and leadership.

Remember, the Coalition drove the car industry from this country and laughed in Parliament as they did it.

The Coalition has legislation in Parliament right now which will rip $1.6 billion out of research and development which will damage bio-science research, including advanced drug trials.

The Coalition has been promising the rural and regional sector a strategic plan for the Agriculture, Fisheries and Forestry Sector for the last seven years. It has never seen the light of day.

Labor is the party of the Button Car and Steel industry plans. Labor is the party that created superannuation that has given us a huge pool of money to invest in our own future.

The next election in 2022, or perhaps earlier, shouldn’t be fought on debt and deficits. In a world where Australia has a very low debt to GDP ratio compared to all other developed countries, we should be focussing on the ‘positive’, not a ‘negative’.

That ‘positive’ is focussing on which party has the best plan to rebuild and reposition Australia for the next decade and century? Which party can build jobs, exports and revenue without ripping the services and heart out of our communities and society?

Labor is up for that challenge.

This story was originally published in Libby's July Newsletter. Please click here to subscribe to the email newsletter.