Austerity in Australia, 1980s style

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.

50 thoughts on “Austerity in Australia, 1980s style

  1. 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.

  2. 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.

  3. 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.

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

  5. @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.

  6. @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.

  7. @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.

  8. @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!

  9. @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.

  10. @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.

  11. 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.

  12. @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.

  13. 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.

  14. 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?

  15. 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.

  16. 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.

  17. @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.

  18. 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.

  19. 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.

  20. 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.

  21. 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”

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