Stimulus path to bigger government

The federal government’s budget surplus has been sacrificed to appease John Maynard Keynes ‘animal spirits’. More than $15 billion has been earmarked so far.

It is now clear there will be negative economic consequences from coronavirus (on top of the effects of the bushfires). Lower than expected tax revenues, and higher than expected expenses, will likely have an impact on the federal budget balance.

That said, a government serious about delivering a surplus could easily find $10–$15 billion in expenditure it could cut with little or no negative economic impact.

After all, the government spends more than half a trillion dollars, and some of that money is an egregious waste (for example the duplication of state functions, providing financial assistance to industry or running programs with little or no evidence they work).

Yet we have already crossed the Rubicon: the government has decided it must engage in deficit spending in the face of these challenges.

For decades, prior to the GFC, both major parties agreed that short-term stimulus, for the purpose of managing short-term fluctuations in aggregate demand, was not the role of the federal government.

It was a lesson hard-learned by years of suffering under economic mismanagement characterised by extremely high inflation, recession levels of unemployment and spreading poverty.

The role of the government was to address supply side restrictions in the economy and keep productivity and economic growth on track in the medium to long term.

In the wake of the GFC, politicians around the world revived the idea of government needing to take a more active role in managing fluctuations in the economy. For many (like Labor in Australia), Keynesianism simply gives a veneer of economic credibility to the kind of social welfare program expansion that progressives were advocating anyway.

The economic effectiveness of this was highly debatable. Much like modern socialists — with their fingers in their ears and eyes tightly shut repeatedly claiming ‘real socialism has never been tried’ — the prospect of failure did not stop Keynesians calling for more stimulus.

Keep an eye out for the advocates of government stimulus laying the groundwork for disclaiming failure of this package. This is about the ideological commitment to big government, not the coronavirus.

This is an edited extract of an opinion piece published in the Canberra Times as Is it time to loosen the purse strings and commit to a Coronavirus stimulus package?