return to letters list

My budget plan for confidence
letter published in The AFR, 16 February 2009

Douglas Robertson asks if I would recommend cutting both government spending and taxes rather than the Keynesian "inflationary refrain" (Letters, February 12)

In present circumstances budget deficits are inevitable because of recession-induced falls in revenue and increases in welfare spending. But should the government add to that through policy measures?

The strong balance sheet inherited by Kevin Rudd provides scope to do so without creating inflationary pressures. But I favour a smaller increase in the deficit than proposed and one that mostly comprises permanent tax cuts (which the Howard government forgot to do). The latter would help confidence, slightly lift spending and/or improve private sector balance sheets because it would be on a sustained basis, as well as requiring the government later on to restore budget balance by reducing spending. In circumstances where Australia faces a prolonged reduction in activity, most present proposed spending offers no sustained benefit, the proposed spending on school buildings, insulation and transfers add little or nothing to productivity, and the proposed infrastructure spending threatens limited benefits.

Importantly for both businesses and employees, employers should be given free scope to negotiate changed employment arrangements that take account of the dramatic deterioration in competitive conditions. If that is not done, unemployment will be higher than otherwise (well above the forecast 7 per cent). Such free scope might lead to lower wages than otherwise but that would reflect the changed competitive position of employers.

It is a mistake to think that employers would act as a group and force wages down: they are not in a monopoly position. For employees, it is surely better to be employed on lower wages than on the dole (although not "Keynesian",in 1932 Keynes wrote an article in Melbourne's Herald that noted the wage reductions that had already occurred but advised against a policy of further reductions).

 In my view suspending legislation regulating employer/employee relations, including the Fair Pay Commission, is the most important measure the Government could take to keep unemployment down. It would boost employer confidence and help cope with the recession we cannot avoid.      

Des Moore
Director, Institute for Private Enterprise
South Yarra, Vic 3141

return to letters list