The Balance
We’ve all been in a situation where we have had to do something that for some reason we don’t want to do. In our younger years it might be homework or cleaning your room. As we age it might be staying in a job that we don’t particularly enjoy. As our lives change, the challenges change but the one thing that remains fairly constant is that from time to time we’ll have to manage tasks that we’d rather not manage.
When faced with the challenge of managing the unpleasant we all like to think that we’ll grit our teeth and push through it. The reality is unfortunately somewhat different and most of us postpone or otherwise avoid the tasks we’d rather not do from time to time. The longer we leave the important but unfortunate tasks in our lives, the harder it usually becomes to complete the tasks we have avoided and because of this, some people postpone those tasks for even longer.
On a national level our country faces one of these very unpleasant tasks. Due to mistakes initially made by the Howard government and then compounded by the Rudd/Gillard/Rudd government our nations overall balance sheet isn’t particularly healthy. Just how bad things are depends on who you listen to.
According to the Financial Review it’s pretty dire (1).
The Guardian is equally pessimistic (2).
The folks at the conversation seem less concerned (3).
Lastly, you could read the government’s budget report (4).
In my view the actual situation is likely not as bad as some are suggesting but neither is it ideal. One thing that all sources seem to agree on is that without changes the situation is likely to deteriorate. Conservatives suggest that the answer lies in a reduction is government spending. On the other side the left seems to prefer an increase in revenue via changes to the way business is taxed. The question that doesn’t seem to have been asked here by either side of politics is what sort of an economic situation do we want our country to be in?
Whilst historically the budget deficit is high by Australian standards, when compared with other countries our situation is quite reasonable. If we are comfortable with running small deficits then we can continue to do so without the country becoming an economic disaster-piece which is sometimes associated with that policy approach.
To ensure that the budget deficit remains small much of the work required has already been achieved by the modest savings that actually made it through Parliament after the 2013/14 budget. Bracket creep will probably take care of the rest as long as the government doesn’t increase spending dramatically.
If on the other hand we want to consistently run a budget surplus the task becomes more difficult. Once again there are two broad approaches which could shift the budget to surplus. The government could make further reductions to spending and those cuts would likely lead to a reduction to the level of services. Alternatively the government could attempt to raise more revenue through new taxation or taxation reform of some kind.
No Government can reduce overall government spending without reducing service levels in some way to some areas. This will adversely affect the majority of Australians who are not high income earners and who rely on Government services to support them in a variety of areas.
On the other hand attempts to increase revenue are inevitably paid for by your average Australian. Changes to personal taxation directly affect personal income. Changes to business taxation also wind up being paid for by everyday Australians as any increase to business costs from taxation reform are usually passed onto the consumer via an increase in the cost of goods and services.
So whatever model the government chooses, should they elect to bring the budget back into surplus, will adversely affect Australian residents. This leads to a key point. If we want to run a surplus then we need to accept that we can’t always have everything that we want all of the time. There is a cost. The question is; are we prepared to pay that cost?
Furthermore there is also a cost associated with consistently running a small deficit. To run a deficit incurs costs in the form of interest for the amount borrowed. Now as long as the total deficit remains small, when expressed as a percentage of GDP, this cost is not a disaster but it is a cost none the less. That money which is currently used to service debt could be used to provide increased services, or lower taxes.
It’s that last point, that deficits cost us all, which I feel is central to the argument. I don’t think anyone wants to have to pay more taxes or to endure a reduction in services. Nobody wants to pay money when they don’t have to. Yet if you’re comfortable running a deficit then paying money, interest on debt, when you don’t have to is exactly what you are doing. This in turn results in less money for services and the need for higher taxes. If you’re in favour of a deficit then that is what you are signing up for.
So whilst we don’t have to run a surplus, why would you not? The country faces a choice. Do we endure a relatively small period, of five to ten years, of slightly reduced services and or slightly increased taxes so that we can ensure sustainable services and similar or lower taxes into the future?
Or do we put off this difficult period which costs us anyway because of the costs in interest to service the deficit. It will continue to cost us into the future. It probably won’t, but it might threaten the overall sustainability of the services and low taxation which we currently enjoy. Is that really the most sensible choice?
When you do the homework and finish cleaning your room, I’m not sure how you could argue that this job (fixing the budget) that we don’t particularly enjoy isn't one that needs to be done. We should simply set about doing it.
(3) http://theconversation.com/budget-explainer-debts-and-deficits-is-australia-really-the-worst-40086
(4) http://www.budget.gov.au/2014-15/content/overview/html/overview_01.htm