budget deficit ethics

Is a $213 Billion Budget Deficit Unethical?

7 October, 2020

In this piece for Inside Story Cranlana’s Lead Moderator Peter Mares explore the ethics of the federal budget deficit, and says the government needs to do more to share the risk.

Massive spending undoubtedly goes against the grain of a government like this one. And spending doesn’t get much more massive than last night’s.

Josh Frydenberg and his Coalition colleagues have often framed their aversion to government largesse as an argument about our responsibility to future generations. “Every dollar we spend today is a borrowed dollar,” said the treasurer ahead of the budget. “That’s the reality and the debt will be there for future generations to pay back.”

Finance minister Mathias Cormann agrees. He once compared budget deficits to parents using their credit cards to pay for the weekly groceries and then leaving their children to pick up the tab. “Not a single parent would expect their children to pay off that credit card in those circumstances. Neither should the Australian government.”

Does this mean that the current taxpaying generation is behaving unethically by allowing the government to amass a $213 billion deficit to inject life into the economy, and leaving others to pick up the tab?

In reality, the government had little choice but to spend on a vast scale. What might make that spending more or less ethical in intergenerational terms will depend at least partly on the effectiveness of the budget measures according to the government’s job-creation goals.

Take the tax cut for people in work, which creates a multibillion dollar hit to the budget bottom line, or a permanent increase to JobSeeker payments, again with a multibillion dollar price tag. Which one will be judged to have had a greater impact on job creation — and hence a greater ethical justification — in a decade’s time?

The government chose the tax cuts, using the argument that relatively well-off taxpayers will stimulate the economy by spending the extra dollars or investing in job-creating businesses. But economists know that people on higher incomes are more likely than others to save any extra income they receive or park it in tax-protected assets that don’t generate jobs, like negatively geared property. That’s especially true in uncertain times.

That’s why a majority of leading economists agreed that putting cash in the bank accounts of unemployed Australians would be a better bet, since that money would mostly be spent on food, rent and other essentials and quickly circulate through the economy.

The preference for tax cuts over a permanent increase to JobSeeker is indicative of the character of the budget and how the Coalition’s political message has shifted. Once, its primary claim was “deficit and debts are bad, surpluses are good.” Now it concedes that borrowing to stimulate the economy and create jobs is necessary, but that business and private investors must take the lead, not the government. The constant thread is an ideological preference for small government.

So, the $3 billion spend on roads and other shovel-ready infrastructure projects over the next four years is dwarfed by the $26.7 billion cost of enabling businesses to instantly write off the cost of new assets. And support for the housing sector takes the form of more incentives for first home buyers rather than direct investment in building homes for renters on low incomes, who can never aspire to own a house.

The common ground across the political spectrum is the urgent need to create jobs. But even if the recovery is to be led by the private sector, that still raises questions of priority. Should the government throw its financial weight behind a gas-led recovery or a wholesale shift to a renewable economy? The response to this question might depend on how seriously you follow the scientific evidence of accelerating climate change.

And here’s an interesting thing. The concern that some political and business leaders show for not burdening future generations with public sector debt is rarely matched by an equivalent resistance to saddling future generations with the catastrophic consequences of more droughts, floods, hurricanes, bushfires and crop failures. An uninhabitable earth is one hell of a credit card bill to leave to our kids.

The well-established cognitive bias to preference immediate rewards over future gains helps explain inaction on climate change. Carbon pricing is an attempt to counter this perceptual flaw by bringing future costs into the present.

An equivalent ethical justification exists for government borrowing in response to the crisis — it can reduce long-term harm. The recession’s impact is being felt acutely by people who have lost their jobs or watched their small businesses go under. They need immediate assistance. But the damage will also reach well into the future.

We know, for example, that many older workers who lost jobs in the early 1990s recession — the one we “had to have” — never worked again. A downturn forces young people out of the workforce or prevents them from gaining a foothold in the labour market, leaving them demoralised and limiting their life prospects. Training opportunities are lost; skills stagnate. Research and development stalls, as does investment in new plant and equipment.

Collectively, these are known as “scarring effects,” and they cause profound damage to the fabric of society. As Reserve Bank governor Philip Lowe warned in a recent speech, “The clear evidence from history is that the deeper and more protracted a downturn, the more severe are the economic scars.”

We have to hope not only that the government’s multi-billion dollar bet on a business-led recovery pays dividends, but also that the benefits are widely shared. As Chris Richardson from Deloitte Access Economics points out, the recession’s impact is unevenly distributed, with regions that were already doing it tough “now struggling a lot more” and affluent areas less severely affected.

The differences are not only geographic; the faultlines are also genderedclass-based and generational. As an outright homeowner with thirty-plus years of well-paid employment and a healthy superannuation balance behind me, I am much better placed to ride out a downturn than a single mother casually employed in the tourist trade.

So when the treasurer tells Australians “we have your back,” someone like me, pocketing my backdated tax cut, might feel better protected than an unemployed worker who just had their coronavirus supplement slashed.

The government’s role in borrowing and investing should not be confined to restarting the economy, but also to sharing risk. And we can’t assume that the collective good automatically arises out of the cumulative effect of private companies seeking to grow their businesses, and of citizens and families advancing their personal interests through individual spending decisions.

Public borrowing for direct public investment in housing, education, research and health care isn’t like flexing the credit card to put your groceries on the never never; it’s laying the foundations for future prosperity. A business-led recovery, and the mantra of giving Australians back more of “their own money” in tax cuts, pushes risk back onto individuals and households.

Inside Story, Peter Mares, 7 October 2020. Read the full article here.

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Photo by Josh Appel on Unsplash