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Former treasurer Peter Costello says the Albanese government must eliminate the federal budget deficit by cutting spending, as entrenched inflation and rising interest rates make cash handouts counterproductive.
The Albanese government needs to change course as entrenched inflation and high interest rates reshape the economy, former treasurer Peter Costello says, warning that cash handouts now make the problem worse rather than better.
Costello Calls for Deficit Elimination
Costello, who delivered 10 budget surpluses and created the Future Fund and the medical research fund, says the government should cut spending to eliminate the federal deficit. That would mean a cut of around $30 billion for the current fiscal year, equal to about 1 per cent of GDP. The federal government had assumed Australia faced only a temporary cost-of-living problem, so it offered what it called help with the cost of living.
That involved empathetic rhetoric and cash handouts, and state governments did exactly the same. It worked politically and was manageable fiscally. The Albanese government was re-elected. Even Donald Trump's war on Iran did not initially disturb the scenario, though his excursion with Bibi Netanyahu drove oil prices higher.
The government responded by cutting the fuel excise because Australians are doing it tough. It was an expensive subsidy but temporary, and the government got no real political thanks for it while getting away with it fiscally. But the world has changed since, and changed dramatically. Inflation is high and now entrenched, and so are high interest rates.
That means interest payments on the national debt are also increasing. Handouts are not only useless in this new reality; they are worse than useless. They only add to inflation, aggravating the problem. The cost-of-living crisis is entrenched, no longer temporary, and at levels driving Australian voters to despair, a despair otherwise known as Pauline Hanson.
Political Pleasers Face Economic Reality
Treasurer Jim Chalmers has a silver tongue, but it is stretched as far as it can usefully reach. He knows it, which is why he is looking unhappy. Don Russell, one-time right-hand man to Paul Keating and now chair of Australian Super, divided political leaders into pleasers and doers in a 2008 speech. Pleasers try not to upset people and shield the electorate from bad news, he said.
Doers identify problems, deal with them, and educate people. The Albanese-Chalmers government is broadly a pleaser, as were its predecessors. The doers included the Hawke-Keating government and the Howard-Costello government. Independent economist Chris Richardson says we have had pleasers ever since WorkChoices, the final Howard-Costello reform effort.
Twenty years of pleasers has delivered an economy with no productivity growth, he says, and we are rats in a cage fighting over shares of the pie. Asked what he would do if put in charge, Costello said the priority is to stop making things worse by running a budget deficit. He says the cut should be eminently doable because Australia's terms of trade have doubled since the Keating era.
The terms of trade measure the price of exports compared to imports, and they have moved hugely in Australia's favour as commodities became more valuable. We are living in a terms-of-trade surge, Costello says. In buoyant trading times like these, we should be paying down debt. Instead, by running a deficit, the federal government is doing the opposite and adding to the debt pile every year.
Experts Back Returning to Surplus
The government will dismiss this as a partisan point, since Costello is a Liberal. But he has the credentials and the support of non-partisans. Former treasury secretary Ken Henry, who advised Labor and Liberal governments, said everybody knows the budget should be in surplus right now and that this generation should not burden the next with debt.
Former Reserve Bank governor Philip Lowe added his voice this week, telling the Institute of Public Affairs that Australia is running sizeable budget deficits at a time of full employment and very high commodity prices. We should be running sizeable surpluses, he said, adding that government spending has been adding to demand over time and putting upward pressure on inflation. Costello says there is new urgency because interest rates on the national debt are rising.
The interest costs on the debt will be a driver of expenditure racing against the NDIS to be the biggest growth in government spending over the years, he says. Australia borrowed on the world market at rates of 1 per cent or lower during COVID, but today it is borrowing at around 5 to 6 per cent.
Richardson says a heap of cheap COVID debt will need to be rolled over, starting in about two years for the federal government and about four years for the states. The Intergenerational Report last month projects that productivity will increase thanks to AI, meaning the economy can grow faster without generating inflation. Productivity growth is like lubricant to prevent the motor running hot. Costello, the father of the Australian intergenerational reports, is unconvinced.
AI Hopes Meet Fiscal Austerity
He calls the report a Hail Mary pass, saying everything is going badly but the government has latched onto AI as its saviour. It is high risk, he says, and we can only hope Anthropic and OpenAI can save Australia because the government does not have much idea how to do it. If the government faces the problem squarely, should it eliminate the deficit by raising taxes or cutting spending?
Costello says revenue is maxed out, so it has to be done on the spending side.
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theage:This story was compiled and edited by the HeadTopics newsroom and HT AI from the reports above.
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