Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

Note from Tom Switzer

Tom Switzer

02 April 2020 | Ideas@TheCentre

We’re only a few weeks into the coronavirus crisis, and already our intellectual opponents are arguing that the coming recession is an indictment of capitalism. After decades of ‘small government’, the nanny state philosophy of redistribution and control is back with a vengeance. When ACTU leader Sally McManus and the left-wing activist group GetUp praise a Liberal government, you know we live in remarkable times.

CIS has long championed values of individual freedom, fiscal responsibility and limited government, and my colleagues and I profoundly disagree with the emerging policy consensus. True, relief in a crisis is a proper role for government — especially addressing short-term hardship (job loss, illness). However, it is appropriate for groups like CIS to subject government spending and security initiatives to sound scrutiny. What are the likely unintended consequences of the wage subsidy, skyrocketing debt, schools shutdown and the rights clampdown, for instance?

Covid-19 represents a liquidity crisis caused not by business or reckless CEOs, but by the government strategy to shut down the economy in order to reduce the spread of the virus and loss of life.

It’s also a myth to say the size of the state shrank before Covid-19. Indeed, government spending as a percentage of GDP, especially on health and education, has increased in the past decade. Don’t forget, too, that the government would not have the money to spend without our vibrant private sector — and all the spending will be repaid in the future via the market economy.

Moreover, higher levels of government spending and higher taxation will bankrupt our nation and retard our economic recovery. The best way out of this crisis, as I point out here, https://www.youtube.com/watch?v=XLna5MdXuaI

is for our political leaders to prosecute  a new reform agenda that improves incentives to work, lifts productivity, spurs a revival in business confidence and strengthens long-term growth and living standards.

It is against this background that some of my CIS colleagues here reflect on the perils of some of the recent government initiatives in the Covid-19 era. An independent voice such as ours is needed more than ever.

Tom Switzer is executive director of the Centre for Independent Studies.

Surveying the public finance wreckage

Robert Carling

02 April 2020 | Ideas@TheCentre

If we think of Covid-19 as a severe tropical cyclone, when it passes and we venture outside to survey the wreckage it will be impossible not to see the enormous damage to the country’s public finances.

Federal and state governments are spending a great deal more, while their revenues take a hit.

As this fiscal incontinence continues, it won’t be long before a greatly increased level of public debt becomes an unavoidable legacy of the crisis.

Australia’s pre-crisis gross general government debt stood at more than $800 billion or about 43% of GDP – about three-quarters of it Commonwealth and one-quarter state.

After 10 years of rapid increase, the Commonwealth was flattening the curve (to borrow a term currently in vogue), but state debt was set to increase by roughly $100 billion in three years to finance an infrastructure splurge. The net result would have been an increase in the dollar amount of debt, but stabilisation as a percentage of GDP – albeit at an historically high level.

Those projections have now gone out the window. While any calculations at this stage are ‘back of the envelope’, it is not difficult to see total debt increasing by 10–15 percentage points of pre-crisis GDP (let alone shrunken post-crisis GDP), taking it quite rapidly to 53 — 58% of GDP.

This would still be well below the average of G20 advanced economies (currently 113%, and surely set to surge). Some will draw comfort from this international comparison, but there is no escaping the reality that a higher level of debt will constrain our governments’ policy choices, risk credit rating downgrades and leave us even more exposed to a future crisis.

An increase is inevitable, but it can be minimised by stopping this misguided economic shut-down as quickly as possible; ending the associated economic rescue spending much earlier than currently envisaged — and ensuring none of it becomes permanent.

Finding the funds

Percy Allan

02 April 2020 | Ideas@TheCentre

In a week we have shifted from a globalised liberal economy and free society to a command economy with closed borders, regimented movement and a welfare state.

And through necessity, all sides of politics support it.

When COVID-19 is over will people demand stronger government (to cope with crises) or pine for laissez-faire (to allow free-will)? That’s an important debate.

But the pressing fiscal challenge is how federal and state governments will fund the huge payments for keeping households and business afloat during this health and economic crisis.

There are basically four choices:

  • increase taxes, fees and charges (which would worsen the economic slump),
  • sell bonds to private investors (which will increase debt, possibly increase interest rates in the short term and require higher taxes in the long term),
  • sell bonds directly to the Reserve Bank (which would defer interest rate increases but still increase public debt and require tax rises in future), or
  • sell zero coupon perpetual bonds to the RBA (which if it agreed to buy them, would effectively be printing money).

None of these mechanisms is appealing; but given this is an emergency with hopefully a finite timeline, the last option may be the most palatable.

In any case, this is a discussion that urgently needs to be had between the National Cabinet and the wider public — since the path chosen has huge implications for taxpayers, retirees and future generations.

Percy Allan AM is a public policy, management and finance adviser; a former Secretary of the NSW Treasury and Chair of the NSW Premier’s Council on the Cost and Quality of Government.