COMMENT
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The Treasurer's economic statement on July 23 contained expected bad news: rising unemployment, a record deficit, low growth and ongoing uncertainty about prospects for recovery.
It could however have been much worse. The forecasts were positively optimistic, based on an assumption that the worst of the pandemic is behind us. At time of writing, this assumption looks doubtful. Victoria continues to have record infection numbers, and is far from having the virus under control.
The economic statement, however, was admirably transparent about the pandemic risks. There was a useful section showing how much worse the budget numbers will be if the Victorian situation continues or spreads to other states or territories. It also included discussion on the risks to the world economy if other countries fail to bring the pandemic under control. These are real and worrying, with a possibility of far worse economic news to come.
A lot can change in a few days or hours. This crisis changes rapidly and unpredictably. With luck, prospects will be brighter when you read this; but equally, they could be far worse. In that respect, our current public policy environment is more like wartime than peacetime. Unexpected events keep threatening to derail policy initiatives. It is a textbook case of managing in the face of uncertainty.
The economic statement was neither a mini-budget nor a mid-year economic and fiscal outlook. It was brief, and included many pages on uncertainty in the economic outlook and risks to the numbers (and had a very long appendix). Analysing its impact on the public service is therefore not easy. Nevertheless there were some important implications for the Australian government.
The budget deficit for 2020-21, next financial year, is forecast to be $184.5 billion, the largest ever. Net debt as a consequence continues to grow, to $677.1 billion at June 30, 2021. Total debt represents the cumulative impact of years of deficits, and will increase for every year the government adds to it with another deficit.
We can afford this level of debt, particularly at current interest rates. As a percentage of GDP it is still relatively low compared to many other advanced countries. It is possible for a government to maintain stability and continue to function with high debt levels almost indefinitely - it always has the ability to pay off old debt and acquire new debt. In extremes a country can simply default, or refuse to pay its debts. There's almost nothing creditors can do about it other than demand a higher interest rate from the defaulting country the next time they lend. There are recent instances - Argentina, Greece - and numerous historical examples.
Nevertheless, debt comes with a price tag. Public debt interest is a first call on a country's budget - interest bills have to be met before we can spend in other areas. The Reserve Bank governor, Philip Lowe, has indicated that the Bank has no intention of funding the debt by printing money - it will have to be paid off the old fashioned way.
The measures outlined in the statement are costly. There is $9.4 billion for health, including purchases of personal protective equipment, hospitals, testing, telehealth and vaccine research. Money is going to the big-ticket items of JobKeeper ($85.7 billion this year and next, to help businesses, together with other tax concessions) and the coronavirus supplement to JobSeeker.
Both are tapering down, so adjustments will need to be made. There are also complex and detailed changes to JobSeeker waiting period times and eligibility. Changes to the schemes will mean extra work for public servants - primarily in the ATO and Services Australia - to explain and implement the new rules and payments. Services Australia's departmental funding will increase by $512 million to help it cope with claims processing.
There is an extensive range of other measures affecting things like aviation, childcare and regional Australia. Many of these involve additional departmental funding. They are widespread and various, including biosecurity controls, the Fair Work Ombudsman, national parks, the Great Barrier Reef Marine Park Authority, the National Museum and so on. None are as big as the boost to Services Australia's funding, but all add up.
There is no question that we need spending on health, including mental health, medical equipment, measures to assist people retain employment or cope with unemployment. The deficit is an unavoidable and necessary consequence of essential spending. However, it will throw a long shadow over public service spending for decades to come.
There are two ways fiscal policy could go. Governments could decide the hundreds of billions of dollars worth of debt is such an unbelievably high number that a bit more will make little difference, so it can spend whatever it thinks desirable. That strategy could spiral out of control - as former US Senator Everett Dirksen observed, "A billion here, a billion there, and pretty soon you're talking real money."
Given the privileged status it enjoys, a public service that fails in delivery of programs and services will not be easily forgiven by either the public or ministers.
Although the Reserve Bank has been supportive of current spending measures in response to COVID-19, it would not support other spending that was seen as less essential, leading to the prospect of a rift between it and the government. A "spend at will" policy would run the risk of entrenching poorly designed programs, which could do more harm than good. It would also lead to a loss of confidence in Australia from international financial markets. There thus seems little prospect either the current or a future government would be comfortable with high debt forever.
The more likely alternative is that future governments will try to reduce debt over time. This will mean tight scrutiny of every new policy proposal to ensure it represents value for money. Savings options to reduce existing spending, which were key to Australia's budget repair strategy under the Labor government in the late 1980s, could see a return to favour.
Savings need to be balanced against the need to maintain support for a weak economy. But rigorous scrutiny of existing programs has benefits. By pruning activities that have passed their use by date we improve productivity.
This applies not only when programs are failing but also when they have succeeded - that is, solved the problem they were designed to solve. We should celebrate and move on. Taking savings can make room for other spending that will be more appropriate for the COVID-19 situation and its consequences. Overall, if the economy remains weak more government spending may be needed for some years; but it should be effective spending on things Australians need.
There's a more subtle risk to the public service in the economic statement: unemployment levels. While the official rate was about 7 per cent, the statement estimated that in June the effective unemployment rate was 11 per cent: at present statistics understate the true extent of unemployment.
There's a political rule that unemployment doesn't change votes - unless a voter personally knows somebody who is unemployed. That explains why the dole bludger myth, and pitifully low levels of Newstart (JobSeeker's predecessor unemployment benefit program) were prevalent when unemployment was hovering at 5 per cent or below. Relatively few voters - not enough to swing elections - cared. But now a majority of voters are either unemployed, have a relative who is, or know someone who is unemployed. It has become a key concern for politicians.
This puts higher expectations on public servants. They have secure jobs: a luxury in the current climate. Not only that, they have conditions that are the envy of the private sector, including twice as much office space per head in Canberra, more generous leave and other entitlements, training and other benefits.
With privileges comes responsibility. Given the privileged status it enjoys, a public service that fails in delivery of programs and services will not be easily forgiven by either the public or ministers.
There is also a moral imperative: the public service can and should do its job well so as to help Australia out of the COVID-19 crisis. So far the public service has acquitted itself well in this regard. There has been little talk of fat cats or any expressed desire to cut back the public sector.
Maintaining this positive public mood will depend on the public service continuing to deliver high quality advice to governments and effective assistance to people.
- Stephen Bartos is the former parliamentary budget officer for NSW and previously Commonwealth Finance Department deputy secretary.