Keating finds his inner Keynes

Tom Switzer

31 October 2019 | Financial Review

One measure of Australia’s much-changed economic policy debate is that Paul Keating – architect of the market reforms that helped create our aspirational society and its modern prosperity – now champions big government.

In an interview with Alan Jones on Tuesday, the former prime minister called on the Morrison government to stimulate the 1 per cent economy via higher levels of government spending.

“The ’80s and ’90s were a period of small government and big open economic freedoms with deregulation,” he told the broadcaster. “I think we are coming to a period now when we are going to see much bigger government.”

He argued that with global growth shrinking and monetary policy having “run its race”, Canberra should borrow more to spend on public works.

Call it the “secular stagnation” thesis, popularised by former Obama White House economist Larry Summers, which holds that Western nations are destined to endure slow growth unless governments stimulate growth through expansionary fiscal policy financed at ultra-low borrowing costs.

The balanced budget fetish belongs to another era, we are told, and governments should loosen the purse strings.

However, Keating and the new Keynesians are wrong. How so?

Well, for one thing, it’s more myth than reality to say we had “30 or 40 years of smaller government”, as Keating told The Australian.

Deregulating the economy is one thing, reducing the size and scope of the state is another thing — and they should not be confused. Even Ronald Reagan, with his two massive electoral mandates, rolled up record deficits and doubled the total US debt accumulated over the previous 200 years.

There were, to be sure, episodes of fiscal restraint, including budget surpluses under Keating (three) and former Liberal treasurer Peter Costello (10). In 1986, Keating warned: “If the deficit was not dealt with, we are done for. We will end up being a third-rate economy … The days of the magic pudding are gone in Australia. You can’t go and have a slice and come back and find it isn’t diminished. We can’t turn our back on growth and go on writing massive cheques.”

But the federal Leviathan always bounces back. When measured by spending, government is as big as ever.

But the federal Leviathan always bounces back. When measured by spending, government is as big as ever.

Far from “small government” holding back economic progress, our economy suffers from the burden (especially the tax burden) of government that is too big. Keating is really calling for even bigger government, not an end to small government.

To his credit, as treasurer Keating cut company and personal tax rates and only last year he said the top income tax rate of 47 per cent was “way too high”. Which means he recognises the adverse effects of high tax rates. But bigger government will ultimately lead to even bigger taxes.

Moreover, the policy prescriptions from the new Keynesians are not convincing. Spending more taxpayers’ money is not the way to sustain solid growth in the real living standards of average households. Just survey the many eurozone nations where fiscal policy looks unsustainable.

In the current climate of low interest rates and balanced budgets, additional government borrowing to pay for infrastructure may not threaten credit ratings.

However, entrenched public borrowing would almost certainly lead to wasteful spending as well as delays and more cost over-runs in construction supply chains; Sydney and Melbourne are already enjoying infrastructure booms that, as reported in this newspaper, are running into shortages of labour and supplies, such as cement.

And if governments borrowed even more, households and businesses would expect future tax increases, dampening the incentives to spend and invest.

Perhaps it’s time to try something new — or, more precisely, return to the policies we know worked so well in the past.

To the extent that government can stimulate growth, it’s through structural reforms that improve the investment climate and liberate risk-taking, spurring a revival in business confidence and growth to give the long expansion renewed life.

Cut red tape. Reduce workplace regulation. Fast-track tax cuts to unleash investment. Fix the state-based payroll taxes and stamp duties on property that stifle labour mobility. Make the 30 per cent company tax rate more internationally competitive. Break the construction union’s monopoly power. Restore monetary policy to its appropriate role of maintaining price stability.

And if governments indulge in more infrastructure spending, ensure it is money better targeted: for instance, more user-charging on the roads.

As for the budget surplus, a strong fiscal position is a cushion against external shocks. Australia weathered the global financial storm in 2008-09 in part because Costello’s budget surplus was a good shock absorber.

With the right policies, an investment boom will drive productivity gains and job creation that will flow to higher wages and lift consumer spending. Government pump priming and more deficits and debt will not deliver secular growth.

Only structural supply-side reform can unleash animal spirits and give our long bull run a second wind.

Print Friendly, PDF & Email