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Governing on auto pilot

12 May 2005

For Nicholas Gruen, Peter Costello’s tenth budget is a reminder of earlier days

HABITS form and help make our lives more relaxed and comfortable. But this budget’s a bit too relaxed and comfortable.

Our economy has been through a record era of growth which has been the result of a generation of economic reform, masterful monetary management, China’s insatiable appetite for various kinds of Australian dirt and good luck.

I was one of a group of six economists warning of the danger signs during the last election. Record and growing trade deficits, emerging skill shortages and infrastructure bottlenecks, business expenditure on training and R&D still a lower share of the economy than it was ten years ago.

In the government’s first major economic statement since the election - after which these problems have only intensified - there’s an eerie silence about them all. Just more cash to spend.

I witnessed a similar lack of direction inside a government of about the same age, but of the opposite political persuasion. You may remember Paul Keating’s unfortunately titled economic statement, ‘One Nation’. It sought to fight a savage recession with increased deficit spending.

With the exception of its first few months in office, the government had spent its time paring back government spending which it had done with flair, fairness and fortitude. It was in the groove. That was the trouble.

When I joined the new treasurer’s staff in the dying days of 1991 I was expecting something like Churchill promised his country when he took over in an even graver crisis: ‘Blood, toil, tears, and sweat.’

But, having taken over a year to finally put Prime Minister Hawke to the sword, the new leaders were exhausted. Like a pride of lions napping through the heat having gorged themselves on a fresh kill, the pollies went off for Christmas.

Automatic-pilot beckoned. When we returned to put the statement together I was struck by the fact that, though there was a mountain of paper about this policy or that, there was no paper seeking decisions on the most basic strategic question. How much more money should we pump into the economy?

Instead, departments submitted spending proposals to the familiar and exhausting scrutiny of the ERC - the Expenditure Review Committee of Cabinet. The ministers representing the Departments of Finance, Treasury and Prime Minister and Cabinet were all very experienced and capable operators in the ERC. That was the problem.

After the process had run its course it was clear that the ERC had knocked off too many spending proposals. The grand change in direction for which the government had been paralysed for over a year was amounting to not much more than $1 billion - then a fraction over one quarter of one percent of the economy.

I was summoned via an extraordinary and cumbersome new device which worked pretty much like a phone but which could be lugged around in your briefcase. We needed to find a way to spend at least another half a billion!

That is a microcosm of what’s been happening within the Howard government. It’s been happening every six months for four or five years. Unlike Mother Hubbard, each time Mother Howard has gone to the cupboard he’s found that far from being bare, the cupboard has another few billion dollars sitting in the forward revenue estimates.

There are good reasons for thinking that this budget may be the end of the line for Old Mother Howard’s magic cupboard. There are growing concerns about the inflationary consequences of growing skill shortages, infrastructure bottlenecks are slowing us down and at least part of the reason for projected increases of revenue comes from improved forecasting methodology. So to the extent that forecasting has been improved this has removed the scope for further systematic happy surprises in the future.

In the meantime, each time the revenue estimates have blown out, the government has improvised some more or less sensible way to hand it back. Tax cuts, $100 cheques here, $200 dollar cheques there. It’s bought short-term popularity, but tens of billions of dollars could have bought that and much more. It could have been invested in the next economic miracle.

The one ‘structural’ theme in this budget is increasing the work participation of single parents with school age children and people with relatively minor disabilities. This ‘tough love’ will help - or hassle - some people into employment and out of poverty and welfare dependence. So it’s welcome - even if better funded carrots to go along with the sticks might reduced the contrast with $4500-a-year tax cuts for those earning $125,000.

And will the jobs be there? However sensible in principle, it’s not the absence of these people from the labour market - relatively unskilled as many of them are - that’s holding us back. Meanwhile there’s an eerie silence about what really ails us - skill shortages, infrastructure, R&D, exports.

There’s no great cause for alarm right now. But I keep thinking of that plane that flew into Mount Erebus. Wasn’t it flying on auto-pilot? •

Dr Nicholas Gruen is visiting fellow at ANU and Melbourne University and CEO of Lateral Economics and Peach Discount Mortgage Broking.

Photo: iStockphoto.com

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