THE VIEW now advanced in some quarters is that last week's Budget was a non-event because it was accepted by financial markets. This acceptance allegedly rebuts those critics who suggested that the of $14.2 billion (excluding asset sales) budgeted for 1994-95 is far too high.
However, while the popular view is that financial markets impose a rigid discipline on governments' budgets, one lesson of the 1980s is that they may be prepared to accommodate large government (and private) borrowings for an extended period.
In fact, by the time financial markets demanded that monetary policy be operated in the 1980s to really restrain private-sector borrowings, such borrowings and our external debt had already far exceeded prudent levels.
The end result was the recession we would not have had if more responsible policies had been applied earlier. The experience of the 1980s thus suggests that acceptance by financial markets can easily lead one down the garden path.
Of course, the Government's case is that it now has a firm anti-inflationary monetary policy and that the forward projects provide a realistic commitment to reducing the deficit to 0.9 per cent of GDP by 1996-97. Financial markets are prepared to accept that for now because the case will not be tested until the economy is operating closer to capacity.
Yet even in the unlikely event that the projected high levels of economic growth and budget revenue turn out to be consistent with the deficit reduction objective, the credibility of the projected figures for Budget spending (and hence for the projected deficits) remains open to serious question. There are two main reasons for concern.
First, various comments in the media over recent weeks suggest that Treasury has quietly let it be known that it is seriously worried about Budget strategy. It appears that this concern relates less to the 1994-95 deficit than to the general approach being adopted by the Prime Minister, Mr Keating, who is reputedly laying down the law in strategy discussions within Government along the lines that "deficits don't matter". This is worrying indeed, the more so given that the weakened ministry makes Mr Keating an even more dominant figure in his Government.
The second associated concern relates to whether the forward projections of outlays for 1997-98 are likely to be realised. One test is to examine the changes that have been made in the estimates for 1994-95 over the three Budgets since the last Hawke Government one in August 1991.
These figures show that since taking office, Mr Keating has presided over a large increase of nearly $12 billion in the forward estimate for outlays in 1994-95. If there were to be a similar "blow-out" in the estimates for 1997-98 in the next three Budgets, outlays would become an even higher proportion of GDP than they are now estimated and the Budget deficit would be about $15 billion, or 2.6 per cent of GDP higher than now projected for 1997-98.
With the Prime Minister riding a "deficits don't matter" horse, pursuing a social policy agenda and providing handouts to a wide range of interest groups, the chances of keeping expenditure anywhere near the current projections are minimal.
Even the most ardent proponents of pro-family policies would surely have to acknowledge that the 1994-95 Budget provisions for assistance to families largely reflect Mr Keating's political strategy of inclusion. That is a strategy of currying political support, or at least keeping opposition quiet, by providing government handouts for all lobby groups.
In the case of assistance to families with children, the cost is an enormous increase of 16.9 per cent in 1994-95 provision followed by a further massive increase of 33 per cent to reach an estimated $13.9 billion in 1997-98. In this Year of the Family, and with the Oppositition Leader actually welcoming the social spending initiatives announced in the Budget, it would not be surprising if Mr Keating were to push ahead with even more social spending.
The extent to which monetary policy will need to be tightened to deal with products of the Year of the Family and the like remains to be seen. However, one other lesson from the 1980s needs to be noted, namely, that once the private sector gathers momentum along with the public sector it becomes very difficult, both politically and in practice, to operate a monetary policy that keeps the economy on a stable path.
That is why the Government needed to take early and substantive action to rain in government spending and borrowing -- and still needs to do so. That is also why the latest analysis of the Budget by the leading investment bankers Salomon Bros warns that a prolonged delay in tightening monetary policy "could, over time, risk an acceleration approaching the bottom of the six to eight per cent inflation range prevailing during much of the previous expansion". The financial markets are watching and waiting.
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