Who is to blame for Canberra’s obsession with budget deficits? John Howard

In August 1962, the Liberal prime minister bragged about how his recent budget had produced a higher deficit that his Labor opponent.

He’d won the federal election eight months earlier, defeating the Labor opposition led by Arthur Calwell, who had promised to eradicate unemployment via a deficit of 100 million pounds.

Robert Menzies promptly produced a deficit of 120 million.

“Too few people realise that a cash deficit of 120 million [pounds] … will of itself have a most expansionary effect,” he said. “We shall pay out to the citizens 120 million [pounds] more than will be collected from them”.

He went on:

So, far from being timorous — I think that was another of the words used by the deputy leader of the opposition — this is adventurous finance.

Add to the deficit the tax refunds now being made, and it is clear that purchasing power in Australia this financial year will be uncommonly high.

The Liberals’ rode this cavalier approach to the nation’s finances to a further decade in power. So how did we get so obsessed with the idea of deficits — a projection, lest we forget, that never proves to be accurate — being an incontrovertible sign of economic health, regardless of context? And do voters care half as much as the political class do?

Gough Whitlam

Gough Whitlam is the go-to example of the Liberal Party mantra — happily taken up by the majority of the Australian media — that the ALP simply cannot manage money. Based on the underlying cash balance — the standard by which, say, the Howard/Costello partnership is remembered so favourably — two out of three Whitlam’s budgets were in surplus. Without getting into the ethics or legality of the way Whitlam’s government was swept from power, the next election delivered his opponents a massive majority.

Malcolm Fraser

Fraser, in turn, ran a Keynesian economic policy, and six out of seven budgets were in deficit (though reduced levels) under his leadership. Indeed Fraser and his treasurer John Howard where opposed on the subject, with Fraser wanting to stimulate the economy, reeling from international downturn in the early ’80s, by blowing out the deficit.

Hawke and Keating

Bob Hawke recognised that an opponent’s deficit was “political gold“, a cudgel that could be used to bludgeon a government. However, his government didn’t deliver a surplus until 1988, five years after taking office. This was famously described by Hawke’s treasurer Paul Keating as the one that “brings home the bacon”. The irony being, as Australian political historian Frank Bongiorno notes, “we recall this budget not because it ushered in a glorious economic era, but because it proved to be the curtain-raiser on a deep and damaging recession”.

Howard and Costello

This is the era when the question of a deficit was really allowed to get out of control. As Jason Murphy noted in these pages, when the Howard government took office in March 1996, treasurer Peter Costello’s rhetoric was “indistinguishable from that of his predecessors”:

In his first budget speech that August [Costello] spoke of reducing the deficit but gave no hint he intended to reduce national debt to zero … That year he ran a budget deficit. 

Then came huge tax windfalls, which changed the calculus of the next decade. As Murphy goes on, by the end of the Howard government, surpluses were “hard to avoid” thanks to annual tax revenue having “doubled compared with when [Costello] took over the treasurer’s office”.

Post-Howard

Pretty much every treasurer since has had to operate according to the template set by Howard and Costello and has found, for one reason or another, that it was impossible. Within a few years of a global financial crisis that his government had guided Australia through via stimulus spending, Wayne Swan announced “four years of surpluses” in 2012-13. He delivered none.

Joe Hockey, obsessed with Labor’s “debt and deficit disaster” and leading the finances of a government claiming (dubiously) to have “inherited the largest deficits in Australia’s history from Labor”, produced a comically punitive and near-universally reviled budget, and thus picked out a grave plot for his government.

Josh Frydenberg perhaps offered the clearest example of governing according to this absurd logic. The ink on the “back in black” merch, celebrating the Liberals projected return to surplus in 2019, had barely dried by the time another global shock came and wiped out any possibility that voters wanted less money spent.

Which raises the question — if Whitlam is the exemplar of wild fiscal irresponsibility, why have subsequent governments never suggested dropping the level of government spending as a portion of GDP back down to the level it was when he took office?

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