Economist John Maynard Keynes once famously said practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.
If the way in which governments have been spending and borrowing is any guide, Kevin Rudd and his band of mostly Labor premiers are slaves of the defunct Keynes.
Aggregating the key variables of commonwealth, state and territory budgets creates what could be called a federation budget and it is a rather scary beast.
About the middle of last year, governments were projecting a collective federation surplus of $26.2 billion for 2008/09, equivalent to more than 2 per cent of gross domestic product.
Six months later, it is projected that governments will descend into an aggregate $22.1 billion deficit, a staggering $48 billion deterioration in the budget bottom line.
And it gets worse. The federation budget is expected to deteriorate in the following two to three years, with the collective governmental deficit increasing to $32.8 billion in 2009/10, $31 billion in 2010/11 and $23.1 billion in 2011/12.
Consistent with a slowing economy, there will be a reduction in revenue growth over the next four years from 4.4 per cent average annual growth, as originally forecast, to 3.9 per cent. This means an implied cut in revenues of almost $50 billion.
When both sides of the ledger are examined it is clear that the real culprit behind the enormous expected federation budget deficits will be rampant Keynesian pump-priming.
In this financial year alone, expenses are projected to be revised upwards across the federation by $35.4 billion. This spending growth exceeds changes in governments' revenue by a factor of eight. Over the next four years, federation expenditure will increase by $97 billion.
The deteriorating federation budget shows the preparedness of our governments to throw taxpayer money about to stave off a recession. Since the most recent federal and state budgets, the Rudd Government has churned over $50 billion from taxpayers to encourage the very same taxpayers to spend up.
From cash gifts for families, pensioners and potential first-home buyers to corporate welfare bailouts, precious few have been left untouched by the Government's spending bonanza.
A key element of the federal Government's spending strategy is to prod the other partners of the federation, the states and territories, to follow its profligate lead. This week the state and territory premiers and chief ministers trekked to Canberra, cap in hand, for a slice of the latest $42 billion spending spree.
The states are looking for more funding for schools, housing, community infrastructure and roads. So, expect a new school or road coming near you, financed by the federal Government and delivered by the states.
However, with every government rushing to spend the outcomes are likely to rank poorly on value for money criteria.
The states, through either own revenue, commonwealth grants or borrowed funds, have announced their own raft of new spending: everything from replacing house carpets to bailing out film studios, causing significant damage to their own financial positions.
A looming structural problem in the federation budgets is the spiral in government net debt. Excluding Queensland, which has no net debt, general government debt is expected to rise from $27.3 billion this financial year to $84.6 billion in 2011/12, an increase of 210 per cent.
In simple terms, governments are looking to dole out money today in the vain hope of buffering against a global recession, with taxpayers to pay it all back, with interest costs, later.
The problem with this debt strategy is that, in a tighter international credit market, the collective shift of all Australian governments toward borrowing is likely to push up long-term interest rates.
And therein lies the real damage of Keynesian-inspired government budgeting.
Governments collectively think that churning money from one group to another will magically boost the economy. It won't. Other defunct ideas, such as the need to spend, regardless of quality, and borrowing, irrespective of the long-term consequences, also seem to be prevailing in the halls of power.
We would be far better off if we turned our backs on Keynes and looked to tax reform and economic deregulation policies that have been the foundation of our prosperity over the past 30 years, to prepare ourselves for the next phase of growth.
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