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Back to Basics

I come from a working class family. My father worked in a very basic blue-collar job. But he and my mother managed their finances well. Apart from the purchase of their house, they never borrowed money. As I recall it, my father was probably sixty years old before the house was paid off. Until late in his life he never owned a car. My mother made our school uniforms. Dad grew a few vegetables in the backyard which helped reduce the food bill. Similarly we used to fish and hunt. “Don’t you ever shoot anything unless you are prepared to eat it,” we were told. Quite early in the year, when she had a little surplus, my mother used to buy something and stash it away admonishing us not to touch it because “that was for Christmas”.  Yet we never seemed to want for anything and always felt “well-off”. When things were going well, on payday dad would lash out and bring home a couple of chocolate bars or, in season, a watermelon which we gratefully shared. It never ever seemed to we children that we belonged to a deprived household. And neither we did. We knew many families that we felt were worse off than us. We were adequately fed and clothed. Dad was a dab hand at such things as repairing our shoes or reupholstering the sofa. The bicycles we rode to school were cobbled together from bits and pieces dad acquired from family and workmates. Because of his basic skills the house was gradually improved. He restumped the house, replaced the floorboards on the verandah where we mostly slept, replaced the roofing, enclosed the verandah, installed a new kitchen and constructed a shed out the back. So despite a tight budget our amenity improved and all the while we made our way through our early lives with never a thought of disadvantage.

There are many things I thank my parents for – their unconditional love, their sacrifices, but probably more than anything the way they have continued to be role models for me.

If you look at their basic philosophy at maintaining a household with limited resources the principal tenets were these:

  • Don’t borrow money unless it is absolutely essential,
  • Be as self-sufficient as you can,
  • Don’t aspire to things you cannot afford,
  • Be thankful for what you have,
  • Only be indulgent when you can afford to be, and
  • When you have surplus invest in the future.

It might not surprise you that I believe my parents had something to teach the government with respect to its financial management.

The Abbot government came to power with a promise to fix the budget. It initially promoted the notion that there was a budget crisis. In reality that was not the case. Whilst the budget seemed destined to produce long term deficits, that was not a short term problem. As we have seen around the world, many countries have endured deficits for prolonged periods without immediate disastrous effects. But we know deficits cannot be sustained in the long term and the longer we allow them to endure the more difficult it is to bring the budget back under control. The European examples that emerged during the GFC show us that countries that don’t balance their budgets end up being confronted with unemployment, lack of growth and other economic malaises that threaten long term economic sustainability.

So certainly in the longer term countries, just like households, must learn to live within their means.

But this of course is not something our politicians are anxious to propagate. At each election they fall over each other to promise new benefits and largesse to voters. And this strategy is not entirely the fault of our politicians because many of our citizens clamour to be greater beneficiaries of the public purse.

So let us step back a little and take a considered look at the budget and what options are open to us.

It is probably presumptuous of me, but let me first assume that you would agree that a balanced budget is a desired outcome. If a government chooses not to balance the budget so that deficits are assumed appropriate outcomes, all we are doing is imposing on a future generation the burden of paying for our current overindulgence.

Now I know this is not a startling revelation, but a fact few of our politicians seem to want to acknowledge is that, on average, the government’s expenditure needs to be no more than its revenue.

Currently the government has committed to expenditure that seems to be far more than its revenue. It has made some attempt to curb expenditure but the opposition has largely thwarted its efforts in the senate. The opposition has been somewhat hypocritical in this process even voting down revenue cuts it proposed itself when in government.

Alarmingly the government’s revenue projections now seem high as well. Falling commodity prices have seen the value of Australia’s exports eroded. Slowing wages growth has also reduced that old standby that governments have traditionally relied on – bracket creep. Consequently just twelve months into their term of government the government is facing a concerning reduction in projected revenue.

Now whilst the government’s efforts at reducing expenditure have been thwarted by the opposition, the government itself has contributed to its own dilemma. Before the last election it irresponsibly committed to unnecessary expenditure rather than confront the electorate with the prospect that some of Labor’s promises were beyond our current capacity to pay. It for example committed to funding most of Labor’s promises with respect to education and the National Disability Insurance Scheme.

It also sent some mixed messages. For a start, despite the parlous financial position it committed to the Prime Minister’s pet paid parental leave initiative. Then whilst trying to peddle a story about budget difficulties it proposed a co-payment for visits to the doctor but then pledged that payment be contributed to a medical research fund. The message about the budget would have been clearer and stronger if the government had postponed the paid parental leave scheme until such time the budget was under control and had used the co-payment to pay down the deficit.

Of course reducing spending will always be harder for Labor. It is difficult to cut government expenditure without reducing spending on welfare, health and education which are areas Labor will always strive to demonstrate their superior benevolence. As Maurice Newman wrote recently, “Its performance in opposition suggests rational economics would come a distant second to ‘Labor values’”.

Assuming then that, given the options, the public would like the government to pursue a balanced budget (and even perhaps a surplus or two) what are the choices? Well it is pretty simple really. We need either to raise our revenue or curtail our expenditure. Both of these options have downsides for citizens.

Given that the opposition has given little indication that they are considering any reasonable curtailment of expenditure, one can only surmise that their response will be to raise taxes. Raising taxes will result in some citizens (or perhaps all) being worse off. Socialist governments inevitably try to ensure that the extra burden of taxation falls on those relatively well-off. The previous Labor government seemed favourable disposed to this strategy and attempted, somewhat unsuccessfully, to do just that. Raising taxation however inevitably results in bigger government, more structural inefficiencies and less growth. It is worthwhile mentioning that Australia is already, in comparison to the rest of the world, a relatively highly taxed nation.

The other strategy is of course to reduce expenditure. And guess what? Any government taking this route is also going to disadvantage some people. There will be those whose “entitlements” are reduced or postponed. Governments need to be careful about this strategy because it will always alienate some voters and thereby put their electoral majority at risk. Consequently most governments pretend that they can reduce expenditure magically without disadvantaging anyone.

So here is the dilemma. No government is going to be able to bring the budget back into balance without some citizens suffering as a consequence. Now that is pretty plain and evident and yet governments and oppositions pussyfoot around this and pretend they have strategies that will solve the budget problem without anyone having to make a sacrifice.

Now when the economy is growing quickly it is possible for a government to manage such a feat. A strongly growing economy provides a steadily improving revenue base which enables it to bestow considerable largesse without compromising the budget. But now that is not the case. The Australian economy is growing slower than it has for some decades and as a result hard decisions have to be made. Unfortunately neither side of politics seems prepared to confront the electorate with this unpalatable fact! They treat the public as fools and continue to promise much more than they can deliver.

Joe Hockey’s famous speech in London where he pronounced that the “age of entitlement” had come to an end seemed to presage a government prepared to take a realistic position with the electorate. But it was a smokescreen and not very long after he and the Prime Minister were already promising us things that the country could not afford.

In the last week such reputable economists as Chris Anderson from Deloitte Access Economics and the outgoing Treasury secretary Martin Parkinson have warned that unless structural repairs are made to the budget we might be facing a decade of budget deficits. What they are saying essentially is that the long term economic welfare of Australia is being compromised unless spending is cut, taxes are raised or both. There will be some losers in this process but that shouldn’t prevent both government and opposition preparing us for this inevitability. Is the Australian public mature enough to accept this fact? Obviously our politicians don’t believe so because they are not confronting us with this information.

Would that my mother was still alive! She would have made a great treasurer. I am sure under her administration the budget would be balanced, we would be provisioning for the future and we would not be allowed to pander for benefits that we could not afford. What’s more under her tutelage we would learn to be grateful for a comfortable standard of living and would not be seeking to greedily seek more at the expense of future generations.

And sure the government has had some major achievements, stopping the boats, getting rid of the carbon tax and the mining resource rental tax, negotiating three substantial free trade agreements and thanks to the splendid Julie Bishop being seen as a significant player on the world scene. But these achievements will not count for much at the next election unless the government restores the budget situation.

Now my mum probably wouldn’t have been much help in these other spheres of government (she probably didn’t even know where Indonesia was)! But on the budget front, come Christmas, appropriate food and presents (not overly extravagant) appeared and rest assured the household net debt would have been diminished over the year. Something to learn here, Joe Hockey? (But on second thoughts, being a rusted on Labor voter mum probably would have preferred to advise Chris Bowen and heaven knows he probably needs it even more!)

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  1. 3 Comment(s)

  2.   By Lynda Dowling on Dec 6, 2014 | Reply

    Absolutely agree whole-heartedly with every word here Ted. Unfortunately we have a situation where it seems we may be facing one-term governments in future years as each discredits the other side and calls each other untrustworthy liars. The major parties are so close now in the polls, I cannot see this changing drastically for governments to be confident enough to make long-term goals. People simply do not trust their government anymore, and the pie-in-the-sky handouts by Labor over the past six years have made people leaners more so than lifters. We all know people love freebies and do not like to hand them back. They will vote accordingly, so promises made cannot be kept. Now we are seeing the Senate with ridiculous minor parties without a clue holding the country to ransom too. We are in deep trouble. We need strong leadership now, and more-so than ever as the world faces massive migration from war-torn muslim countries. Our country is changing its culture too rapidly for my liking as well as its deficit.

  3.   By Lee on Dec 7, 2014 | Reply

    Ted:
    You write “Don’t aspire to things you cannot afford,”

    True?

  4.   By Greg Brown on Dec 7, 2014 | Reply

    Sounds so reminiscent of the good old days that I remember from my childhood Ted, although my Mum tells me that they weren’t all that good. I thought I was one of the really fortunate kids because we had fish and chips maybe twice a week. I was a middle aged adult when my Mum told me that when Dad didn’t have work catching fish was cheap meat. We also had our chickens for eggs and fattened up a few ducks for Christmas, and all on a standard house block. Great memories for me at least, no doubt pretty tough at times for my parents to make do but I sure didn’t know about it. Perhaps you would call that good management or leadership.

    I can’t imagine the current generation being so easily pleased though. There was no media to tell me what I was missing out on and no marketing machine making me feel like I was an inferior human if I did not have certain possessions or clothes. I think it is also tougher for political leaders in the current environment. People expect it all for nothing. Not saying that it can’t be done but turning around the budget I think is more about changing societies attitude. The “Me” generation is well established such that any party that supports the debt culture is likely to get elected over a party that displays good economic leadership. Sadly I suspect that if we don’t return to a strong growth scenario that allows much easier balancing of the books we have a strong chance of drifting along the way of Greece. In the end the world forces economic reform on households and countries.

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