Charles Gutjahr

Melbourne, Australia

Blame for the budget deficit

17 May 2014 — a 5 minute read on politics

There's so much in the Abbott government's first budget for us lefties to complain about. I know ranting on a blog won't change anyone's opinion... but, dammit, I can't resist so here's a blog post.

The budget deficit is not "Labor's fault".

The Abbott government's own budget papers show that the deficit was not caused by Labor's actions, yet the myth lingers.

Labor myth

The Liberal Party recently published a lengthy document called "Labor's Mess" which blames Labor for a wide range of economic woes. It opens with this:

"Labor left Australia with a broken budget, a damaged economy and a serious mess to fix" — Labor's Mess, p3

You might think my instinct is to deny that statement, but I don't: it is essentially correct, though unnecessarily hyperbolic. Our government is spending more than it earns, and that needs to be fixed. However "Labor left" a problem doesn't mean "Labor caused" a problem. There's a clear implication is that this is Labor's fault... but for Labor to be at fault then they would had to have caused the deficit.

Is the budget deficit due to Labor's actions?

A budget deficit simply means the government spends more money than it raises. Starting from a neutral position, you get into a deficit either by higher spending or by lower taxes 1 — or a combination of both.

What happened under Labor? Let's see what the numbers in the budget papers have to say:

Budget Year Receipts % of GDP
ie Tax
Payments % of GDP
ie Spending
Coalition 2002-03 25.5 24.6
2003-04 25.3 24.3
2004-05 25.6 24.1
2005-06 25.6 24.1
2006-07 25.1 23.3
2007-08 25 23.1
Labor 2008-09 23.2 25.1
2009-10 22 26
2010-11 21.5 24.6
2011-12 22.2 25
2012-13 23.1 24.1
2013-14(e) 23 25.9
Coalition 2014-15(e) 23.6 25.3
2015-16(e) 24 24.8
2016-17(p) 24.4 24.7
2017-18(p) 24.9 24.8
(e) Estimates.   (p) Projections.
Source: Budget Paper 1 Statement 10: Table 1: Australian Government general government sector receipts, payments, net Future Fund earnings and underlying cash balance
Licensed under Creative Commons Attribution 3.0 Australia
The text in italics are my additions

It was a combination of both. Compared to the previous six Coalition budgets, in the six Labor budgets:

  • Spending increased by 1.2 percentage points relative to GDP
  • Tax revenue fell by 2.9 percentage points relative to GDP

So the primary factor in the deficit is something a government does not directly control: tax revenue. Governments can adjust taxes, but the amount of money a tax actually brings in varies from year to year. With a poor economy, taxes fall and the government has less money — even relative to GDP 2.

The increase in Labor's spending was smaller, but still significant. That's the part you can argue the worth of. I happen to think the spending increase was a justified Keynesian response (and prominent economists agree), but some people don't. It's a basic tenet of Coalition rhetoric that Labor spent too much:

"The Labor Government did not have a revenue problem, it had a spending problem." — Labor's Mess, p15

Wrong. Those numbers above, taken from the Abbott government's first budget, clearly show it was primarily a revenue problem and not a spending problem... but that hasn't stopped conservatives saying Labor spends too much.

So what would have happened if the Rudd/Gillard government didn't spend any more money?

In the six years of the Rudd/Gillard government spending averaged 25.1% of GDP, compared to 23.9% of GDP in the final six years of the Howard government3. Revenues under the Rudd/Gillard government averaged 22.5% of GDP, so if they stuck to Howard-era spending of 23.9% there would be a deficit of 1.4%.

Read those numbers again — the deficit was not caused by Labor's spending, because if Labor didn't spend there would still be a deficit.

No doubt conservatives would say Labor should have cut spending, not just kept it steady. Well, what would have happened if they did?

The budget papers estimate that the Abbott government will drop spending to an average of 24.9% of GDP over the forward estimates period. That's a mere 0.2 percentage points below Labor's spending... clearly not enough to close a deficit of 1.4%. The lowest spending in the forward estimates is 24.7% of GDP in 2016-17; at 0.4 percentage points below Labor spending that's still going to close the deficit. In fact if you compare the difference between Labor's biggest-spending year (2009-10 at 26.0% of GDP) and the Coalition's lowest-spending year (2016-17 at 24.7% of GDP) it's still not enough to close the gap.

Or to put it another way: if Labor cut spending by as much as Tony Abbott's government is cutting, we still would have been in deficit.

This is not Labor's deficit. It's our budget deficit — it would have happened no matter whether we elected Labor or the Coalition.

Not a free pass

Just because the deficit is not Labor's fault doesn't mean they always make the best economic decisions. They've taken some economically irresponsible positions in response to this budget — for example opposing the fuel excise indexation and the increased pension age.

You can (and should!) argue you all like about Labor's policies. But don't conflate those real economic decisions they make with this discredited myth of Labor being responsible for our deficit.

  1. I'm using the word 'tax' to mean all government revenue, even though some money comes from non-tax mechanisms... it's easier to say tax rather than "cash receipts from operating activities and sales of non financial assets"
  2. All numbers I'm using are expressed in percentage of GDP, because it makes it easy to compare years and it accounts for population growth — which real or nominal dollars do not.
  3. The Howard government spent more in their earlier years, so only comparing their later years is being generous towards the Howard government
© 2024 Charles Gutjahr