Koukoulas: this is Howard’s deficit, not Rudd’s

The hypocrisy of Malcolm Turnbull, the Opposition parties and some fiscal zealots in arguing against the Rudd government’s fiscal stimulus package is breath-taking. The reason the budget is moving into a deficit now is the direct and unambiguous result of the Howard and Costello government blowing fiscal surpluses in the four or five years up to 2007.

Over that period, the once in 50 year boom in Australia’s terms of trade, the accelerated industrialisation of China and India and the massive growth in capital expenditure saw government revenues surge at an unprecedented rate. But instead of saving the windfall gains as any responsible and prudent economic manager should, Howard and Costello spent or gave away every dollar that was above the unwritten budget surplus target of 1% of GDP.

The Howard and Costello Government, of which Turnbull, Hockey and Bishop were senior ministers, became the biggest spending government in Australia’s history and its reckless approach to fiscal policy was a critical reason why the RBA had to hike interest rates to one of the highest levels in the industrialised world.

Had Howard and Costello accumulated those windfall gains to the Budget rather than cynically trying to buy votes, a few things would now be evident. Notably, interest rates would have been lower. More importantly, today’s government would now be in a position to undertake counter cyclical fiscal policy to support the economy as it plunges towards recession — and it would be able to keep the budget in balance.

Alas, the Rudd government has to deal with the cards it has been dealt. It must run a deficit now — to do otherwise would be dumb. It needs to work to minimise the depths of the recession, to minimise job losses and minimise the human misery that higher unemployment will entail.

There are many lessons to come from this current recession. One is that fiscal policy and the spending and taxing decisions of governments are critical elements of managing the business cycle. When times are prosperous and growth is strong, governments need to reduce deficits, accumulate surpluses and save for a rainy day. Because the rainy day will come. The politics of this is tough, but Howard and Costello didn’t do the Australian economy any favours by spending as much as it did when the economy was clearly over-heating.

Running a budget deficit now when the economy is in recession will help to protect jobs, promote growth and even help householders to build savings and reduce debt. This won’t avoid the recession — the world is too weak and capital expenditure growth in recent years means Australia has a huge amount of spare capacity.

The interesting issue will be what happens when the economic recovery comes. Mr Rudd and his team will get top marks if they use any upswing in the economy to rebuild government savings and return the budget to surplus. On present indications this is where the policy debate should be in 2011 rather than now.