Deficit is a worry and right-wing governments aren’t going to fix it

The ridiculously-named ‘big beautiful bill’ recently passed in the US warrants close attention from Australian policy makers.

The focus should not just be on the items in the bill, but on how the US political landscape has shifted and what that might mean for Australian political parties on both sides.

Although numerous contested claims have been made about the bill’s benefits, it seems clear that it will add to the (already enormous) US deficit.

For example, the Congressional Budget Office projects it will add $3.4 trillion to the federal deficit over the next 10 years.

Trump, of course, has form on the debt and deficit front. ProPublica calculated that national debt increased by almost $7.8 trillion in his first term.

The Republicans have shifted a long way from 2012, when vice-presidential candidate Paul Ryan proposed a radical new fiscal program that would have cut the budget deficit by 75% or more within 10 years.

This shift should worry Australian politicians for two reasons. The first is that debt and deficits are not nearly as benign as the public seems to believe. Second, it suggests some closely held political truisms may no longer hold true.

The CIS has been warning about the risks of debt and deficits for some time. For example, a recent CIS publication by Robert Carling, Gene Tunny and Peter Tulip laid out the fiscal challenges facing the government.

As Robert states “the federal government’s finances [will not] cope well with more economic or other shocks to the system — and there are even bigger debt problems in some states and territories.”

However, the political economy effects of shifting attitudes to debt and deficit are more subtle.

It was traditionally taken for granted that the right cared more for debt and deficits than the left.

Right wing politicians used to grumble that the public would elect right-wing governments to do the hard work of balancing the books and then they would immediately elect a left wing government to unbalance them again.

There was a positive element of this too though. John Howard convinced the public that fiscal prudence was the best measure of the competence of a government. This millstone hung heavily around the neck of the Rudd – Gillard – Rudd Labor government that followed.

This millstone is gone, or at least greatly diminished. It seems clear that voters no longer consider a budget surplus the sign of success, or a large deficit that of failure.

The main measure of a good budget now seems to be how much cash is shovelled out the door.

Certainly the lack of alarm over the deterioration in the fiscal position in the recent budget suggests Labor isn’t very worried about debt and deficits.

Some on the left believe that voters ignoring on budget surpluses is an unalloyed good for the party — and they aren’t entirely wrong.

The conventional wisdom suggests that in any contest between left and right over who can hand out the most money, the voters will prefer the real deal on the left over those Johnny-come-lately spendthrifts on the right.

But Trump’s example shows that this wisdom only holds as long as the status quo holds on the right.

To put it bluntly, if the right abandons fiscal responsibility to the same extent as the left, then not only can the right compete with the left on spending, they can win the fight.

Why? Because in so many areas, the left is now tied to vested interests in a way that the right simply isn’t.

The left is compelled to launder their spending through the priorities of quasi-government institutions, not-for-profits and unions because these groups represent key constituencies for left wing political parties across the globe.

These bodies — which range from the well-meaning to the borderline corrupt — have their own weaknesses.

Even those who interests align relatively well with voters will take a cut from any funding. Many are preoccupied with policy solutions that don’t work very well.

Take teachers unions for example. In Australia, Labor’s Gonski spending explosion was heavily influenced by what the unions thought the money should be spent on (such as reducing class sizes).

This spending was largely ineffective in terms of improving results.

Another example is childcare. Voters might well feel good about recent moves to subsidise higher wages for childcare workers, but if given a meaningful choice would they prefer the government to spend that same money on greater subsidies and more flexible care options instead?

Labor might retort that they have done both, but what if the Coalition promised to overhaul the whole system and give voters the option to keep the same subsidy and spend it on any type of care they want?

Another, rather crude, example: do you think there are more votes in increasing the age pension or in boosting unemployment benefits?

And that is before you get into ideological crusades — which many of the left-wing institutions are obsessed with — that the public has little patience for.

A populist, big-spending right would be unencumbered by the baggage that hamstrings these bodies. They could cut out the middle men and just bribe the voters directly.

To be clear, the Australian right adopting big government populism would be terrible for the country, as it undoubtedly will be for the US.

The extent to which US politicians have abandoned their responsibilities is scandalous.

In the same way that the recent inflation crisis put paid to the nonsense economics of modern monetary theory, the US is on the path for a potentially disastrous fiscal reckoning that will force US politics to focus on debt and deficits again.

Australia would be ill-served to follow down the same path. However it is far from a forgone conclusion that a more positive direction will be taken.

The populist alternative remains alluring, especially in the short term where the consequences can be deferred into the future.

Australia would be far better off if politicians and voters cared more about fiscal responsibility. But the onus lies on both sides of politics to prevent this from happening; not just the right.

Simon Cowan is Research Director at the Centre for Independent Studies.