Crispin Hull / Spending


When the Government announced this week its $80 billion increase in military spending over the next decade to $270 billion, there was no chorus of “Where is the money coming from?” that usually accompanies pre-election promises of, say, increased dental services or childcare subsidies.

An ingrained acceptance of higher military spending prevails. With health, education and welfare, on the other hand, the attitude seems to be that “taxpayers’ money” is somehow being wasted or squandered.

Yet the acid question is not “Where is the money COMING FROM?” but “Where is the money GOING TO?”

The contrast between military spending and what to do about spending on infrastructure, health and education as Australia recovers from Covid can be instructive.

The first thing is to stop obsessing about the deficit. Having a deficit is not a sign of over-spending or too little revenue as the classic left-right divide would have you believe.

The hero of the Liberal Party, Prime Minister Robert Menzies, ran large deficits in every one of his last nine years in power. It did not matter, though, because unemployment and inflation remained low. Indeed, it was the right thing to do to build the economy.

Where did the money come from? From the stronger economy and the full employment that those very deficits created.

The real balance of government financial responsibility is not between revenue and expenditure, as applies to households and businesses. The critical balance is how much and when the government pulls money out of the economy (a surplus) or how much and when does it put money back into the economy (a deficit).

If unemployment is high or growing, governments should spend more money in the economy irrespective of existing government debt or the deficit, provided inflation remains in control – between 2% and 3%.

If governments do not spend to reduce unemployment, the nation is worse off economically because the value of the work of idle people is not added to the economy or the nation’s total wealth. Some capital also remains idle – again not adding to wealth.

Looked at this way, government deficits and borrowing can increase productive capacity through healthier and better-trained people and an increase in overall national wealth which in turn deals with the resulting deficits and debt, provided the debt is in the nation’s own currency.

It runs against the grain for people who look at things as they do their own household or business. But the critical difference is that Governments can make more money by printing it, or issuing bonds in their own currency at fairly low interest rates.

If the debt is in a foreign currency it has to be serviced and repaid in that currency and printing local currency or issuing bonds to cover it devalues the currency and adds to inflation. This is why Greece, Ireland, Italy and Spain got into trouble with high government debt – it was in Euros and those governments could not print their way out of it.

So government debt and deficits are not intrinsically bad. Indeed, they can do a lot of good. Nor are surpluses intrinsically good. Indeed, they can do a lot of harm, particularly when they prevent money going into the economy which could create productive work, a healthier better-educated population and a cleaner environment.

The real discipline comes with knowing when to reduce government spending, to increase revenue and stop printing more money or issuing more bonds because it will cause inflation to get out of hand. That in turn results in a loss of confidence in the currency.

In short, the Government’s job is not to run a balanced Budget. Its job is to provide a stable currency. Its job is not to run its finances like those of a household but to use its ability, within limits, to print its own money and issue its own bonds to secure employment, quality services and infrastructure that improves lives and economic capacity.

It cannot do this rashly. It only works in the lead up to full employment. Thereafter it is inflationary and destructive.

The trouble with military spending is severalfold. First, a large portion of it is spent overseas, running up debt in foreign currencies. Second, while ever people are fixated on the Budget deficit, military spending will consume revenue that would be better applied elsewhere.

And third, military spending requires long-term large commitments. So, if a government commits, rather blindly as it has, to spending 2% of GDP on defence and signs up to buying ships, aircraft and other weapons, it cannot wind them back very easily if economic (or pandemic) circumstances cause a contraction of GDP.

To the extent that the military budget is spent on weaponry imported from somewhere else it makes the economy poorer. To the extent it pays salaries and increases skills and employment it helps, but not by as much as civilian spending.

The question is whether the recent ramping up of military equipment acquisition (including this week’s) is warranted or whether its inevitable displacement of spending needed elsewhere is understood and accepted.

Prime Minister Scott Morrison made a reference to the rise of fascism in the 1930s as a reason for the military expansion. But surely the lesson of the years between the wars is the failure of governments to use their financial strength to create full secure employment and a stable currency.

To do that governments must ignore the powerful, wealthy people who profit from more military spending and who perversely think that any greater government social spending is a waste of their taxpayers’ money when, up to a point, the reverse is true.

The case for extra military spending is a pretty poor one when you consider that Australia has already committed itself to vast spending on equipment over the next ten years – submarines, frigates, armoured personnel carriers, fighter aircraft and so on.

Or perhaps this 2020 defence update is an admission that earlier commitments to big equipment purchases was wrong in the face of more nimble modern technologies. Sadly, because we are contractually cutting back on them would be costly. So what about some cuts to military spending elsewhere?

If we can blithely write another cheque for military spending, why doesn’t the same logic apply to social spending?

This article first appeared in the Canberra Times and other Australian media on 6 July 2020.


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