The 2020s: the new age of profligacy

Fiscal profligacy is breaking out all over. Australia is an exception, but many other countries have given up on efforts to curb deficits and borrowing; some never even tried, and the handful that have succeeded in applying discipline are under pressure to relax it. The United States is a stand-out example, where the polity simply no longer cares about deficits and debt and sees nothing wrong in running a budget deficit of almost five per cent of GDP in the midst of an economic boom that should be producing surpluses. 

Britain is one of the most interesting and instructive cases. The biggest challenge facing Boris Johnson’s government in the wake of its electoral triumph is implementing Brexit and doing so in a way that optimises the benefits and minimises the costs of disentangling from the European Union. There is, however, another challenge much less talked about in Australia — restoring stability and strength to the UK’s public finances. 

This has been a long–running project ever since the UK economy was destabilised by the financial crisis and associated Great Recession of 2008-09. Government spending — which had already been rising strongly in the Blair Labour government’s second term — soared, reaching its highest post-war level of 47 per cent of GDP. (By comparison, Australia’s government spending peaked at just over 35 per cent of GDP.) The budget deficit blew out to more than 10 per cent of GDP and public sector net debt doubled to more than 70 per cent of GDP. 

The Cameron Conservative governments elected in 2010 and 2015 made restoration of fiscal discipline their top priority. The project came to be known, pejoratively, as ‘austerity’ rather than more objectively as fiscal discipline or consolidation. It emphasised returning to a balanced budget primarily by curbing spending rather than raising taxes — although there was some of the latter. Certain areas of spending, such as the National Health Service and (for reasons that are difficult to fathom) foreign aid, were ring-fenced from budget cuts, which made the cuts much larger — and harder to sustain — in other areas in order to achieve global targets.

Teresa May took the ‘austerity’ torch from Cameron in 2016, and by 2018 — although the objectives such as a balanced or surplus budget still had not been reached — much had been achieved. And then along came the political system’s nervous breakdown over Brexit.  

Amidst a weakening economy and the leaching away of May’s political authority, by early 2019 the government was declaring that ‘austerity’ was coming to end, even though its objectives had not been reached. Austerity was being blamed, among other things, for 130,000 avoidable deaths! A weakened government had too much else on its plate to devote political capital to preserving something as electorally unappealing as ‘austerity’. 

Fast–forward to the December 2019 general election and the Conservatives’ manifesto promises to ramp up spending on the NHS, law and order and so on while applying a ‘lock’ to current rates of major taxes. The triumphant Johnson government’s political debt to the votes it says it has “borrowed” from traditional Labour voters will make it doubly hard to re-tighten the fiscal reins. 

The UK experience is rich in lessons. One of the most telling is that in a modern, noisy democracy full of vocal constituencies ready to defend existing social benefits and advocate more, it is very difficult to stick to a multi-year glide path of fiscal consolidation and see it through to the end. Either the government will change, or circumstances will change, or people will just tire of ‘austerity’.  

This is something to bear in mind when Treasurer Josh Frydenberg tells us that after another 10 years of fiscal discipline the Commonwealth’s net debt will be back to (almost) zero.