Striking parallels: divergent paths

I say governments have made this mistake - rather than the Reserve Bank itself - because until the early 1990s de facto, and 1996 de jure, the Reserve Bank used to have to go cap-in-hand to the treasurer of the day to get his permission to raise interest rates; and the treasurer of the day, being a politician, was always reluctant to give that permission if an election was in the offing or until inflation had itself become a serious political issue. It is inevitable that inflation will rise a lot further - and the costs of bringing it down will be much higher - than if you “nipped it in the bud”.

It’s therefore fortunate that the Reserve Bank no longer needs the treasurer’s blessing before raising interest rates. And so the likelihood that the second of the mistakes which has always been made at this stage of previous business cycles will be made in this one is minuscule.

The third mistake which Australian governments have always made at this stage of the business cycle is that when, as now, their coffers are overflowing with tax dollars, they just can’t help themselves from spreading it around in the form of tax cuts or increases in spending - even though this is precisely the stage of the business cycle when fiscal stimulus is least needed and most risky.

This third mistake is one which, unlike the first two, is not being avoided by the present Australian government.

The China-driven resources boom has substantially increased the revenues being collected by the Federal Government. For example, when the government first made an estimate of total tax revenues for the current (2005-06) fiscal year, in the 2002-03 budget papers, they were projected at $187.6 billion.

By the time of the most recent estimate, made in last December’s Mid-Year Economic and Fiscal Outlook, that estimate had been revised up to $203.8 billion, an increase of $16.2 billion (or 8.6 per cent).

Similarly, the estimate of total tax revenues for the forthcoming financial year, 2006-07, has been revised upwards from $193.1bn when it was first published in the 2003-04 budget papers to $212.9 billion in last December’s MYEFO, an increase of $19.8 billion (or 10.3 per cent).

In total revisions to the budget estimates that are the result of anything other than a Cabinet decision, since the 2002-03 budget was handed down, have added $97.5 billion to the resources available to the government over successive rolling four-year forward estimates periods.

“Policy decisions” taken by the government over the same period are projected to “cost” $98.8 billion (in terms of revenue foregone through tax cuts or additions to expenditures).

In other words, the government has spent every dollar - plus an additional $1.4 billion - that the resources boom has dropped into its lap over the past four years.

Now I’m not so naïve as to suggest that the government should or could have “saved” every unforeseen dollar of additional revenue it has adduced since the 2002-03 budget.

Had the revenue windfalls which have come the government’s way as a result of the commodities boom been used in ways that strengthened the capacity of the Australian economy to withstand the inevitable eventual downturn in commodity prices, then there would perhaps be less grounds for concern at the fact that every dollar of this windfall has been dissipated.