One of my favourite movie scenes is from Jaws, when Roy Scheider’s character Martin Brody, after seeing the shark for the first time, tells the captain “You’re going to need a bigger boat.” That scene came into my mind in December 2008 in my office at the Treasury when, seeing updated cash-at-bank projections for the Commonwealth Government reflecting the latest disappointing tax collections, it was apparent that the Commonwealth would need to start running much bigger bond auctions and substantially raise the debt limit, then only $75 billion. This was the beginning of the slide into a position of permanent deficit and growing debt (e.g. see chart below). While deficits were inevitable and desirable at the time of the financial crisis, there is no justification for the large $37 billion deficit (2.3% of GDP) we currently have in the 2015-16 financial year.
A good question is why have we failed to repair the budget, particularly when there is widespread agreement that reducing the deficit and limiting the growth of debt is desirable? The answer is possibly the selfishness of current generations, who would rather avoid the necessary austerity measures that would cost them but benefit future generations (through repaying debt and not transferring it on to future generations). An excellent working paper from ANU’s Tax and Transfer Policy Institute published last month presents a computable overlapping generations model illustrating this point (Budget repair measures: Tough choices for Australia’s future). The authors, George Kudrna and Chung Tran, note, regarding three budget repair measures they modeled:
“Even though the long-run benefits of budget repair measures are undeniable, the transitional costs to the economy and welfare are significant and unavoidable. The budget repair measures are indeed tough policy choices for a better future in Australia. Our results consistently suggest that none of the three fiscal austerity measures are politically feasible as they will likely fail to gain the political support of current generations. The conflict of interest between the current and future generations suggests political infeasibility for any structural fiscal reforms.”
So do not expect budget repair any time soon, not solely due to a lack of will from politicians, but partly due to many current voters not really wanting it.