The government is growing

It probably won’t come as a shock to anybody reading this, but the government is growing. A few billion in bail-outs, a few billion in hand-outs, a few billion in stimulus… and pretty soon we’re talking about real money.

I was curious about how much spending had gone up, so I checked the government’s latest publication — the Updated Economic and Fiscal Outlook. While their reporting is as transparent as a brick wall, the information is hidden in their somewhere, and after a bit of magic the truth was revealed.

The size of the commonwealth government has increased from about 24% to about 28% in less than a year.

Ouch.

In Rudd’s first budget he estimated that 2008/09 spending would be 23.8% of GDP. In the first update that was revised up to 24.9% of GDP. And in the latest estimates it is now up to 27.6% of GDP.That’s an increase of 3.8%.

In an essay written for the Whitlam Institute, John Quiggin has argued that the size of government in Australia (commonwealth, state & local combined) should increase by five percent. It looks like he’s going to get his wish.

For those of us who dream of a smaller government and more individual freedom, current trends are worrying. The Rudd government is fast turning from ordinary to bad to downright scary with their pursuit of over-regulation, over-spending and government ownership… mixed with censorship, proposed restrictions on philanthropy and war on everything.

And even more scary is the fact that most Australians seem to like him.

34 thoughts on “The government is growing

  1. And even more scary is the fact that Rudd is still popular.

    But the bill hasn’t come in yet. This is why with the exclusion of automatic stabilizers like unemployment benefits etc. any spending out to be matched by a corresponding tax increases. Then see how the punters would like that and just how popular Rudd would be. Do that and you’d find he’d be about as popular as a black dude at a KKK meeting in terms of popularity.

    Imagine the announcement of today’s Ruddweb was also combined with a tax increase to pay for extra spending over the period. How well would that compare to say Telstra’s announcement that they could build a comparable project offering the same speeds but “only” reaching 90% of the country.

    The punter simply doesn’t realize the bill’s will come in.

    Quiggin’s an old war horse for the socialist/green left. In 1994 he wrote a book suggesting that the days of full employment were over and that only massive spending in the people services would be able to close the employment gap. That seemed to have gone the same way as the NK missle: point it north and it heads south:-) 30 years has passed by and he’s still stuck in the Arthur Scargill 70’s. It’s always good to see historical relics dug out of their cribs anyway 🙂

  2. John

    Could you please correct…. ought… and bills.. thanks.

    Current indications are that the next budget will be 4% in deficit and that by the 3rd year we will have reached 7% by some pundits.

    There’s only two possible ways to go with this sort of spending. Inflate or raise taxes. They can’t inflate as we don’t have the luxury of a currency with reserve status like the US. So they will be raising taxes. With that kind of gap they will also have to hit the middle classes as well. So lets see how the “aspirational” punter will like it in a few years time.

    This dude is worse than Whitlam.

  3. Rudd has handed out $1,000 cheques to voters…twice. it’s not hard to see why he is so popular.

  4. John,

    Where did you find those numbers? I downloaded the UEFO but could not find them.

    Also, in another forum someone asked about the following quote, and I don’t think got a sensible answer.

    “Typically in Australia, a 1 per cent of GDP stimulus adds 0.5 to 1 per cent to GDP growth and supports up to 75,000 jobs. As stimulus is reduced, the support for jobs is reduced.”

    If these estimates are correct, don’t they show that additional govt spending is actually a bad idea?

  5. Rudd is popular because he is the PM, he says the popular stuff and has not increased taxes, unemployment or interest rates. Which was also why Howard was popular. Rudd is also like Howard in that he is sending out cheques.

  6. E.D – Rudd himself contradicted that when he first began on this Keynesiam binge. He was going to “save” 90 000 jobs, but it was going to cost $450 000 per job.

  7. What happened to Rudd’s promise to ‘take a razor to the public service’? Did that get filed under F for fiscal conservative?

    Slightly off topic, but omg, I can’t believe there’s actually a ‘Whitlam Institute’…

  8. The difference, Terje, is that Howard made significant tax cuts. Rudd has indeed increased sin taxes, and the income tax cuts that are (as yet) merely promised, only exist because his hand was forced during the election.

    It’s been the contention of many a libertarian that taxes are so high, that cutting them would actually increase revenue over the longer term. Howard cut taxes significantly, but then we criticised him for increasing the size of government based on higher revenues.

    Of course, he squandered billions of this extra revenue on his new brand of handouts (baby bonuses, pensioner bonuses and home-owner grants) instead of funneling it into further tax cuts, but at least he was spending money he actually had, and was still committed to further tax cuts (albeit at a much slower rate than it should have been).

    Howard was anti-libertarian on many issues – but the notion that “both parties are just the same” is surely laid to rest by Rudd’s performance.

  9. Papachango, Rudd came round personally and gave my a shave! the razor was clean, and he didn’t cut me. He is a man who lives up to his word, now and then. (Yes, I thought he was being metaphorical, but it seems he really meant it literally!) Always read the fine print, papa!

  10. And could we use better English ourselves? Some of those Russian advertisers may be confused by ‘growing’ and think the government is growing something- perhaps tape worms for all that red tape? The Government is self-growing.

  11. E.D. — the UEFO itself doesn’t have enough information. You have to also look at the MYEFO, which can also be found at http://www.budget.gov.au, and then do some calculations. That’s why I said that the reporting was as transparent as a brick wall.

    As for the quote — I’m not sure why you think it’s an argument against govt spending. If you believe fiscal policy works, then it allows you to add some growth in times of recession, and then take some growth off in times of high growth — smoothing the business cycle.

    The theory sounds appealing, which is why so many people (especially financial journalists) are Keynesians.

    There are a number of problems. The stimulus is paid for by govt borrowing, which is correlated with increased private savings (known as ricardian equivalence), which decreases private consumption. Also, the government borrowing decreases the amount of capital that can be borrowed by private business, decreasing investment. With a globalised economy and floating exchange rates this effect is somewhat offset by an increase in the exchange rate (relative to what it otherwise would be, not relative to the past) which decreases net exports.

    To use Keynesian language, Y = C + I + G + NX

    Y = income
    C = consumption
    I = investment
    G = government spending
    NX = net exports

    The Keynesian wants to increase G so that Y goes up. Nice story. But because of what I said above, an increase in G generally leads to a decrease in C and I and NX… and the impact on Y is uncertain.

    Past experience suggests that expansionary fiscal policy (ie the stimulus) doesn’t work. Despite popular misconception, it didn’t work in the US during the 1930s. It didn’t work for the Japanese during the 1990s. And it’s not going to work for us now.

    But there are bigger issues at play also.

    1) The stimulus will likely lead to bigger government in the long run as the spending won’t be completely unwound. And while govt spending is thought to have a +ve short-term multiplier, it is also thought to have a -ve long-term multiplier. So we (at best) get a year of slightly higher growth followed by an eternity of lower growth.

    2) In the rush to spend money, it is unlikely that the money will be spent well. Digging holes and filling them in may hire a digger & a filler… but in the long-run it is simply a waste of resources.

    3) Perhaps most importantly (and the issue I’m researching now) is that continuing ad-hoc govt policy, growing debt and anti-market rhetoric will increase the political risk premium. Even if this increases only slightly, this will have a significant negative effect on private investment… which is ultimately the only driver of long-term growth.

    What the Keynesians don’t seem to appreciate is that only the private sector can create sustained growth. You can’t pass mandates that tell the economy to grow. You might (and it’s only a maybe) delay or moderate the recession by a small amount… but only at the expense of harming the fundamentals of the economy and lowering long-term growth.

    /end rant 🙂

  12. Fleeced: “Howard cut taxes significantly”

    Hahahahahahahahahahahahahahahahahahahahahahahahahahahaha

    [pause for breath]

    Hahahahahahahahahahahahahahahahahahahahahahahahahahahaha

  13. Even Quiggin understands this.

    He argues that income and company taxes will have to increase to support the greater role of government as a result of the radical transformation of the economy and society by the global financial crisis.

    Unfortunately the punter isn’t watching at the moment and the sticker shock is going to be interesting to watch.

    Slightly off topic, but omg, I can’t believe there’s actually a ‘Whitlam Institute’…

    Isn’t that funny. It’s like the Bizarro Sienfeld skit. It’s an opposite virtual reality world for the think tank sector. Instead of a think tank, it’s an “Unthink tank”.

  14. TEX!!
    Wash your mouth out!
    The government has lost the war on drugs, AND the war on poverty! What would be the outcome of a war on waste?

  15. John,

    “I’m not sure why you think it’s an argument against govt spending.”

    Doesn’t this mean that (in the worst case scenario) 50c of every $1 spent by govt is wasted? Surely it would be better (if possible) for every dollar of govt spending to create more than a dollar in economic output?

  16. E.D. — if every dollar of government spending increased GDP by 50c… then the government could simply increase spending by $2 trillion and the GDP would increase by $1 trillion! 🙂

    That sounds appealing to a lot of people.

    Government spending is generally recorded in GDP based on how much is spent (not on how much value is added to the economy), which is a deeply flawed accounting method, but one that ensures a first-round effect of 1:1 impact on GDP.

    The reason that the multiplier might be lower or higher than 1 is how it impacts on private consumption, private investment and net exports.

    There is no measure of government wastage in the information we’re talking about. It all assumes government spending is equally valuable to private spending.

  17. Oh — and a multiplier of 0.5 (ie $1 spend = $0.5 GDP) is not a worse case scenario. Robert Barro estimates a multiplier of 0 in peace time and 0.8 during war.

    Once we consider long-run factors, it is very easy to believe that the multiplier will be negative.

  18. But Fleeced — who would be on the board for the feasibility study designed to set up the meta-committee? Perhaps we first need a review to determine the appropriate board members and guidelines… with wide-ranging community consultation of course. 🙂

  19. Sorry, still don’t get it.

    Earlier you said Y = C+I+G+Nx. Now if each is 1, then Y=4. But if G increases to 2, then Y must increase to 5.

    Yet Treasury says it will increase to 4.5 to 5. So if it does only increase to 4.5, where did the missing 0.5 go?

  20. Sorry, still don’t get it.

    Earlier you said Y = C+I+G+Nx. Now if each is 1, then Y=4. But if G increases to 2, then Y must increase to 5.

    Yet Treasury says it will increase to 4.5 to 5. So if it does only increase to 4.5, where did the missing 0.5 go?

  21. Fleeced – I was not arguing that Rudd is as good as Howard. I was explaining why Rudd and Howard were both popular. To become less popular Rudd needs to do one of the following:-

    1. Stop being PM
    2. Say something unpopular (eg cricket is stupid)
    3. Allow interest rates to rise
    4. Allow tax rates to rise
    5. Allow unemployment to rise

    A rise in inflation may do it also to some extent.

    I think that he may be quite a bit less popular in 18 months time.

  22. “Digging holes and filling them in may hire a digger & a filler… but in the long-run it is simply a waste of resources.”

    This is one of the big problems in Japan. Both business and the government seem to believe strongly in over-employment. Even a convenience store with no customers at 3am will have 2 staff. And in Japan it takes 6 people to hold signs while one digs a hole in the road.

    Building things for the sake of building them doesn’t result in productive outcomes for anyone (ignoring the positive psychological impact and increased prospect of future employment). You might as well pay the person for sitting at home and watching TV- it’s almost the same thing.

  23. E.D.

    There is another relationship going on.

    If G increases to 2, then C, I and NX all go down.

    If increasing G to 2 means C, I and NX all go down to 0.5 then Y=3.5 resulting in LOWER income despite more government spending. As John says government can push income into the negatives by trying to promote income!

  24. Actually, Shem, thought reveals that you are not 100% correct. I eat, and get rid of the waste, which nature recycles into food to be eaten again. (Even the sewage out to sea feeds seaweed, which keeps the fish alive, and I also eat fish that are caught from the sea.)
    Digging and filling could be useful actions, if there is some time between them. Hyde park has regular diggings by council workers, as they keep ptting in different flowers for different events. a lot of business involves recycling. And, on a practical side, those workers are at least staying in shape, unlike couch potatoes.

  25. ED — 4.5 is bigger than 4. So on first glance at the issue, the government should spend more.

    The “missing” 0.5 is a decrease in either C,I or NX. There is no measure of waste in the above equation. Waste is an additional cost on top of the crowding out effect.

  26. I can see why C or I might fall, but why NX? Currently, lower spending on imported goods combined with a (relatively) weak $A is boosting NX.

  27. ED — NX is boosted compared to what it was yesterday. What matters is the level of NX compared to what it otherwise would have been. That counter-factual is hard to determine.

    One reasons for believing that NX might be lower than otherwise expected is that the government is borrowing more money from overseas. As foreign savers put money into Australian govt bonds they increase the demand for AUD which puts upward pressure on the AUD… resulting in relatively fewer exports and relatively more imports (compared to a counter-factual of no government policy, NOT compared to yesterday).

    I’m not saying this is necessarily happening… just that this is how the mechanism can work.

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