Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I wrote this for the Fairfax press early this morning before a 10km run around the Vondelpark in the heart of Amsterdam – in cold pouring rain. They call it high summer. Anyway, the opinion piece was confined to 500 words. I could have said a lot more but you can extrapolate each line accordingly. I also did an ABC radio interview hiding under a tree in the park – the juxtaposition of talking to Sydney about the NSW Government’s failure to deliver adequate services and being among the wonderful urban amenities (for example, public transport and bike paths) and public spaces provided by the Dutch was not lost on me. Pity public spending can’t fix the lousy weather over here. Anyway, now I am off to work for the day over here. Part 3 of the fiscal sustainability series coming next – for Wednesday.
Opinion piece follows:
There is fact and fiction in yesterday’s NSW Budget. The fact is that NSW, and particularly Sydney, is in bad economic shape and needs urgent surgery. The fiction is that the troubles will pass quickly and allow the Government to run surpluses again (that is, withdraw net spending from the economy).
NSW faces two particular challenges. First, the brunt of recession is being borne by Sydney because the financial sector is concentrated there and also because its property boom was bigger than elsewhere. The boom left a massive debt legacy and defaults are rising as recession bites.
Second, the government has to improve its appalling service delivery. The degradation of services is the legacy of the past surpluses. This challenge will remain long after the recession is gone.
My estimate is that deficits will be required over an extended period to address both challenges. I fear that a rush to get back into surplus will further undermine the quality of service delivery in crucial areas such as education, health and environmental infrastructure provision.
The Government has accepted its current role is to stimulate rather than cut. Last November’s contractionary mini-budget was a disastrous sop to the “deficit hysteria” dominating the public debate.
Informed opinion knows that deficits are good in crises and largely reflect the in-built “automatic stabilisers” which moderate the impact of the economic cycle. In bad times, tax revenue falls and welfare spending rises. The process reverses in the upturn.
Policy should thus not focus on any particular deficit outcome but on the underlying driver – declining economic activity. Responsible leadership should aim to minimise the job losses. No government (federal or state) should sit idle when the unemployment rate is projected to rise to 8.5 per cent by next year.
In this regard, the Budget contains several excellent initiatives including the cuts in payroll taxes and stamp duties on new homes. Both will boost jobs across all areas of the state including the Hunter. The stamp duty reduction is a much better way to boost growth than first home buyer scheme which mostly increased prices. The increased infrastructure spending over the next four years is also excellent and will provide enduring benefits to the State.
But Government’s plan to freeze public employment is inconsistent and will undermine the service delivery challenge.
The projected growth in public debt is modest and no cause for fear as long as the investments generate long-term returns. The unwillingness of the NSW Government in recent times to use debt to underpin infrastructure development has damaged the State.
The Budget fiction is twofold. The built-in growth forecasts (the same used in the Commonwealth Budget) are too optimistic and deficits will persist for longer than projected. Moreover, the longer-term service delivery challenge militates against any return to surplus in the foreseeable future.
My other concern is that this unpopular government will use its budget for political purposes in the forthcoming election cycle and take its focus off the longer-term service delivery challenges.