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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

Ken Henry, fiscal policy, challenges « Previous | |Next »
May 21, 2009

Ken Henry in his speech, Contemporary challenges in Fiscal Policy to market economists in Sydney this week takes on his critics of the underpinnings of the 2009 budget. Most of the Australian criticism has been directed at the assumptions underlying forecasts that underpin the medium-term fiscal path to return the budget to surplus. The claim is that they are too optimistic. Henry has provided a detailed explanation of the basis of Treasury's growth forecasts that suggests they are plausible.

A complex issue is the requirement to explain the large budget deficit now and how that deficit would be wound-in over time through a medium-term fiscal strategy. That in itself is not a difficult concept to grasp, even if the way this is to be achieved is complex.

One trenchant critic of the 2009 budget was the Institute of Public Affairs, the sturdy defender of free market capitalism, individual liberty and small government. Their messages are: Free markets thrive on creative destruction. Reduce the regulatory burdens. Let financial markets manage through the crisis on their own since they are self-correcting. These classical liberals hold that market relations should dominate just about every sphere of social collective life, other than the moral order. Utilitarianism is their default moral public philosophy.

This is in contrast to Australian conservatism which holds that social conservatism rules in the moral order. Conservatism today in Australia practically means neo-liberalism + social conservatism.

In his speech Ken Henry says:

Consider the reporting of the budget in the Wall Street Journal Asia last week. According to that reporting, in all of the decisions taken by the Government in response to the global recession, the only ones that will have any stimulatory impact on the economy are the 'tiny' personal income tax cuts announced in the 2008-09 Budget. The journal also informs its unfortunate readers that revenue downgrades alone would not have driven the Australian budget into deficit. And to cap it off, readers were told, in what is surely one of the most ironic sentences ever uttered in macroeconomic analysis, that '(t)his Keynesian revival comes at a particularly bad time, given that tax revenues are falling as the economy slows, a normal feature of economic downturns'. Apparently, the right time for a 'Keynesian revival', involving the spending of large amounts of public money, is when tax revenue is strong and rising, a normal feature of economic boom times.

Henry's comment is that the budget's complex story-telling exceeded the reading age of this commentator, and that newspaper readers in Australia can be thankful that they don't often have to confront material that is quite that bad.

For me this account shows the awful position the conservatives have got themselves in once you step beyond the surface debt debt debt /deficit, deficit deficit rhetoric and ask well, what would you do to address the global financial and fiscal crisis. Their position is that the Rudd Government should not have adopted a highly expansionary fiscal policy, not gone into deficit and just opted for tax cuts. Keynesianism is Big government and that means socialism, which in turn means the crushing of individual liberty by the state.

This often leads them into strange territory such as Oliver Marc Harwich's op-ed in The Australian, which tries to argue that Kevin Rudd's hero, Dietrich Bonhoeffer, was a neo-liberal.Harwich's work for the CIS tries to claim the German "social market" movement -- in which it is argued that the market must be accompanied by state planning, collective economic sectors, and a strong welfare net--- for contemporary neo-liberalism. Contemporary neo-liberalism (the Thatcher /Reagan kind) is opposed to the social market movement.

Once you accept that the worst recession since the 1930s requires a substantial fiscal response the immediate issue becomes the size of the deficits and the quality of the spending. Henry explicitly address the way the budget was constructed in terms of the integrating stories in three time periods: the four year forward estimates period; a 12 year medium-term; and a 40 year Intergenerational Report time-frame:

We developed the medium-term scenario to provide parameters for the medium-term projections of the budget balance. The latter are required to span the gap between the four-year forward estimates period and the 40 year projections contained in the intergenerational reports.In spanning the gap we also wanted to reconcile the short and medium-term GDP trajectory with the long-term projections contained in our IGR modelling. Call us fastidious if you like, but we don't like discontinuities in our economic projections. We wanted to be sure that we were describing a medium-term scenario that is consistent not only with the short-term forecasts, but also with the long-term IGR projections.

The approach is predicated on a gradual recovery in aggregate demand in the final forecast year (2010-11), after which the supply-side drivers of the economy take over, then holding growth in real spending to no more than 2 per cent in real terms until the budget returns to surplus in 2015-16.

This is not the same thing as saying Treasury believes such fiscal discipline will be exercised.That is the realm of politics. The responsibility lies with the Rudd Government to limit real spending to no more than 2 per cent in real terms until the budget returns to surplus in 2015-16. This is another point of criticism.

| Posted by Gary Sauer-Thompson at 3:55 PM | | Comments (7)


Thanks for an important thread, Gary.
Was interested in your social conservatism/ free marketeer comments mid-thread. I think the split that occurred in their hegemony of earlier this decade occurred just because of that.
The libertarians don't hold with much of the social conservative ethos, for some of them morality is useless coming from social conservatives as the left and the market remains the only factor, although the end consequence of their game is that materialism, in their sort of form, being ultimately emotionally unfulfilling; many of them may indeed embrace the ( excluding, nuclear ) "family" eyewash of social conservatism, just to find any meaning at all in their nihilistic universe.
The other thing, I should be shocked at their attempted shameless misappropriation of Bonhoeffer, but after watching Kevin Andrews and cold blooded Sharman Stone on SBS's refugee episode this wake, nothing shocks me anymore.

yeah Howard held the social conservatism-free market thing together. He kinda defined Australian conservatism.

I note that they are very quiet on the Mathew Johns, group sex thing.I would have thought they would have condemned the group sex as well as the subsequent gang bang as it would offend their family values. But they stayed mum.

I see that Alan Moran from the IPA argues thus:
The difficulty we now confront is that the bastion that promoted responsible fiscal policies, the Treasury, now encourages increased spending and has even been a leading promoter of introducing increased costs in pursuit of lower carbon dioxide emissions. The Treasury Secretary, Ken Henry, has given full license to Rudd's exorbitant expenditure give-aways. Henry even urged that these to be concentrated on the consumer rather than on infrastructure. The latter at least has some payoff albeit likely to be inferior to leaving the funds with the private sector in terms of increased productivity. There has never been a case in the past when the Treasury was anything other than a bulwark against the natural proclivity of politicians to spend. This therefore is a particularly dangerous period for the Australian economy.
The budget was about spending on infrastructure!

Alan Moran argues that the ALP cannot take tough decisions in terms of cutting spending because which is genetically programmed against reining in spending unless it is defence spending and there is little enough of that left to be whittled away.

"Genetically programmed"? Didn't Keating have budget surpluses when he was Treasurer?

Yes, they are mean-spirited curmudgeons, aren't they?
Relates to Gary's latest thread about America- recessions are great things so long as someone else is copping the effects of them(also charming piece at Quiggins about housing evictions and the banks).
The thought that even a trickle of money might be going into someone elses pockets bothers them in a way that would have shamed Ralph Nickleby, of Dickens fame.
The comment about the Rights silence on the Cronulla antics was prescient, go to Sydney Morning Herald and have a glace at the astonishing conclusion Miranda Devine has just come to, concerning it all.
Also interesting listening to the comments of the panel on Q and A last night, passing over the "group sex" topic.
Very subdued Tony Abbott....

Gary, can you really defend the claim that "social conservatism rules" for the IPA?

Apart from a few articles about social capital - which do not take a socially conservative tack - and on gay marriage - which again, do not take a socially conservative tack - you haven't got much data to work with. There may be counter-examples that I have forgotten (and possibly some before I started with the IPA five years ago) but it certainly undermines the oddly common contention that social conservatism "rules".

Always happy to debate economic issues where we do disagree, but the social conservatism line is a cheap, and I think inaccurate, shot.

the post was badly written if you interpret ithge particular paragraph as saying that the IPA's position is one of social conservatism. It was not my intention to say that at all. The IPA has little to do with social conservatism---on my reading this think tank is consistently neo-liberal--or classical liberal (a point of contention probably). No cheap shot was ever intended. My intent is to try and open the debate to go beyond the cartoon level of the mainstream media.The economic issues are serious ones.

The intent of this part of the post was to say that the IPA are the study defenders of free market capitalism, individual liberty and small government in Australia. With respect to the moral order, my guess is that the IPA are utilitarians, though I'm not sure whether it is act or rule utilitarianism. Probably both given the different voices.

I'll change the post to make this clearer.

Our bone of contention is probably the around the claims about self-correcting of markets.