Over the weekend, The Australian’s Judith Sloan published a remarkably one-eyed critique of Wayne Swan’s record as Treasurer:
Perhaps the most glaring failure of Swan’s tenure as treasurer was the non-delivery of a budget surplus in 2012-13. Notwithstanding the oft-repeated (and warranted) commitment to return the budget to surplus last financial year, there really was Buckley’s chance that this would be achieved.
Just as there is no point trying to fatten the pig on market day, Swan left the charge to return the budget to surplus way too late and failed big time. At this stage, we expect the budget deficit for 2012-13 to exceed $18 billion or about 1 per cent of gross domestic product.
In all the time he was treasurer, he was unable to manage the budget properly (see chart). The spending spree of 2008-09 and 2009-10, meant to stave off the effects of the global financial crisis, was excessive, wasteful and ill-timed.
Research commissioned by the Treasury suggests a large proportion of the cash handouts was saved, rather than spent, by recipients. And the over-priced school halls were still being built in 2011 and 2012. When revenue collapsed in 2009-10, particularly company tax and capital gains tax receipts, Swan was unsuccessful in adjusting spending…
In comparison with the two standout treasurers of the past 50 years, Keating and Costello, Swan is a mere shadow…
The economy is weaker, less competitive and less flexible than when Swan became treasurer. It will take a number of years to repair the damage.
Let me state from the outset that I thought Swan was an ordinary Treasurer, unable to communicate a coherent message on the budget or economy and incompetent in pushing through reform (e.g. the bungled resources super profits tax).
That said, arguing that the Government’s response to the Global Financial Crisis (GFC) was entirely wasteful and ill-timed, and that it should instead have cut spending as taxes collapsed, ignores economic reality. The fact of the matter is that Australia was facing the worst global downturn since the Great Depression and the Government’s stimulus (along with assistance from the RBA and China’s own massive stimulus) helped Australia avoid a technical recession. Was there waste in pursuing such stimulus? Of course there was: desperate times and quick action was always going to produce some waste. But was the result better than a recession (made worse had the Government followed Sloan’s preferred spending cuts)? Probably.
In praising Peter Costello’s performance as Treasurer, Sloan also glosses over some important facts.
First, the primary factor separating the diverging budgetary fortunes of the Costello era and Swan is that Costello was Treasurer during a period of favourable macroeconomic conditions, both locally and abroad. Costello presided over the most lucrative part of the resources boom when commodity prices and the terms-of-trade literally exploded (see next chart).
Nominal GDP is the dollar value of what’s produced and earned across the economy and is also the measure that drives taxation revenue. Due in part to the inexorable rise in the terms-of-trade, Costello experienced ever growing nominal GDP growth as commodity prices surged, whereby it reaped the benefits of growing personal and company taxes, not to mention increased capital gains taxes as asset markets boomed. By comparison, Swan experienced two episodes where nominal GDP collapsed – both on account of falling commodity prices (see next chart).
Let’s also not forget that Costello wasted much of the revenue windfall in the form of pre-election bribes and tax cuts. He also made the short-sighted decision to end indexation of petrol excise (which now costs the Budget some $5 billion per year), and made the disastrous decision to halve the rate of capital gains tax (CGT), making property speculation even more fruitful. The decision on CGT also helped kick-off a boom in household debt, whereby debt levels literally exploded over the 11 years that Costello was Treasurer. (see next chart).
This extra demand (spending) by the household sector meant that the Federal Government was able to run bigger surpluses, without adversely affecting overall demand in the economy (see next chart).
Once Swan became Treasurer in late-2007, however, the ratio of household debt to disposable income flatlined as households dramatically lifted their savings rates. This deficiency of household demand (spending) effectively left a hole in the economy that had to be filled by increased demand (spending) by the Federal Government, which pushed the Budget into deficit.
Finally, lets not forget that the Commonwealth bureaucracy – as measured by public administration & safety employment in Canberra – ballooned under Costello’s watch, contradicting the Liberal’s “small government” (“fiscal conservative”) credentials:
Put simply, analysis of Swan’s performance as Treasurer is not as black and white as Sloan makes out. Had roles been reversed and Labor was in power during the Great Moderation and the once-in-a-century commodity price boom, chances are it would now be claiming fiscal superiority over the Coalition.
Costello’s reign as Treasurer was as much a case of good luck and being in the right place at the right time as good fiscal management.
