Judith Sloan Misses Some Key Data

The Australian’s Judith Sloan's article today looks at fiscal policy management in the last few years.   But for some reason that is not clear, her article today, http://tiny.cc/fa4a0 stops looking at the hard data on Government spending beyond 2008-09. 

There are two full years of data available beyond 2008-09 plus the updated forward estimates out to 2014-15 in the MYEFO documents.  Sloan quite rightly picks up the massive increase in government spending associated with the textbook implementation of stimulus in the wake of the onset of the Lesser Depression or GFC in 2008-09 but then ignores the unwinding of the stimulus since 2009-10.

Ms Sloan’s article notes quite rightly that as the global economy tipped on the brink of depression:

• “the government quickly sent out cheques to most citizens and embarked on a dizzying array of spending programs in the name of fiscal stimulus.”

It was indeed a stunning fiscal strategy that saw Australia avoid recession, cap the unemployment rate below 6% and leave a legacy of upgraded school infrastructure among other things.

Sloan then emphasises her point:

• “Government spending increased by more than $44 billion in one year or over 16 per cent. As a percentage of GDP, spending rose from 23.8 per cent in 2007-08 to 25.9 per cent in 2008-09.”

The numbers she uses here are for government “expenses” and not total “payments” – the difference effectively being purchases of non-financial assets and net acquisitions of assets under financial leases.  These matters are relatively small, but can be significant.  It is not clear why she chose this narrower definition of government spending, but that is not all that important.

What is important is that even using this narrower definition of government spending, the hard data for 2010-11 showed expenses falling to 25.4% of GDP.  Ms Sloan omits the Treasury estimates for 2011-12 which show a further fall in expenses to 25.0% of GDP and yet a further fall to 24.3% in 2012-13, when the Budget returns to surplus.

It is important to note that as a reference, the average “expenses” to GDP ratio under the 12 Howard Government Budgets was 24.7%.  In 8 of the 12 Howard Government Budgets, government expenses equaled or exceeded 24.3% of GDP, the estimate of what will be delivered in 2012-13.  SO the Government spending like drunken sailors?  You be the judge.

Clearly then, in just four and a half months when 2012-13 starts, government expenses will be lower than the average under the Howard government and 2.0% of GDP ($30 billion per annum!) down from the 2009-10 peak.

Ms Sloan goes on to note:

• “We are being told by Julia Gillard that "our fiscal policy must be disciplined. Putting the budget into surplus means that we are well positioned to deal with further global financial and economic uncertainty and crises if that should occur."

• "Of course, lecturing the Europeans is always good sport, even if they do not take notice. "If anything of value can be retrieved from the wreck of failed economic approaches in Europe pre-2008, it is the lesson to the world: fiscal discipline matters," our Prime Minister pontificates. The only problem is that it is Peter Costello who should be giving the lecture.”

Just to reiterate, as Treasurer, Mr Costello delivered 12 Budgets where the average expenses to GDP was 24.7%, a result higher than in the forward estimates for 2012-13, 2013-14 and 2014-15.  The peak Costello expenses to GDP ratio was 25.6%, delivered in 2001-02 when the economy was growing at a solid pace and only 0.5% of GDP lower than the peak delivered in response to the GFC.