Gerard Jackson
BrookesNews.Com
Monday 19 January 2004

Budgets always remind me of the unlamented Soviet Union's five-year economic plans in that they never turn out as expected. Current accounts blow out, unemployment rises, inflation unexpectedly leaps, a wage push breaks out, output drops, the economy heats up or slowdowns, the US economy slides into recession and so forth.

This is not to say that budgets are not important. I still have vivid memories of Ted Heath’s "dash for growth" budget that saw Britain's inflation rate leap to 24 per cent. And let's not forget Mr Whitlam's big-spending programmes. Unfortunately, this Government's spend and tax record is beginning to make Whitlam look like Calvin Coolidge.

My target, however, is not budget details, where the devil is not always found, but in some of the government's fallacious thinking, all of which is continually echoed in the media. It usually pays to focus on the economic opinions of one or two commentators to get a handle on what passes for economic thought in the media.

In this instance I shall draw attention to Sid Marris, The Australian's economics correspondent, who parrots the accepted fallacy that the revival in the housing industry accelerated recovery, a fallacy that the Treasury cheerfully passed on to the Treasurer who smugly repeated it as if it just came down from the mountain. (Because the Treasury is still under the Keynesian spell it considers any government spending as investment and consumer spending as the key to recovery and growth).

Like all of the government's spending initiatives the ones directed at the housing industry did nothing for economic growth. What matters for growth is not spending per se but the right kind of spending. As Ricardo said in his debate with Malthus, "To save is to spend," meaning that in order to raise living standards genuine savings must be used to accumulate additional capital.

Mill made this view clear when he stated in his Principles of Political Economy that the demand for commodities was not the demand for labour. (Too many modern economists simply do not know how insightful the classical economists really were, despite their errors.)

In plain English, spending that directly employs labour on the production of consumer goods does not raise real wage rates, not that anyone in the Treasury appears to understand this classical observation, not that officials at the Reserve Bank of Australia are better informed.

Official attention to consumption clearly shows that politicians and their advisors believe that this is where the engine of growth is really located. That consumer spending as a proportion of total spending is greatly exaggerated is a fact that they either treat with benign amusement or complete contempt.

No matter how hard one searches one will not find a shred of evidence that any of our commentators are aware of these observations, transfixed as they are by spending and surpluses.

Even those who have tried to distance themselves from Keynesianism are still infected with its thinking to the extent that they are still unable to question the Keynesian fetish of consumer spending even though they dimly discern specks of light that appear to lead in another direction.

What we are left with are big-spending politicians; a situation that must eventually lead to higher taxes. If not that, then little or no genuine tax relief in the foreseeable future.

Gerard Jackson is Brookes' economics editor