While other countries fell into the global recession, Australia maintained strong economic growth, low government debt and a triple-A credit rating. With this record, you might expect the federal election to be focused on how to convert the strength of today’s economy into resilience for the future. But instead the political spotlight has fallen on the perceived problem of government debt, with alarming proposals to bring austerity ”down under”.
For an American, Australia’s anxiety about deficit and debt is a little amusing. Australia’s budget deficit is less than half that of the US and its net debt is less than an eighth of the country’s gross domestic product.
Most countries would envy Australia’s economy. During the global recession, Kevin Rudd’s government implemented one of the strongest Keynesian stimulus packages in the world. That package was delivered early, with cash grants that could be spent quickly followed by longer-term investments that buoyed confidence and activity over time. In many other countries, stimulus was too small and arrived too late, after jobs and confidence were already lost.
In Australia the stimulus helped avoid a recession and saved up to 200,000 jobs. And new research shows that stimulus may have also actually reduced government debt over time. Evidence from the crisis suggests that, when the economy is weak, the long-run tax revenue benefits of keeping businesses afloat and people in work can be greater than the short-run expenditure on stimulus measures. That means that a well-targeted fiscal stimulus might actually reduce public debt in the long run.
Australia may have successfully dodged the global crisis, but some politicians seem to have missed the lessons it taught the rest of the world. In this election, the conservative side of politics has foreshadowed substantial cuts to the government budget. This would be a grave mistake, especially now.
Recent experience around the world suggests that austerity can have devastating consequences, and especially so for fragile economies. Government cuts have helped push Britain, Spain and Greece’s economies deeper into recession and led to widespread public misery.
The youth unemployment rate in Spain is above 50 per cent and the figure for Greece is above 60 per cent. Their tragic experience should be a warning to the world. But even seemingly healthy Germany was pushed into a recession from which it is just now emerging – but it is an economy that is still weaker than it was before taking the “dose” of austerity.
Proponents of austerity ignore the fact that national debt is only one side of a country’s balance sheet. We have to look at assets – investments – as well as liabilities. Cutting back on high-return investments just to reduce the deficit is misguided. If we are concerned with long-run prosperity, then focusing on debt alone is particularly foolish because the higher growth resulting from these public investments will generate more tax revenue and help to improve the long-term fiscal position.
Proposals for substantial budget cuts seem particularly misplaced at this time given that Australia’s economy is confronting new global challenges. Commodity prices are softening and growth is slowing in many key export markets. Australia is already facing declining mining investment. The slowdown in economic growth is not the result of flaws in government policy, but of an adverse external environment. It would be a crime to compound these problems with domestic policy mistakes.
Sharp cuts to public spending over the next few years will exacerbate these challenges. Withdrawing government spending as the economy weakens risks tipping Australia into recession and increasing unemployment.
Assuming standard multipliers, cutting public spending by $70 billion from an economy the size of Australia’s over a four-year period could reduce GDP growth by around 2 per cent and cost up to 90,000 jobs.
Instead of focusing mindlessly on cuts, Australia should instead seize the opportunity afforded by low global interest rates to make prudent public investments in education, infrastructure and technology that will deliver a high rate of return, stimulate private investment and allow businesses to flourish.
I was in Australia during the last federal election and noticed then that the tone of the economic debate was both far too pessimistic about the current economy and far too complacent about the risks in the future. Three years later, the obsession with public debt continues to be a distraction from the more fundamental question of how to establish sustainable long-run growth.
Rather than look through the rear-view mirror at public debt, this election should look forward to the challenge of maintaining Australia’s economic success for the future.
Joseph Stiglitz is a professor of economics at Columbia University and a recipient of the Nobel Prize in economics.