Every year the budget brings along with it a frenzy of media activity from news hacks looking for interesting angles but the budget is more than just a headline and news grab, says UNSW Business School Professor Gigi Foster.
Each year when the budget is released, journalists ferret around in their Rolodexes seeking ‘expert’ commentary. Is someone willing to offer a quotable sound bite on whether we are spending enough on our children? The elderly? The young, unskilled and unemployed? The disabled?
Are we spending too progressively (i.e. too much in the direction of favouring the poor over the rich) or not progressively enough? Are we giving enough to rural Australians, our Indigenous people, our women facing domestic violence, or our recovering drug addicts?
What about defence spending: too much? too little? Is higher education and research and development being short-changed, or have university Vice-Chancellors argued for more than is really needed to deliver world-class education and research?
Or how about the environment and climate change: is our level of spending adequate to protect us from an uncertain environmental future?
What about our levels of spending on industrial subsidies? Innovation grants? Healthcare?
In short: journalists want to know what parts of the resource-allocation behemoth we are getting right, and what aspects of our spending are off the mark. They seek a commentator who will provide a comprehensive, detached and balanced judgment of the suitability of the Commonwealth government’s entire spending plan.
The problem is that this hopeful quest for the ‘expert budget analyst’ is a fool’s errand. These experts exist only in the fantasies of economic journalists and the dreams of a few young, up-and-coming politicians before they spend too long in politics. Let’s explore why these ‘experts’ are mythical, and how the opinions offered by actual living analysts are different but still, occasionally, useful.
Problem 1: The budget is as big and as inter-linked as the Matrix
The first reason why a comprehensive judgement upon the sensibility of the budget of Australia, or indeed of any developed nation state, is too hard for most mere mortals to credibly construct is that there are just so many pieces of it that are interdependent with one another in so many complex ways.
And it’s not only that spending in a given category relates to spending in other categories. The budget is set in the context of myriad complex institutions that influence how much bang each budgetary buck can deliver.
Someone who gets one type of assistance may well get another type as well. A family may have less need for direct assistance when broad social investments, such as in health and education, are higher.
At levels above the individual or family too, the need for a given type of expenditure is related to the levels of existing expenditure in many broad areas of the economy. There are links, for example, between subsidies to businesses and R&D spending; spending on health care and spending on the aged; spending on schools and spending on youth unemployment; and so on.
If we don’t have good roads, then more spending to encourage innovation won’t be as effective because the people spurred to be more innovative will get held up in their efforts by traffic and flat tyres. If our primary- and secondary-school spending is delivering ‘excellent’ results in those years, then our higher-education spending should be expected to be that much more ‘effective’ because skills build upon each other. The effectiveness of our subsidies to research and to industrial production – activities that involve setting complex contracts – is influenced by the clarity and efficiency of our legal system.
More complex still, any level of public support inevitably crowds out other incentives to some degree. For example, personal incentives to work often fall when we support the unemployed, and private incentives to invest often fall when the government steps into a market. To mount a case for an adjustment to the level of expenditure in any budgetary category requires us to know how all of these incentives will change through time, and ultimately what these changes will mean in terms of whatever it is that we ultimately care about.
Problem 2: Working out what we actually want, whether we can reasonably expect to get it, and whether we are in fact getting it
Presumably, we spend money in each category of expenditure in the pursuit of particular outcomes. Nominating the outcomes we want is hard enough. Then there’s monitoring what our progress against those outcomes looks like, and estimating the extent to which more money would actually improve those outcomes (e.g. disease prevalence, longevity, and health service quality from the ‘health’ part of the budget), which involves developing an understanding of the institutional framework in which each category of expenditure is being spent (e.g. the influence of teachers’ unions, the challenges of rural vs urban schools, and the different positions and power of the three school sectors in the ‘education’ part of the budget). Then we have to decide how much we as a society care about each of those outcomes relative to the others.
Are you exhausted yet?
In the face of this overwhelming complexity and the absence of an expert who truly understands it all, analysts sometimes make recourse to benchmarking Australia’s expenditure levels against our peer nations’ spending in different categories, with the hope of making a balanced judgment about what changes to our spending would be both feasible and able to deliver a better net result in terms of some type of vague aggregate of all the target outcomes.
Problem 3: Everybody wants something for nothing. Never mind that there’s no free lunch
Perhaps the biggest problem of all is the fundamental reality of trade-offs. Money does not come out of thin air. To allocate more money to one category means taking that same amount from another (assuming we leave off the table the options of higher government borrowing or money-printing, which also have costs). It’s easy to forget about this when you are personally affected by a particular issue and see that you’d benefit from more money allocated towards programs to address that issue. However, the sad fact is that every time you eat cake, someone gets their cake taken away. Australia may operate with an ‘abundance mentality’, and we are lucky to have enough money to finance a healthy amount of spending in most expenditure categories relative to our peer nations, but trade-offs still exist. When we forget this, we insult the core unifying ideal of our nation – namely that everyone’s in this together.
Unfortunately, quite frequently, we do forget this. A narrow focus on the plight of just one segment of the population or the need of just one sector is what often drives public thought about whether the budget is ‘good’ or ‘bad’.
Lobbyists and pundits routinely take a narrow view in order to get attention and make their favoured issue appear important. It’s much more likely that someone will win ears, hearts, and votes by speaking of the terrible plight of elderly people in under-staffed nursing homes than by speaking dispassionately of how we should aim to balance the needs of each group in society against the needs of every other group.
Making difficult judgement calls about who and what is most deserving in a world of scarce resources is unpleasant and will result in hate-mail. By contrast, trumpeting the interests of a single group can make you a hero.
The “good-enough” heuristic
All of this is not to say that we can’t do a ‘good enough’ job with our spending. Applying simple heuristics like international benchmarking of different expenditure categories can assist in highlighting the areas where Australia’s spending patterns are unusual. But while spending (say) nothing at all on healthcare when our peers are spending billions would clearly be silly, finding that our spending is ‘unusual’ doesn’t necessarily mean it’s bad for Australia. In theory, the ‘right’ mix of government expenditure is that mix which leads to the creation of the most of what we collectively want, for the amount spent, given all the natural constraints faced by Australia.
It may sound simple, but a proper analysis of our budget is a big ask. Let’s hope that the Parliamentary Budget Office has some people working on crafting a reasonable view right now, in preparation for the imminent media frenzy. It’s part of the PBO’s job, after all – not the job of us poor academics. I’m off now to teach a class.