Home > Economic policy > Austerity in Australia, 1980s style

Austerity in Australia, 1980s style

January 2nd, 2014

The Sydney Morning Herald has an editorial praising the expenditure cuts introduced by the Hawke-Keating government in 1986 and 1987, and suggesting that Abbott should copy this example. Apparently, according to the Oz, Hawke and Keating themselves have endorsed this view (I haven’t gone behind the paywall for the full article).

This argument carries a great deal of force, because, as we know, the Hawke-Keating cuts restored the budget to surplus, leading to Keating’s famous declaration that the 1988-89 Budget was “the one that brings home the bacon”. Leading scholars like Alesina and Ardagna have pointed to this exercise as one of the great success stories of “expansionary austerity”.

What’s that you say? The economy fell in a heap in 1989, leading to a decade of deficits and fifteen years of high unemployment? To quote another Keating aphorism, that was “the recession we had to have”. I guess we are about due for another.

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  1. Ikonoclast
    January 2nd, 2014 at 04:11 | #1

    I don’t understand arguments for austerity based on nominal balances of a nominal quantity (money or fiat money) in the form of government deficits or surpluses.

    If the call for austerity were based on arguments related to resource and environmental limits I would understand it. For then the argument would be based on real quantities not nominal quantities.

    The fact that so many are parroting the neo-conservative call for fiscal austerity (a position based on falsehoods and macroeconomic ignorance) and so few are looking into the possible arguments for a different kind of austerity based on resource limits and environmental limits, shows the paucity of realistic thinking in our society. The great majority of our elite (being a power and financial elite) clearly have zero functional understanding of the real physical world system we live in. We are being led by intelligent zombies. Have you ever thought of how intelligent zombies would be much more dangerous than the mindless zombies who are standard in the zombie genre? Well they are the people leading us.

  2. rog
    January 2nd, 2014 at 04:12 | #2

    From memory Keatings recession was mostly due to runaway inflation and soaring interest rates and an RBA that acted too slowly when needed. There were other things happening too, like floating the AUD, which had an impact.

    Today we have low inflation low interest rates and a steadier AUD, with nett govt debt/gdp low why volunteer for austerity?

  3. Catching up
    January 2nd, 2014 at 05:37 | #3

    @rog Agree. One needs to govern the conditions that prevail. Not to ideology.

  4. nick j
    January 2nd, 2014 at 06:50 | #4

    Strangely, post war austerity in the UK involved high levels of employment, 45 hour weeks and a steadily rising standard of living. And rationing, but I’m not advocating a return to that!

  5. TerjeP
    January 2nd, 2014 at 06:50 | #5

    I’d spend more time looking at monetary policy as the source of the recession we had to have. The RBA was not at it’s best.

  6. Paul Norton
    January 2nd, 2014 at 07:23 | #6

    On the other hand, those 17 per cent interest rates came in handy when the main source of my wage in 1989 was the return from investment in a cash trust.

  7. PhilH
    January 2nd, 2014 at 07:45 | #7

    Just as the “Bush tax cuts” set up the US government’s recent deficits, the “Howard tax cuts” have created ours.

    So we could just, you know, reverse some of the tax breaks on high incomes. Leave the poor alone for a change.

  8. Ernestine Gross
    January 2nd, 2014 at 07:46 | #8

    Ikon, your first two paragraphs contain an important aspect of the distinction between economics and accounting (the latter includes GDP and derived aggregates).

  9. sunshine
    January 2nd, 2014 at 08:11 | #9

    Will the Coalition have the courage of its convictions and mobilise ‘downward envy’ ,so carefully cultivated by Howard, to make the cuts to those who can least afford it ? Hopefully Labor would use that as an opportunity to distinguish itself from the Coalition on something other than climate change.

  10. crocodile
    January 2nd, 2014 at 08:26 | #10

    The early 90′s recession was felt by most of the developed world. Most of our trading partners had one at approximately the same time. The RBA may not have been at its best but hard to see how it could of been avoided without the benefit of a prior substantial boom like the early 00′s.

  11. John Quiggin
    January 2nd, 2014 at 09:24 | #11

    @rog

    Monetary policy was the trigger. But the recession was deepened and prolonged by resistance to fiscal expansion aka “pump priming”

  12. Alphonse
    January 2nd, 2014 at 10:22 | #12

    I wonder how the zombies’ acolytes would split on the choice between running deficits or repealing the tax cuts that are Howard’s structural deficit legacy.

  13. Brian
    January 2nd, 2014 at 10:36 | #13

    Do you have a good citation on the 86-87 and ’89 consequence?

  14. I used to be not trampis
    January 2nd, 2014 at 10:42 | #14

    Austerity worked in 1987 and 19996 as Keynes would have said it would. It didn’t work in Swan;s lat budget as Keynes said it would. Nor in Europe. the IMF demolished the expansionary austerity myth a long time ago.

  15. Zac
    January 2nd, 2014 at 11:12 | #15

    Didn’t the economony collapse in late 1990? In 1989 it was still growing strongly.

  16. Ikonoclast
    January 2nd, 2014 at 11:28 | #16

    @Ernestine Gross

    However, I wonder if we would agree in total. I would still say that an appropriate fiscal setting is a necessary but not sufficient condition for a healthy economy. In others words, inappropriate settings of a nominal quantity (the budget deficit/surplus monies) can affect real quantities (production, labour utilisation, capacity utilisation) in the real economy.

    So while I am the first to say money is nominal, not real, I mean this at the primary physical level. At another level, as an agreed social construct with an agreed function and purpose in our system, money is real and changing its amounts and availability at individual or aggregated levels does have real effects.

    Fiscal austerity in a recession makes no sense. It is pro-cyclical policy and makes the recession deeper. A different kind of austerity (real resource austerity) would make sense at our current historical juncture. It would be possible to combine fiscal non-austerity (stimulus in short) at the same time as practising real resource consumption austerity. For example, stimulus monies and other measures to encourage human services provision and development of mass transit infrastructure whilst at the same time discouraging inefficient use of oil and mass car ownership. It would be possible to have a an economic stimulus which delivered less real resource consumption. Obviously, there are limits to this. An economy cannot be entirely decoupled from real resources. But as JQ says, given the enormous inefficiencies in our current system (and plenty of unnecessary over-consumption) there is plenty of low-hanging fruit.

  17. history in time
    January 2nd, 2014 at 11:57 | #17

    A looser fiscal policy in 1989-90 and 1990-91 would not have helped much and would have been very hard to justify politically or economically at the time. The early 1990s recession was mainly caused by very high interest rates, which were justified as needed to bring the growth of the economy to heel, in turn needed to contain foreign debt. Internationa factors did not help. When the extent of the slow down and recession was clear fiscal policy was substantially eased in 1991-92. That the Government felt confident to do the latter occur was because of the space provided by the earlier fiscal consolidation in the mid to late 1980s.

  18. Neil
    January 2nd, 2014 at 16:42 | #18

    Just as the “Bush tax cuts” set up the US government’s recent deficits, the “Howard tax cuts” have created ours.

    Phil

    Why blame Howard when Labor had the power to overturn those tax cuts?? In fact Labor gave even more cuts and then bragged about it. This from Wayne Swans last budget.

    http://www.budget.gov.au/2013-14/content/overview/html/overview_41.htm

    The Government has delivered $47 billion of tax cuts in our first four years since coming to office. In addition, we have provided further tax cuts as assistance for the cost of living impact of the carbon price from 2012‑13. Even after accounting for the small increase in the Medicare levy in 2014‑15 we will be delivering total tax cuts of around $20 billion a year over the next four years compared to the 2007‑08 tax scales.

    Why go back six years to the Howard tax cuts when Wayne Swan is bragging about his tax cuts just over six months ago?? He even compares his cuts with Costello’s.

  19. January 2nd, 2014 at 16:53 | #19

    @Neil
    Exactly. Governments of all persuasions like handing out tax cuts. Even if they shouldn’t.

  20. PhilH
    January 2nd, 2014 at 17:04 | #20

    Neil, in making repeated, annual tax cuts, the Howard government established the expectation that tax cuts are normal, making tax increases politically much harder. Labor played the same tune, albeit to a lesser degree.

  21. rog
    January 2nd, 2014 at 22:14 | #21

    It’s called magic pudding economics; the theory is that you reduce taxes to increase business activity which then pays more taxes. You cut taxes to increase taxes. Except, when you look at the stats most companies don’t pay tax so the cuts remain as a deficit.

    And then the experts call for the govt to cut spending to match the (unexpected) loss of revenue. Govt cuts spending, the economy shrinks, unemployment increases putting pressure on govt resources. So it goes.

  22. Yuki
    January 2nd, 2014 at 23:48 | #22

    @Ikonoclast
    I can’t help admiring your stylish wearing of the hair shirt but on this occasion I would give sincere applause if you can justify your approval of the idea of austerity based on resource limits (I set aside your reference to the environment as deserving separate consideration). What limits?

    Even more to my point can you point to any historical examples of forecasting which have led to sound policies of the kind you contemplate other than some short term highly specific ones related to making war?

    While I don’t advocate laissez-faire I do ask you to consider the analogy between the modesty of relying on the market to set prices and the Rule of Law. In each case the problems of arbitrariness, often unacknowledged sel interest and sheer ignorance are mitigated.

  23. TerjeP
    January 3rd, 2014 at 01:01 | #23

    Why go back six years to the Howard tax cuts when Wayne Swan is bragging about his tax cuts just over six months ago?

    I would think the answer is obvious. Tribal bias.

  24. Tyler
    January 3rd, 2014 at 03:26 | #24

    why the idiots at fairfax feel it’s wise to dare a newly elected conservative government to slash spending when they’ve made their utter disinterest in anything like an equitable approach to fiscal issues readily apparent is beyond me. Some absurd combination of ideological masochism and contempt for the lower classes who’d bear the brunt of any cuts i suppose

  25. Ikonoclast
    January 3rd, 2014 at 05:40 | #25

    @Yuki

    I am not sure I wear a hair-shirt unless Jeremiah wore a hair shirt. I am definitely a “Jeremiah” albeit a secular one using physics for forecasting and not religious dogma.

    You ask “What limits?” I would nominate oil and fresh water as key resource limits along with the environment’s limits on absorbing/processing wastes, particularly but not only CO2 emissions.

    Hmmm, forecasting can lead to sound policies if the forecasting is not ignored. The relative success of arresting the hole in the ozone layer began with the forecasts of dangers being listened to and acted upon. The forecasts of LTG (limits to growth) and AGW (anthropogenic global warming) would lead to sound policies if they were listened to and acted on. However, the warnings are ignored.

    Something like 36 or 37 years ago, a friend and I did a small undergrad assignment where the basic thesis was that most scientific warnings of long term dangers are ignored. This is where broad political, social and economic change is needed to implement “fixes” to avoid the dangers. We specifically had the newly released Club of Rome report in mind. I can’t remember the detail of our argument now. However, the correctness of our thesis has been borne out to date with zero effective global response to date to the dangers of LTG and AGW.

    I (and my colleague) were right and we always knew we were going to be right on this one. It was a lay down misere which takes little real predictive ability; just a reading of history, an assessment of the nature of humans and an understanding that what is locally rational in self-interest and adaptation terms can be globally irrational.

  26. Donald Oats
    January 3rd, 2014 at 09:42 | #26

    Ditch baby bonuses. No handouts for buying a house. Get rid of negative gearing by a phase out process. Simplify tax system by removing work expenses as deductions, and ditch salary sacrifice arrangements. Chuck out any subsidisation of diesel vs petrol. Make some slight increases to the higher tax rates. Charge ED admissions (by sending a bill) where the person is there because of intoxication. Fine people for public intoxication, say over 0.15, a fairly severe level. Eliminate tax avoidance techniques involving trusts, etc. Ensure that companies pay tax owing in Australia.

    None of those measures involve direct loss of jobs, although some transfer of money is clearly going to happen within the economy. Some reduction of government expenditure and increase in revenue are in the list. Clearly some people in the middle class bracket will feel the effects (as I would), but it isn’t going to cause people to go without the necessities.

  27. crocodile
    January 3rd, 2014 at 10:56 | #27

    Donald, unfortunately, most of those measures were implemented for the purpose of garnering electoral support. I cynically refer to it as vote buying where all the luvvies think they are getting something for nothing. Not so easy to wind back once begun as the electoral losses could be crucial. Instead, it is easier to simply offer even more handouts than the other team. Like it or not, that is what we are stuck with unless some miracle happens.

  28. Tim Macknay
    January 3rd, 2014 at 11:14 | #28

    Fine people for public intoxication, say over 0.15, a fairly severe level.

    This would raise very little revenue, and would tend to penalise marginalised groups most severely.

  29. crocodile
    January 3rd, 2014 at 11:45 | #29

    Can’t see any good reason to fined for just being pissed. Laws are already in place for causing trouble; drink or no drink.

  30. January 3rd, 2014 at 11:48 | #30

    @Tim Macknay

    Yes, don’t penalise public intoxication any more than it already is. But do tax drinks based on alcohol content. People do respond to price signals.

    And yes, Donald Oats, its time to get rid of all those stupid distortions in the tax system. If Labor had tried to do it, the media would have screamed their collective heads off. The Libs might manage it, but I doubt they have any interest in doing it.

  31. Julie Thomas
    January 3rd, 2014 at 12:16 | #31

    @John Brookes

    People do respond to price signals? These are rather confusing for the gullible and trusting you know. I go to the hardware store – the multi-national hardware store – and there is no rationality in pricing. I can get a set of screwdrivers for the price of one single screwdriver in another packet and who can tell if it is worth the extra?

    Some decades ago I could have found a proper hardware store where the man who owned the store ran the store and he would have known and advised me which one to buy. That made my choices so much more rational and efficient.

    The co-payment for a GP visit is supposed to be a price signal but surely it would work better if people understood the problem – that some people are using the system in a selfish and greedy way that will lead to disaster for our ‘free’ – well sort of free – health system.

    Humans are not rational as everyone knows about the other – but not themselves – but I am quite sure that we could all be more rational if we understood the rules of the game.

    I can see that there are lonely old folk and incompetent young folk who are clogging up the system because they do not understand all these rules about the economy that are supposed to be common knowledge. These people are not deliberately choosing to be a problem. They read the labels on the over the counter medications they take and they believe the warning that says “See your doctor if pain persists”.

    Many reasons apart from stupidity and laziness that means some people will believe what a multi-national corporation tells them. Some humans are like that. I would have thought that a good idea would have been an education campaign aimed at informing people – in a clear and honest way using scientific results – not only of the way they are poisoning themselves but also of the ways that they can contribute to a healthy health care system.

    The Qld govt – another awful Newman – is running a lot of ads aimed at ‘helping’ people to choose more rational drinking and driving behaviours and this is a good idea. Why not inform the people about the dangers of fast food and a sedentary life-style if the govt is worried about the spiralling health costs and interested in building a cohesive society?

    I rather think this is just another ideological sleight of hand by the LNP.

  32. January 3rd, 2014 at 12:59 | #32

    @Julie Thomas

    But they do! Increase the price of alcohol, and the amount consumed will fall. Its not just the monetary price. Many people cut down their drinking in their late twenties and early thirties – because they have other priorities, like children, houses and social standing. They are faced with a choice, and decide to reduce their drinking, because otherwise work and family or both would suffer.

    I’m sure that part of the problem with alcohol and drugs in isolated communities is that there isn’t sufficient price to pay for drinking – because the alternatives don’t have enough value.

  33. Julie Thomas
    January 3rd, 2014 at 13:45 | #33

    @John Brookes

    Okay I’m already confused by the economics but you do know that ‘some’ people will make their own alcohol if the price of the ready made stuff gets too high. :)

    Oldest son has lost a lot of weight and cut down on his drinking by moving back to Brisbane and a lower paying and lower stress producing job. He didn’t have to do anything, he tells me. It has just happened!

  34. January 3rd, 2014 at 21:52 | #34

    @Julie Thomas

    I’d like to know his secret. I gave up drinking and put on weight. Sigh.

  35. Ikonoclast
    January 3rd, 2014 at 23:48 | #35

    @Donald Oats

    I agree. We need to get rid of subsidies for negative things. These subsidies are like anti-pigovian taxes promoting the very things that damage our bodies, our society and our environment. Whilst I am not anti-tax overall (like Libertarians) I am against subsidies for “bads” and taxes for “goods”. For example, subsidising fossil fuels and car ownership while levying payroll tax is unbelievably stupid.

    Since taxes are a “necessary evil”, in some senses, seek to implement pigovian taxes and remove anti-pigovian subsidies wherever possible.

  36. Donald Oats
    January 4th, 2014 at 04:25 | #36

    @crocodile

    To be honest, the items to do with fining drunkenness, etc, in my previous list were kind of tongue in cheek. Governments are often accused of using fines as a revenue source, so I thought I’d throw another one into the mix, and see what the reaction to it was. Fines could be a better deterrent to the drunkenness leading to bat-sh*t crazy fights and civic messiness, and is much easier for police to administer than dealing with the aftermath of fights where alcohol was a precipitating factor, for example. The court system is averted, and perhaps one fewer intoxicated person to end up in ED or in a street fight.

    @Ikonoclast
    Good point on payroll tax—I forgot about it. State guvs like their revenue, but this is a rather bizarre tax with no good benefit (apart from the guv’s point of view, that is) that I can see.

  37. faust
    January 4th, 2014 at 05:19 | #37

    Expansionary austerity only works if you have either loose monetary policy and/or supply-side reform to boost business investment. Australia does need a period of tightening of overall government spending but the real problem is that the ageing population will place increasing pressure on health/social costs but during a time where Australia has desperate need for improved infrastructure and larger defence force. That problem then is that what is squeezed is mainly social spending.

    From experience in Europe, the UK is the only country where austerity has been applied that has not had a multiplier effect that wipes out any gains and the sole, simply only, reason is the QE. I doubt the RBA will want to stoke inflation by following the BoE’s path.

  38. Julie Thomas
    January 4th, 2014 at 06:03 | #38

    @John Brookes

    Seriously, I think he drank more when in a social situation that he didn’t really ‘like’ – the neo-liberal asshats who he had to hang out with to get ahead when he was doing a career and climbing the ladder.

    His current employer understands the need for a life work balance – it’s really true! – and so oldest son doesn’t have to do the horrible group bonding stuff and socialising with right wing dicks that he used to cope with by drinking.

  39. I used to be not trampis
    January 4th, 2014 at 10:36 | #39

    I will disagree with John re the recession we had to have.

    al that was needed was to allow the automatic stabilisers to do their job.

    There was no liquidity trap nor was monetary policy impaired as in 2006 so monetary policy was all that was needed to get the economy going again.

  40. W. Smith
    January 4th, 2014 at 18:53 | #40

    One of the obvious reasons The Australian went so feral against the previous government was that they were clearly afraid of the fact that Keynesian economics worked exactly the way it was supposed to during the GFC. Not able to discredit Keynesian spending at the macro level, they manufactured stories about wasteful spending (school halls and so on).

    We’re now about 35 years into the neoliberal experiment and we’re still talking about the need for government austerity. Isn’t it about time to admit that the experiment has not been a success and to try something else?

  41. rog
    January 4th, 2014 at 18:58 | #41

    Laffer came out recently and said he got it all wrong, QE is not inflationary.

  42. W. Smith
    January 4th, 2014 at 19:05 | #42

    Rog: listening to Paul Keating in his recent interview series with Kerry O’Brien, I must admit to being taken aback by just how Laffer-esque his thinking was. All the usual right-wing guff: lowering taxes actually increases revenues and decreases tax avoidance, public spending crowds out private spending.

    Yes, Keating was – is – a neoliberal, but for some reason I expected something more sophisticated.

  43. January 4th, 2014 at 22:55 | #43

    I will be surprised if Abbott doesn’t engineer a recession. Newman did in Qld, and Abbott is making many of the same early noises. It would only be luck and/or Keynesian desperation from Hockey that would prevent it.

  44. Ikonoclast
    January 5th, 2014 at 02:47 | #44

    @W. Smith

    This is the astonishing thing. The people running our society are surprisingly stupid. One could apply this judgement equally to Keating or Abbott. Of course, they do have a kind of facile intellectual ability, the type of ability suited to politicking which equals lying plausibly with total effrontery. They are socially and politically clever but largely ignorant of science, logic, philosophy, history and empiricism. However, Keating and Abbott are relatively benign compared to Putin for example. The main point of democracy seems to be to rotate people out of power quickly before power corrupts them.

  45. Faust
    January 5th, 2014 at 03:22 | #45

    Why would anyone bother listening to Laffer on anything. The guy has been living off the ‘Laffer curve’ remark rather than any insightful or accurate analysis since.

  46. rog
    January 5th, 2014 at 05:38 | #46

    Seems to be quite a list of those who choose to quote Laffer. Here is his latest observation

    Inflation does not appear to be monetary base driven

  47. faust
    January 5th, 2014 at 06:30 | #47

    Love how he claimed that there was no property bubble and that the US economy would do great… in 2007.

    The guy has been banking on the idea that reduced tax can lead to greater level of economic activity and therefore increase total tax revenues. The ‘laffer curve’ has been abused by the economic right as Keynesian economics has by the economic left.

  48. W. Smith
    January 5th, 2014 at 16:56 | #48

    Ikonoclast: I give Keating credit for some policy achievements – the introduction of capital gains tax and fringe benefits tax, for instance. He certainly wasn’t a pure neoliberal.

    The thing about the Laffer curve is that nobody ever contradicts right-wing politicians on this subject. I get frustrated about the number of times I hear Liberal politicians tell journalists that lowering taxes will increase revenue and invariably increase economic activity. Yet do journalists ever ask right-wingers for evidence for such assertions?

    Maybe social democratic economists like John Quiggin need to educate journalists on questions like these – so they have the confidence to challenge politicians when they spout this kind of theological claptrap.

  49. may
    January 7th, 2014 at 15:03 | #49

    in the world outside Australia the last 5 or so years are becoming known as
    “The Great Recession”.

    isn’t it a bit obvious the previous federal government did the right thing by the response given a reference to “The Great Recession”, which would be along the lines of

    “what”

    “ay”

    “what “Great Recession”?”

    “piss off”

  50. Geoff
    January 10th, 2014 at 10:48 | #50

    Great to have comments on the recession we supposedly had to have, Professor.

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