THE CENTRAL controversy about Tuesday's Budget, delivered by Treasurer Ralph Willis but bearing clear prime ministerial trademarks, is less about proposals for 1994-95 than about the strategy implied by the projections for the years to 1997-98. Many analysts accept (wrongly I believe) that, with the economy operating below capacity, the Federal Government can appropriately run in 1994-95 a relatively high deficit of $14.2 billion (3.1 per cent of GDP) excluding asset sales and increase spending excluding asset sales at a relatively high rate (2.9 per cent). Their concerns relate to unrealistic forward projections of continued rapid growth in the economy, which imply a "go for growth" strategy that risks over-heating the economy.
So what, it may be asked? If the projections are wrong then the Government can change its policies but, before it does, hold an early election which, with a by then strongly growing economy and an Opposition short of credible alternative policies, it would be bound to win. After such an election, the Government could then announce tax increases and even (possibly) spending cuts to reduce the deficit to more appropriate levels.
Mr Keating has proved such a chameleon that it might not be surprising if he were to switch from his present "social conscience" mode to an "economic reform" mode in a year's time. Last Thursday Mr Keating responded to criticism of the white paper on employment by proclaiming his mission to create a "civilised society" (does anyone want an uncivilised one?) and attacking The Age for ceasing to champion "great social reforms". Yet as recently as August 1990 Mr Keating lambasted The Age for being "basically into that sort of twilight zone of economics and politics, where they'd like that sort of comfortable world of the '60 and '70s, and social policy slopped on, trowelled on, not directed, targeted".
The question now increasingly being asked is which is the real Mr Keating? The suspicion is growing that, while he tries to ride two horses at the same time, the economic reform horse has fallen back and cannot now make up the ground it lost at the barrier.
The problem is that, once a leader starts to "slop on" social policy, it is difficult politically to change horses: the "social conscience" syndrome becomes a pervasive mind-set. In the early 1980s years of Labor, Budget expenditures and deficits were allowed to blow out to Whitlamesque proportions and, when in 1985-86 and 1986-87 they needed to be heavily reined in, that was not politically possible. Mr Keating's subsequent four years of Budget surpluses came too late and these were in any event more a result of the over-heated economy than a response to it.
The Whitlamesque tendencies have indeed re-emerged already.
Commonwealth expenditure for its own purposes (that is, excluding payments to the states) is now running almost out of control. In 1994-95 such expenditures are estimated to be no less than five per cent higher than last year in real terms (excluding asset sales) and to account for 3.2 percentage points more of national resources than five years earlier. Had these expenditures merely stayed the same proportion of GDP as in 1989-90 they would be $14.7 billion lower in 1994-95.
Mr Keating's recent claim that "we've got a great record as Budget managers" is thus simply laughable. But, coupled with his suggestion that there is "something wrong" if Australia could not repeat the 1983-89 growth performance, it is extremely worrying.
It was just such a "go for growth" strategy in the 1980s that pushed the economy over the top and then into recession.
The argument is that "this time it will be different" because reforms have so improved productivity that growth at the 1980s pace is sustainable. However, while there has probably been some structural improvement in productivity, this argument is essentially a smoke-screen to cover up for poor policy.
Other important changes since the 1980s also need to be reckoned with.
Current international best practice on inflation will require demand-restraining action earlier than in the past. Whereas in the 1980s Australia "got away with" (for a time) much higher inflation rates than the OECD average, we now have less room for manoeuvre.
Also relevant is the increased difficulty in attracting private overseas capital. In particular, Japanese institutions, which invested heavily in Australian governments' bonds in the 1980s, are now chary about the exchange risk. More generally, while it remains the only significant net saving country, Japan has virtually ceased to be an exporter of long-term capital. International investors are currently signalling to the US that it must tighten monetary policy and moderate its (slower) growth. Unless Australia fairly quickly eliminates its (larger) public-sector deficit (which would require a Commonwealth Budget surplus) our much larger external deficit makes us highly vulnerable to the same pressures.
Mr Keating's 1994-95 Budget thus incorporates a high-risk strategy and it is irrelevant that Australia's Budget deficit stands up well against the OECD average. Australia has a different structured economy and has two major handicaps -- an antiquated industrial relations system and a large external debt. These call for a low-risk Budget profile and fast micro-economic reforms.
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