ALP papers stir discussion on debt

Issue 

By Peter Boyle

MELBOURNE — Controversial papers being circulated for community discussion by the Victorian ALP Budget Coordinating Committee argue convincingly that the money can be raised to pay for urgently needed social and environmental projects.

According to the leaks, Prime Minister Paul Keating's mini-budget will not provide more than a $2-3 billion increase in government spending, and a considerable part of that looks like going straight into the pockets of big business. The Liberals say that even $2 billion is too much.

Former Cain government adviser Michael Salvaris, who drafted the papers, says that at least $10 billion should be spent federally and up to $50 billion at all levels of government, simply to make up for the last half decade of socially destructive austerity. There is no other way to restore and improve health, education, public transport and other social services.

The money, he says, could be raised in loans and taxes if Labor governments had the courage to confront big business demands for lower costs and smaller government. In the two papers, The Problem of State Debt and State Budget Review, the committee outlines in some detail how this could be done in Victoria.

The rationale for austerity is based on the rarely challenged assertion that the state's public debt is too high and that Victorians were "living beyond their means". Thus in June 1991, the Kirner government committed itself to reducing the debt by implementing real cuts in public spending of $1.27 billion over three years, increasing commercialisation and user-pays in public services, reduction of government services to undefined "core" functions, corporatisation, privatisation and asset sales.

New Right theories

The Budget Coordinating Committee papers describe Kirner's statement as "essentially economic rationalist" and providing "implicit support for some key New Right theories of government". The areas most likely to be affected by the budget cuts are education, health and transport.

It estimates that 18,000 public sector jobs will be lost and a further 33,000 private sector jobs as a flow on. This contractionary policy has deepened the recession in Victoria, which, as a manufacturing state, was already badly hit by federal tariff reductions.

The premise — that the state debt was too high to allow the government to do anything else — is wrong or at best very doubtful, according to the committee's documents.

The public sector net debt in 1990-91 was $28.3 billion (28.3% of the state's gross domestic product). While this is high in comparison with most other states, Tasmania's debt was 38.8% of GDP and the Northern Territory 29.2%. Interstate comparisons are unfair to states e public trading enterprises (which carry nearly half of the debt) and favour states like NSW which have privatised more.

The comparison itself suggests the New Right "solution" of privatisation, which of course would reduce the public net debt — at the cost of handing the most profitable government enterprises over to private interests.

While the Victorian public debt has grown in the last few years, there has been a longer-term decline: from 150% of GDP in the 1930s to 55% in the early 1960s and to less than 30% for most of the 1980s. It is now at half the level it was for most of the last 30 years, when Liberal governments and big business did not raise a whimper.

The recent rise in debt and interest has been significantly due to additional liabilities resulting from failed economic ventures (public and private) and poor management practices and revenue shortages, leading to more short-term borrowing. Interest payments could be reduced if the state debt were better managed, centralised and planned over the long term, and if interest rates were brought down further by the federal government.

The household analogy

Advocates of dramatic debt reduction use the analogy of the household budget or that of a business, but this is misleading. "Net debt" does not take into account the state's non-financial assets such as land and buildings (which in Victoria are estimated to be worth about $80 billion). A household or business would count these assets in evaluating its net debt. If these are taken into account, then the current levels of Victorian public debt and interest are well below average and prudential standards in the private sector.

A 1991 EPAC report found debt as a proportion of equity in Australian companies rose from 35% in 1981 to 57% in 1990. In Victoria the ratio of gross state borrowings plus bank overdrafts amounts to only 29% of total state assets.

Current state debt and interest levels are also well below those that prevail in comparable OECD countries. In fact the Australian public sector as a whole is on the low end of the OECD scale when it comes to indebtedness; the governments of Germany and Japan are much more "highly geared". Because of some $20 billion of federal government cutbacks when Keating was treasurer, overall Australian public debt has been falling.

Real issues

According to the committee's documents, once these facts are taken into account, it is possible to break out of the narrow, "managerialist" framework of economic "rationalism" and judge the proper level of public sector spending and debt by truly rational criteria, such as:

  • the real capacity of the state to afford it;

  • the unmet need for community infrastructure and services.

Victorian government spending and revenue as a proportion of total state economic output are well below the average level for other states (by an equivalent of $1.3 billion in 1991 alone and $4 billion since 1988), so the state can afford to spend more.

If the Kirner government were prepared to reject the business sector's insatiable demands for lower costs, extra tax revenue could be raised through taxation that wouldn't hit the poor. For example, instead of introducing a flat fee for car registrations, as the Kirner government did in 1991, it could have based the fee on the value of the car. Any state tax can be scaled according to the wealth of the taxpayer, say the discussion papers.

As to unmet social needs: apart from the long lists provided by community groups, welfare organisations and health, education and welfare workers, there is the glaring fact that Victoria, like other states, has suffered a "sustained decline in community infrastructure". Australia-wide, capital investment in schools, hospitals, public transport etc has declined by 20% over the last two decades. As the last Victorian budget papers admitted, government spending as a proportion of total state economic output now stands at one-third its level 30 years ago.

By cutting costs to business and taxes on the rich, this policy redistributes resources to the upper end of the income scale. This political decision is at the centre of the economic "rationalist" strategies now being followed by federal and state Labor governments, according to the discussion papers. It is the real scandal that is being covered up by Labor and Liberal governments' purported pursuit of supposedly objective, uniform rules of financial management.

Leave it to business?

Why should governments slash spending when so much has to be done?

"The argument that this huge and intractable problem can be solved if government opts out and hands over its responsibilities to the private sector (however prettily that argument is packaged in 'partnership' rhetoric) shows a naivety, and a disregard for experience, which borders on the fatuous. For the government is essentially pinning its hopes on the private sector to fill the gap in public infrastructure, apparently on altruistic grounds. This seems a forlorn hope, in light of recent Australian experience which shows that, when given the most favourable conditions by government for the best part of a decade, the business community was scarcely able to use its new profits to invest productively in its own infrastructure for profits ...

"If on the other hand the government is expecting that the private sector will only invest in such public infrastructure projects as the private sector chooses, and only on strictly commercial terms, then the government is in reality no better off than it is now and the community as a whole is worse off. This is because the capital works projects likely to be attractive to business and to go to the top of the list will very likely be quite different from those the community actually needs the most ..." (The Problem of State Debt)

How have we got to the situation that real discussion of priorities in investment seems ruled out of order? Salvaris says that it is because federal and state Labor governments have accepted the ideological framework set by the New Right.

Most Labor Party leaders, officials and the senior bureaucrats no longer stand for using government to redistribute wealth more equitably. The Budget Coordinating Committee's discussion papers note that "both major Australian political parties are now ranged on the conservative/liberal side of this question, espousing cuts in government spending and tax rather than increased public spending".

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