The distance from Athens to Canberra

How far is Australia from Greece?  Pretty far, but, sadly, they’re getting closer every day.  Not because the Earth is shrinking, but because the Australian government is very gradually easing into Greek financial methods.

Greece provides a brutal reminder of what happens when governments spend and promise beyond their means, make it harder for workers to find jobs, and stifle wealth-creating enterprise.

Previous Greek governments financed government expenditures and consumption through borrowing, ran up staggering debts, made promises that cannot be fulfilled (known as ‘unfunded liabilities’) and did their best to drive work underground or out of the country.  Everything seemed fine until it didn’t.

The Global Financial Crisis hit Greece, as it did other countries, but frankly the debt crisis would have hit them without the GFC. Their problems are home grown. Greek jobs are hard to find partly because of the ‘costly to fire, costly to hire’ dynamic well known to labour economists.  When you aren’t generating wealth, it’s hard to tax it. And borrowing and unfunded liabilities grew wildly. Now the bills are due, the country is in an existential crisis, and capital, bank deposits, and young people are fleeing.

Surely Australia is far from such a situation, not only geographically, but financially and politically.  Thanks to years of relatively responsible fiscal and economic policies, Australia is not where Greece is, but the gap is narrowing and could shrink quicker than you’d expect if actions are not taken now to ensure Australia’s future.  Among Australia’s problems are that governments relied on future windfall royalty payments from mining, and based expenditures on such expectations, restricted job flexibility, and are still buying votes with entitlements for child care and nanny payments that will almost certainly grow in future, as will the bills for Medicare, which will balloon in cost as the population ages. Populist threats to raid superannuation savings make the future less certain and affect savings and investment behaviour today.

The good news – and it is good news – is that Australians have time to avert crisis. The bad news is that the new Budget doesn’t go very far toward doing so. Spending restraint and fiscal balance are one part; the other is an economy that offers wealth-creating employment to people and capital. The proposed budget has a little bit of the latter, but didn’t touch for instance Australia’s industrial relation constraints that stifle job creation, and hardly addresses the long-term fiscal imbalances. Additionally, more could have been done to kickstart the much-needed implementation of Harper’s Competition Policy Review recommendations.

And as some entitlements were expanded (childcare, for example) little was done to restrain future expenditures. Treasurer Joe Hockey even bragged that any realised savings would be spent right away, saying “What we want to do is redeploy our savings and redeploy government expenditure into areas of growth in the economy.”  That could have been translated directly from Greek into English.

Moreover, the asset test for age pension still doesn’t include family homes, unfairly giving those who could purchase homes an advantage over those who could not and channeling savings into a relatively unproductive investment – a bigger house – rather than the wealth and job creating part of the economy.

Australians are fortunate that they have time to fix their problems. Australia is a nation capable of adult discussions about what is and is not affordable. Other countries are heading toward fiscal disaster as spending, government debt, and unfunded liabilities all continue to be increased by profligate governments. (I’m sad to say the US, which taxes my income regardless of where I live or work, is one of the worst performers on those measures. Americans have yet to have a grown-up discussion of arithmetic; politicians continue to believe that they can police the world, pour ever-greater sums of money into health care, and buy votes with promises of benefits … all financed by a giant IOU. I wish the US had some of Australia’s more mature attitude.)

But having time to fix the problem is no excuse for kicking the can further down the road. Australians have a chance to avoid a Greek future, but it will get harder and harder every day they put off controlling expenditures and freeing the economy.

The future has a nasty habit of eventually arriving. It’s best to prepare for it when one can. That means living within one’s means, not making promises of future payments without identifiable corresponding revenues, and securing equal opportunity for wealth-creating cooperation.