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Anna flicks the switch

By Nicholas Gruen - posted Thursday, 5 March 2009


Call it the audacity of hope.

In the political playbook of George W. Bush’s advisor and confidant Karl Rove, you go after your enemy where you are weak or they are strong.

John Howard was at his audacious best working from the Rove playbook in 2004. His authority having been undermined by the duplicity of his 2001 claim that boat people had risked drowning their own children for a photo op, Howard declared the 2004 election would be about who you trust.

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As we learned more about Mr Latham it turned out Howard had a point.

Now Anna Bligh is telling the good denizens of Queensland that in running up budget deficits and higher debt, in presiding over a downgrade in her Government’s credit rating, she’s doing the difficult thing, the tough, the unpopular thing. Well you could have knocked me down with a feather.

Here you were thinking it was the easier thing to do. This “tough” thing the Premier is doing turns out to be her least worst political option, all the easy options having run out.

Governments, state and federal, have been taking the easy option for about a decade during which we should have been investing more in infrastructure, skills, and productivity - where necessary and prudent by increased borrowing.

At least Queensland has done better than most state governments, with a strong capital program that’s continuing where other states have been winding theirs back to preserve their AAA ratings (for a while anyway). Queensland has also mostly avoided shonky “public private partnerships” which usually cost more and simply push government debt off the books.

At least now, making a virtue of necessity, the Queensland Labor Government will be advancing the sensible arguments that have gone missing for so long. They’ll be saying that yes, other things being equal, debt is bad. But just as those with a mortgage believe the benefits of owning their own home are greater than the costs (including the debt and interest they incur) so borrowing enables governments to generate greater benefits than the costs they incur. Just as firms decide to borrow more to grow rather than fixate on having a AAA rating (a AA rating is nearly as strong) now governments - well at least one government - is explaining why AA is better for a growing state than AAA.

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I couldn’t agree more. Nor it seems could Standard and Poor’s whose statement on releasing its credit downgrade sounded almost apologetic, repeatedly emphasising Queensland’s “strong balance sheet, its strong management and strong system support”.

So why, when the arguments are starting to run my way do I have a queasy feeling? One can always find investments with a higher expected return than the interest one will pay, but as one takes on more of them, one also increases risk. Australia’s debt phobia may not have been very economically sophisticated, but there was a kind of folk wisdom in it. As former Reserve Bank Governor Ian Macfarlane pointed out, governments find it politically easier to be generous with your money than to be niggardly. Just ask Gough Whitlam - or John Howard. For a decade, fiscal populism has seen us anathematise debt. Now the pendulum is swinging. But because it’s swinging from one kind of fiscal populism to another, I can’t help but fear it will swing too far in the opposite direction.

While fiscal policy lurches away from one extreme and we wonder how far it will lurch in the opposite direction, the different political history of monetary policy has led to the evolution of institutions to finesse these problems. We have a public, expert body which sets interest rates - the Reserve Bank of Australia.

So there’s one way in which Anna Bligh could take us towards a better world, rather than simply play “reposition the pendulum”. At the same time as maintaining the capital works program and accepting the resulting increased debt, she could establish an independent body to publicly advise her government on the cost effectiveness of its capital investments, the prudent level of debt and the appropriate time to return the budget to an operating surplus.

At a time when the credit rating agencies had trashed their reputation (handing out AAA ratings to securitised sub-prime mortgage bonds) it would be like establishing an internal government credit rating agency which would itself enhance market confidence and lower Queensland’s cost of borrowing.

And Queenslanders could boast of having Australia’s only premier with real balls.

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First publshed in The Age on February 26, 2009.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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