In the highly technical and confusing world of money, a balanced budget means incoming dollars (revenue) should be the same as outgoing dollars (spending). If spending exceeds revenue then either an increase in taxes, or borrowing, or drawing down on cash reserves to cover the difference, or all of the above, is needed. It’s the same as running your own household. It’s that simple or at least it should be.
So, having viewed the recent US government shutdown from a safe distance, can our Federal government see any parallels in the way they are about to approach the problem of balancing our budget? If one listens to the far right Tea Party members of the Republican Party (TEA stands for ‘Taxed Enough Already’) you will hear them constantly resurrecting their hero Ronald Reagan and preaching Reaganomics with such fervour, it’s surprising the former president is not already the Patron Saint of America. Would they be right about Reagan’s economic credentials? No. Can anyone explain why to them? No, they won’t listen. So, should we be surprised to see that in Australia, there are already signs that we are just as stupid; that we won’t learn from history either, and that our new government is foolishly travelling down the same mad road as this ultra right wing extremist body?
Tea Party members support the principle of a balanced budget. But they go a lot further than that. They don’t think spending should ever exceed revenue. Reaganomics as interpreted by the Tea Party, or the American Taliban, as ‘Will McEvoy’ of ‘The Newsroom’ called them, means less taxes and less spending. That means the government gets less of their citizens’ money and spends less on social services and infrastructure. Technically, that makes sense. The problem with that philosophy however, is twofold. Firstly, it doesn’t work and secondly, it isn’t what President Reagan did.
Like so many events throughout history, the re telling of Reagan’s economic credentials, of what he did, generates an exponential growth in embellishment, distortion and deliberate misrepresentation as one side or the other quotes what they think they know when trying to win a few points. Reagan did reduce taxes in 1981 the first year of his presidency, but over the next seven years he raised taxes, particularly on incomes below $50000. He did this no fewer than eleven times, either directly or by closing tax loopholes and limiting allowable tax deductions. During this same period he reduced corporate taxes but did not reduce spending, rather he increased it, particularly in the area of defence. His administration was thus forced to borrow heavily both domestically and abroad to cover ongoing budget deficits. His management of the economy was helped somewhat by a period of relative peace; America was not at war. But even allowing for that, his economics made America the world’s largest debtor nation owing nearly $3 trillion dollars by 1987. Because he was highly selective with the various revenue streams where he applied his increases and cuts, the chief economic indicators for growth, unemployment, poverty, tax revenues and deficits for that period varied wildly across a spectrum of highs and lows. This meant anyone who came after him (i.e. Republican presidential hopefuls) could cherry pick figures and quote percentages for any given period of his presidency and use them to emphasise their own economic plans. In reality, however, their claims were meaningless and could not seriously be applied to present day economic rationalism. In the main, Reagan’s economic reforms favoured big business and the wealthy at the expense of middle and low income workers.
And that brings us to the Tea Party of today. They want less regulation, lower taxes and froth at the mouth whenever the Affordable Care Act (Obamacare) is mentioned. They want policies that essentially place the burden of revenue raising on the less well off, while rewarding the wealthy for being, just that. Sound familiar?
So, how does Reaganomics impact on Australia? Essentially, while not saying it, the Coalition’s approach to economics is a broad version of Reaganomics; not what Reagan did, but the myth of what he did, i.e. lower taxes, having less government regulation, reducing waste and where possible, reducing welfare payments. Our Treasurer, Joe Hockey has made it clear that the age of entitlement is over, that we must learn to live within our means. No argument there. The problem is that Joe Hockey had us thinking originally that he could do this and return a surplus budget. He can’t and he knows it. He knows that our current net debt of $284 billion will increase to almost $400 billion by 2016 when we next go to the polls. That is unavoidable. That is why he is now flagging an increase in our debt ceiling to a staggering $500 billion. This he claims is Labor’s legacy. Really?
Hockey made a lot of noise about the state of the economy before and during the election suggesting that we were facing a national emergency. He has now had time to appreciate the truth of the matter and his rhetoric has noticeably subsided. Prime Minister, Tony Abbott also made a great deal of noise about reducing debt and deficit. The recently announced Commission of Audit is the process by which the new government will determine what stays and what goes. Declining revenues will play a big part in determining the choices available, and the dismantling of the carbon tax will only add to Hockey’s woes. This could hardly be called Labor’s legacy, certainly not in the way Hockey was referring. Dismantling the carbon price will reduce revenue making all of the coalition’s promises that much harder to keep. Those promises include a paid parental leave scheme and a ‘Direct Action’ policy to tackle climate change, the Coalition’s replacement policy for the carbon tax, which will involve paying big polluters to reduce their carbon emissions. Yet, Hockey insists those promises will be met. We can expect the Treasurer to be talking a lot about Labor’s legacy in the coming months. But in reality, the program he is laying the groundwork for, will be very much the Coalition’s legacy. The Commission of Audit report to be completed by March 2014 will show that forward projections of revenues will not accommodate their promises even with their intended budget cuts. Hockey’s options will be a hard pill to swallow and involve raising taxes, borrowing and, heaven forbid, possibly even raiding the future fund. Either way, raising the debt ceiling will be essential. Better to do it now while nobody’s looking. But given the Prime Minister’s attitude to climate change, the greatest temptation for Hockey and Abbott will be to simply dump ‘Direct Action’. It will most likely be delayed, like, forever! The next three years are not going to be pretty for the coalition or the country and the end result will give Labor plenty of ammunition come 2016 when the government will have to explain why the national debt jumped from the present $284 billion to probably in excess of $400 billion in just three years with no plans to combat climate change. Funny how the theory of Reaganomics looks so good on paper, but when applied in practice, will work the same way here as it did in the US.
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