As I type these words, I’m mentally preparing for the backlash.
I know, because my Twitter feed kinda got busy on Monday night and Tuesday, when I expressed the sentiments I’m about to express, below.
Attacking ‘sacred cows’ is a dangerous business.
But attacking new sacred cows is just outright asking for it.
Like the new religious convert or the reformed gambler, none are quite so strident as those with a new cause to believe in.
It spawned the multi-purpose joke “How do you know someone is a [insert cause here]? Don’t worry, they’ll tell you!”
It is, of course, a gross generalisation, but it’s also true that my social media accounts get most animated when I dare express a different opinion to those new converts.
And to be fair, most of them are kind, polite people, expressing a deeply held conviction. A few are a little over the top, but that’s a pretty good ratio on social media these days!
With that out of the way, and with my stackhat firmly clipped under my chin, let’s get on with it…
See, there was a time, not too many decades ago, when running a balanced budget, every year, was the done thing.
Then, some time later (largely as a consequence of the Great Depression and the evolution of economic thinking), the idea of running budget deficits in the bad times and surpluses in the good times was born.
(For the record, it’s known as ‘Keynesian economics’, named after famed economist John Maynard Keynes.)
Which makes sense, right — you collect a surplus of metaphorical nuts in the good times, preparing for the time when nuts will be scarce and you’ll collect less than you need to eat, dipping into your stockpile.
Over the long term, our metaphorical squirrel collects only as many nuts as she’ll need — but the timing of the collection and the consumption shifts to allow for the reality.
So, instead of a balanced budget every year, it’s balanced ‘over the cycle’, in boffin-speak.
And that has remained the orthodoxy ever since.
An orthodoxy I agree with, by the way — it makes perfect sense for the government to step in, like it has during COVID, to minimise the pain for the economy as a whole, and for individuals in particular.
Without government support, it seems inevitable that unemployment, which thus far has peaked at 7.5% in July 2020 and has since come down to 6.4%, would have hit maybe 11 or 12% (and some predicted it could end up nearer to 20%!), and would have stayed high a helluva long longer than it has.
It’s not just in a crisis though. In more normal times, this ‘Keynesian’ budget management usually works in similar, if less extreme ways.
When the economy is doing it tough, tax revenues (from income tax and company tax, in particular) tend to fall, and welfare payments (unemployment benefits) rise. Less revenue and more payments tend to result in a budget deficit.
In the better times, tax revenue rises as companies make more, and more people are employed (and paying tax) while unemployment benefits naturally fall.
For most of you, this is super-obvious, so long has it been part of our economic lives.
And… spoiler alert: It works really well.
(We had that lesson reinforced in the aftermath of the GFC, when some countries went for ‘austerity’ while others opted for ‘stimulus’. The austerity countries are largely still digging themselves out of that hole, more than a decade later.)
So far, none of this is controversial (other than for a few of you who are already bristling. We’ll get to you in a minute.).
Now, in 2020, the federal government threw the kitchen sink at the economy, in hopes of either staving off recession (unlikely) or moderating its length and severity.
The result was an enormous success, as I mentioned earlier. Some of the programs (I’m looking at you, Early Access to Superannuation) were a complete debacle and woefully counterproductive to long-term wealth, but the vast bulk was spot on.
(We can complain about some of the details of some of the other policies, but the government — correctly — chose ‘fast and ugly’ over ‘glacial and perfect’. The latter would have been a disaster.)
The problem with throwing a kitchen sink at something is that, even if it’s warranted, someone has to clean up the resulting mess.
In national debt terms, here’s how the ABC described the likely impact of the stimulus:
“In December [2019]… Australia’s net debt position … was estimated to be peaking at $392.3 billion in 2019-20, before slowly reducing in size.”
“Treasury is forecasting Australia’s net debt position will be $703.2 billion for 2020-21 (meaning a net debt-to-GDP ratio of 36.1 per cent).”
“And that debt will increase to $966.2 billion in 2023-24 (to a net debt-to-GDP ratio of 43.8 per cent).”
And according to the Canberra Times:
“…the Parliamentary Budget Office predicted net debt could reach between 14 and 24 per cent of GDP by the end of the decade – up to $800 billion higher than it would have been otherwise.”
I have no problem, at all, with those numbers.
In the event, some of the stimulus will turn out to have been too much, and too little in other areas, a post-match review will show us what we can do better next time. But, overall, they got it roughly right, given the speed at which the stimulus was needed, and provided.
But now, it’s time to clean up the resulting mess.
Historically, this level of debt is not unprecedented, at least relative to GDP. The most striking example is in the immediate aftermath of World War II.
Back then, it hit 120% of GDP.
The ‘don’t worry’ crowd point to that example and say ‘Who cares about the debt? We’ll just grow fast and/or inflate it away’ (rising prices and incomes make historical ‘fixed’ debt easier to service.)
They might be right.
But if they’re not?
If the Australian economy of the 2020s and 2030s isn’t like that of the 1940s and 1950s?
Then we’re going to leave our kids with a shedload of debt.
Given we incurred the debt to save ourselves from a 2020 problem, (and if the ‘growth will fix it’ view is wrong) is it really right to burden future generations with its cost?
Is it fair to roll those dice on their behalf?
I am very sure (though never certain — that’s for the ideologues) that the answer should be a firm ‘no’.
We took the medicine. We benefitted from it. We created the after-effects.
(And yes, if that also sounds like what we’ve done to the climate, you’re right. But that’s a topic for another day.)
We owe more to our kids and grandkids, in my opinion than to say:
‘Look, hopefully growth and/or inflation will come. If not, sorry. You’re on your own.’
(There is no small irony that many of the ‘don’t worry’ group are the same people blaming their own forebears for some of today’s problems. I’m not saying it’s hypocritical — after all, they might be right — but there is a decent risk of history repeating itself.)
I don’t doubt those people’s sincerity. At all.
I’m just saying that I think it’s a risk that, in all good conscience, we shouldn’t take on our kids’ and grandkids’ behalf.
We wanted the government to spend up to help us.
We should be prepared to pay for it.
No, not right away. And not in full, too quickly.
But, as it stands, we’re trying to have our cake and eat it too — deficits in the bad times and, well, deficits in the good times, as well.
Now, to the objections.
Yes, governments can run essentially endless debts. Governments aren’t the same as households, after all. But the costs, then, are also endless. Happy inheritance, kids.
Yes, growth and/or inflation might take care of some, or even much of the debt. But, to torture my metaphor, what happens next time we need to throw the kitchen sink at an economic problem, but we had left it in pieces on the floor? Or, to switch metaphors, if we don’t refill the ammo cupboard, there won’t be anything there next time we need it.
The metaphor is imperfect, of course — I have no doubt we could take on more debt if we needed to. But there is a limit, and each time we add to our debt, we reduce the ability of Australians, at some future point, to do the same.
And then there’s the MMT thing. Modern Monetary Theory. Its adherents are the converts I mentioned at the top.
Maybe they’re right. Maybe there’s no limit to how much debt we can run. But, like the ‘let’s let growth take care of it’ lot, it’s a helluva risk to take. If they’re wrong (and I think they are, but I remain open to being convinced), we won’t just be replacing the kitchen sink, but probably the whole house. The economic and social impacts of reversing course on that could be awful and long lasting.
Here’s the bottom line:
I reckon we, as a society and individuals, owe it to future generations to at the very, VERY least, leave the place no worse than we found it. Ideally, we should be seeking to leave it in a better state.
That means not playing Russian Roulette with the economy, and with the level of national debt. It means being thankful for the stimulus, but also committed to paying back the good fortune when we’re able.
No, austerity isn’t the answer. And paying it back with undue haste would risk undoing the very recovery we’re enjoying.
But, as a decent society, we should make sure that we are the ones paying back the obligations we incurred, as we can afford to, rather than rolling some dice, the result of which won’t be known until it’s too late to make good on the potential mistake.
It’s just the right thing to do.
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Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Twitter. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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