Recent economic management in Australia has been abysmal, and a reckoning awaits

Everyone knows that the Australian economy has been allowed to overheat.  Unemployment has just hit a record low of 3.5 per centand many employers are having difficulty recruiting staff.  Annual inflation (as measured by the CPI) increased to 6.1 per centin the June quarter, and is expected to go much higher.

With the economy now suffering excess demand, one has to ask why the Commonwealth and nearly all the States have recently brought down budgets with roaring deficits.  At the same time our Reserve Bank, after lowering interest rates to rock bottom levels and stimulating an asset price boom, has recently hit the panic button and initiated a property downturn.  Effectively, official monetary and fiscal policies now have markedly inconsistent settings.

The bottom line is that government spending (at the behest of "moderate" or "progressive" administrations) is out-of-control in this country, and there is little to show for the profligate deficit spending of the last 15 years.  Excessive deficits are contributing to interest rates going up faster than they would otherwise need to.  There is also no clear end in sight to the spending spree, which might only end when Australia's creditworthiness starts being questioned or voters rebel.

In Australia, there has been a major increase in the size of government over the last 20 years.  Up until recent years, government expenditure ranged from around 24 per cent to 26 per cent of GDP.  In 2019–20 expenditure grew to 29.2 per cent in GDP and was expected to hit a peak of 34.4 per cent in 2020-21.  While government spending will fall over the next few years, nobody expects a return to the long term average anytime soon, if at all.

The cause of recent bad economic policy can be traced back to Australia's response, firstly to the financial crisis of 2008, and then to its totally excessive reaction to Covid.  With exports to China booming, the then Rudd government did not need to increase spending, as it did.  The response to Covid later copied that of many other Western countries, and involved extensive lockdowns, big cuts to interest rates, and massive fiscal stimulus.

No amount of deficit spending or interest rate cuts was even going to make much difference to sectors affected by Covid lockdowns (eg hospitality), with much of the government money being windfalls that ended up in household savings or corporate profits.  Before Covid, every post-Howard budget, except for the first Abbott/Hockey budget (itself largely blocked by the Senate), had also involved substantial (though more modest) deficits.

Recent years have seen huge spending on COVID, money wasted on poorly chosen defence acquisitions, big spending on infrastructure (much going well over budget), soaring spending on childcare, and out-of-control spending on the (unfunded) NDIS, to name but a few.  Poor spending programmes are always difficult to reverse, and, during the COVID induced spending binge, all sorts of additional outlays were slipped into Government budgets, largely unnoticed.

The Coalition’s JobKeeper scheme wasted at least $40bn, according to analysts. It sent cash to businesses that didn’t need it and “saved” jobs at huge cost.  Billions of dollars also have been spent or promised by both sides of politics to "save" the Barrier Reef to little obvious need or benefit.  Such spending is futile, if claims that the reef is doomed due to global warming, are to be believed.

The situation with debt and deficitsis grim.  Commonwealth debt is spiralling towards $1 trillion.  NSW debt stood at $50 billion in 2019, is heading to $140 billion this year and towards $200 billion by 2025.  The NSW deficit has blown out to $11.3 billion, compared with the $3.6 billion deficit forecast in the 2021-22 half-yearly review.

The NSW government has promised a $27 billion spending spree over the next five years, with continuing big infrastructure spending, and significant reforms to "unlock women’s economic potential" via boosts to childcare and early education.  The planned opening of a section of the City and Southwest line between Sydenham and Bankstown is already expected to be up to 12 months late, and the cost of the metro rail line that extends on to the Sydney CBD and Chatswood has blown out by $6 billion to $18.5 billion.

Figures for Victoria are equally bad.  The Victorian budget forecast a $21 billion deficit in 2021-22, $7.9 billion in 2022-23 and lower deficits in following years, with debt increasing from under $50 billion in 2019 to $210 billion by 2025.  Both Victoria and Queensland have seen rapid growth in the size of their public sector workforce.

The Northern Territory is in the worst shape and had made noises about seeking a bailout from the Commonwealth.  The NT's budget for 2022-23 estimatesa $1.1 billion deficit with net debt of $8.7 billion.  The other states and territories, while not quite as bad, are all (bar WA) in deficit.  The WA Budget is in surplus (in part due to getting a bigger share of GST revenue) but with falling iron ore prices this situation won't last.