Peter Costello has probably tried harder than any other politician to persuade voters that government debt is inherently evil. He hammered the theme while Treasurer in John Howard's Coalition government and has continued to do so when attacking the Rudd Labor government’s $42 billion stimulus package intended to boost a sluggish economy. After Senator Nick Xenophon unexpectedly helped the Coalition reject the debt-funded package in parliament last Thursday, however, Costello and his party's current leader Malcolm Turnbull were suddenly on the defensive.
It was much easier to criticise the popular package when Coalition members expected it to pass than explain why they had killed it off, much to the annoyance of the business sector. But the Coalition was saved from a protracted hassle with business when Xenophon accepted the package on Friday, after the government gave him $1 billion in concessions for the Murray Darling basin.
Costello also found himself on the back foot last week when felt obliged to condemn Pastor Danny Nalliah, after the fundamentalist preacher claimed that the Victorian bush fires were God's punishment for that state's abortion laws. Costello has strongly defended of Nalliah in the past, despite his earlier call for his followers to pray for God to pull down temples, synagogues, mosques and bottle shops. Costello still sent Nalliah a video message of support to play to his congregation less than a month ago. That error of judgement should now be behind him.
But Costello’s continuing role in demonising government debt will do little to further his goal of taking over as Liberal leader if Turnbull stumbles. Although Turnbull is often seen as keen to distance himself from Costello, he is simply following in his rival’s footsteps by railing against the debt needed to fund Rudd’s stimulus package. Perversely, if Turnbull does stumble, it is likely to be because of the way he has been faithful to Costello’s outspoken stand against debt, regardless of the condition of the economy.
When a global economic crisis punches a big hole in revenue and leads to more spending on the social safety net, governments are forced to borrow to cover the budget shortfall. The only alternative is to make unemployment worse by increasing taxes and cutting spending.
Turnbull and Costello can reasonably question what’s the right size, composition, and duration for the deficit. But they have not improved their credentials as good economic managers with exaggerated claims that Kevin Rudd is saddling voters’ grandchildren with a terrible debt burden because of a temporary stimulus package.
If the opinion polls are any guide, voters aren't overly bothered by government debt at present. Newspoll showed last week that Labor has now closed a previously wide gap with the Coalition over who can best handle the economy. Labor also retained its clear lead on issues such as health, education, and industrial relations and is close to drawing level with the Coalition on national security— the other main area where it was previously well behind the Coalition.
Nevertheless, the Coalition still believes that banging away at government debt offers the best of hope of restoring its former lead on economic management. On present indications, the level of government debt will not be a problem. Treasury estimates that net government debt will only amount to 5.2 percent of gross national product in 2011-12 compared to an average of over 45 percent in other advanced economies. It may be turnout to be a different story regarding to the way household and business debt has risen sharply in recent years— apparently without bothering either Costello or Turnbull.
Turnbull accepts that nothing much can be done at this stage about the collapse in revenue or the rise in safety net costs. His quarrel is with the size of the government’s stimulus package. There are good grounds for arguing that it would have been better if the government spent a smaller proportion of the package on cash hand-outs that provide little of lasting benefit.
But Turnbull’s proposal to cut over $20 billion from the overall package would reduce the stimulus, without making much difference to the overall debt position. Most of the debt results from a $115 billion drop in revenue over the next four years. Moreover, Turnbull has said he would increase the size of his preferred stimulus package — and debt — if the economic situation worsens.
Despite Howard’s pre-election spending sprees, economic growth was strong enough to let Costello deliver a succession of budget surpluses while Treasurer. Along with the sale of assets such as Telstra, the surpluses cut government debt to near zero. If Costello were still Treasurer 2009, however, he could not stop the budget from going into deficit and debt would be starting to grow.
Contrary to the popular perception, the financial markets were not happy with zero government debt. They lobbied successfully for Costello to borrow to keep the market for government bonds open for their sake. More bonds will now be issued for the far more pressing task of trying to prevent a deep recession. If some debt is needed over future decades to finance new infrastructure projects which strengthen the productive base of the economy, that’s fine. However, debt used to finance deficits caused by revenue shortfalls, or short term spending, should be reduced automatically as economic growth resumes.
In the meantime, the political battle will focus on whether Turnbull can still frighten voters about government debt by relying on the same catchy lines that Costello tossed around in an era when the nation was enjoying a protracted boom. Now that the economy is in danger of going backwards, that simple message no longer resonates so readily.