Liberals have regressed to big government - The Centre for Independent Studies
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Liberals have regressed to big government

Liberals once stood for a smaller state, popular capitalism and a sensible approach to public finances. The party’s ideological regression has been staggering: during the recent era of Coalition rule, the party of John Howard and Peter Costello rarely explained how growth comes from the private sector, entrepreneurship and innovation.

Instead, the size and scope of the federal government exploded. According to the Australian Bureau of Statistics and Macquarie Macro Strategy, government spending was little changed between late 2009 and late 2014, but has grown at an average annual rate of 5.9 per cent over the period since.

Sure, the large and massive expansion of the state in response to the COVID-19 crisis represented an exceptional state of affairs.

However – amazing as it may sound – the ostensibly small-government Liberal Party seemed totally oblivious to the fact that all the non-COVID spending on health and education as a percentage of GDP (fully backed by the Labor Party) has put the nation’s economic agenda in jeopardy.

The National Disability Insurance Scheme is financially unsustainable, while higher Gonski education funding has not prevented declining school performance.

And the NSW budget spendathon this week underlines the Liberal Party’s sad decline into the party of big government.

Sadly, the explosion of government appears to be an experience common to much of the democratic world. Ministers and department heads have quickly become used to exercising power with a heavy hand and seem reluctant to stop.

Having ignored the basic rules of free-market economics for so long, governments have no choice but to embrace them again.

It is as if the economic ideas of Friedrich Hayek and Milton Friedman, which so profoundly influenced Margaret Thatcher and Ronald Reagan – and which helped influence Australia’s economic reform agenda in 1980s, 1990s and early 2000s – had never happened.

We now seem to live in a risk-averse society – not just one that, until recently, was reluctant to expose its people to catching a virus we have found can be contained by a successful vaccination program, but one that avoids risks necessary for prosperity.

If political leaders fail to support an incentive-sharpening reform agenda to boost productivity, we will deter people from taking the risks inherent in setting up any business.

This is fatal to a free society for several reasons. First, if we deter enterprise, we discourage wealth creation and, ultimately, pursue economic decline.

The British experience

Take Britain. In recent years, the UK economy has been torpedoed by the greatest act of state intervention most Brits have seen in their lifetimes: one has to travel back to the Attlee administration of 1945 to find a government controlling the lives of its people, and spending its people’s money, in anything like the way a supposedly Conservative one has done.

The result is falling incomes and productivity, very low economic growth, and the highest government spending and inflation in decades.

Another danger is that once you expand government it is exceptionally hard to contract it. Huge government departments and regulatory bodies become self-perpetuating.

Even in more sensible times, talk of ministers going into departments and abolishing them to save taxpayers’ money was often simply rhetoric; officials and functionaries in those departments did not want them abolished because they would lose their jobs. Not to mention loud protests from stakeholders in the sector – including consultants, not-for-profits and crony capitalists, who make a living by capturing and directing government spending.

The state becomes an end in itself, rather than the enabler to private citizens it should be.

Then there’s monetary policy. Central bankers and their defenders blame rising inflation on Russia’s invasion of Ukraine and supply-chain bottlenecks that have disrupted the global production of goods.

Inflationary policy settings

No doubt global factors have contributed to rising prices, especially food and energy. But the blame lies primarily with the government, which controls the supply of money.

The result of the extraordinarily loose fiscal and monetary policy settings in Australia, Britain, the US and elsewhere has been the surging inflation that has caught central banks and Keynesian economists by surprise.

Having ignored the basic rules of free-market economics for so long, governments have no choice, if their nations are to remain solvent, but to embrace them again.

If the money supply is not controlled, if the free lunches are not ended and public spending not aggressively reduced, and above all if taxes (especially business taxes) are not cut, we can forget any real improvement in the Western standard of living.

What we have seen in the West in recent years, and are still seeing, is a desire to pump money into the economy’s unproductive sectors rather than its productive ones.

And in this instance as in so many others in history, the productive sectors are those where incentive, risk and innovation combine to allow wealth creation and growth. The unproductive sectors are almost entirely those run or sponsored by the government.

If these trends persist, our present standards of living will become a fantasy.