PM’s reckless spending puts us in inflation firing line | Australian Financial Review

As the Morrison government prepares to unveil the annual budget update, it’s important to consider the facts underpinning the Australian economy and the serious policy challenges we now face.

The federal government’s net debt is now forecast to reach $1.3 trillion – more than seven times our government’s alleged ‘‘debt bomb’’ of $184 billion in 2013 – according to the independent Parliamentary Budget Office. That’s 55 per cent of gross domestic product, compared with 12 per cent when Labor left office.

The budget position is even worse. The Morrison government’s eye-watering deficit of $161 billion, or 7.8 per cent of GDP, was fuelled by mind-boggling spending of 32.1 per cent of GDP – a modern record.

Compare that with a deficit of $19 billion, or 1.2 per cent of GDP, under Labor in 2012-13. And we held expenditure to 23.9 per cent of GDP, which, despite the turmoil of the global financial crisis, compared favourably with John Howard’s 23.3 per cent in 2006-07.

If the Liberals described our 2012-13 deficit as a ‘‘budget emergency’’, how do they describe a deficit more than eight times the size?

Our fiscal stimulus strategy, which was timely, targeted and temporary, kept Australia out of recession during the global financial crisis when every other advanced economy went under. Yet despite Scott ‘‘Hey Big Spender’’ Morrison’s monumental raid on the public purse, Australia slid into the great COVID-19 recession just like the rest of the developed world.

The central economic problem is that the Morrison government has never had a fiscal strategy. Morrison’s Liberals had increased net debt from 13 per cent to 19 per cent of GDP before the pandemic hit. And while we imposed a hard fiscal rule in 2010-11 – one year after the GFC struck – to contain spending and bring the budget back to balance, the Morrison government has failed to announce any such rule.

This budget crisis is compounded by an estimated $40 billion waste in JobKeeper payments to companies that didn’t need it, but seized on corporate welfare to boost profits and returns to shareholders. All this when the government refused to invest in universities, school libraries or science facilities, where productivity-enhancing investments could have turbo-charged the Australian economy of the future. Instead, there is little economic legacy from the single biggest budget deficit in our history.

In an era of growing inflation, this reckless fiscal indiscipline is grossly irresponsible. It places upward pressure on long-term interest rates for the whole economy. Meanwhile, public debt repayments will cruel future budgets’ ability to invest in our economy, schools and hospitals, fund our growing national security needs, while also sustaining a safety net to preserve our social fabric.

Fiscal policy consolidation needs to start now. Instead, Morrison’s fiscal policy paralysis puts us in the direct firing line should global inflation roar back. There are many factors fuelling this: rolling supply chain constraints; the collapse of local manufacturing (led by the Coalition’s deliberate, ideological termination of car manufacturing); the failure to deliver superfast national broadband; growing bottlenecks from infrastructure neglect; local labour shortages, exacerbated by a non-existent national skills policy; and all turbo-charged by a low migration strategy calculated to appease the ideological right by favouring temporary workers over permanent migrants.

Back in early 2008, about nine months before the GFC hit, and when inflationary pressures were also beginning to emerge following the China resources boom, I detailed in Perth a five-point strategy to combat inflation including new national education, skills, training, infrastructure, and industry research and development plans.

Although the GFC intervened, the core elements of that plan were still implemented: hence 3000 new school libraries, Skills Australia, Infrastructure Australia, high-speed fibre NBN to the premises – not slow-speed copper from the ‘‘node’’, the New Car Plan, and a strong migration program. Morrison’s Liberals, for no good economic reason, went about undermining each of these future investments after 2013.

But where Morrison’s general culture of fiscal and economic policy indolence finally comes home to roost is productivity. When we left office, productivity growth was running at 2 per cent, having risen from 0.7 per cent in Howard’s final years. Now it languishes at close to zero.

As then Treasury secretary Ken Henry used to tell our government, there are three core drivers of economic growth: the three ‘‘Ps’’ of population, participation, and productivity growth. This formed the conceptual foundation of our entire economic strategy – a sustainable flow of permanent migration; boosting participation through early childhood education for all four-year-olds, increasing the childcare rebate from 30 per cent to 50 per cent, Australia’s first paid parental leave scheme; and big investments in human and economic capital. I see no such conceptual framework guiding this government at all.

For the first time, I am genuinely anxious about Australia’s future. A combination of factors causes my pessimism: our fiscal disrepair; the absence of a national economic strategy; climate policy minimalism rather than a renewable energy revolution to turbocharge future growth; the disdain and disinterest in diversifying our economic structure through a national venture capital industry capable of growing the Australian IT, AI and biotech brands and industries of the future; growing federal corruption; and a reckless disregard for our national security as Australia gradually turns itself into a military target, destroys our largest market (and that’s before Beijing inevitably kills the iron ore trade) and all in the absence of an effective China strategy to deal with the real challenges emerging from that country’s rise.

So when we listen to the triumphalism of the mid-year economic and fiscal outlook tomorrow, let us at least remember how to differentiate between policy fact and political fiction – however socially uncomfortable that may be for this paper’s conservative readership.

Kevin Rudd is a former prime minister of Australia.