Dumb slogans vs rational debate on sovereign wealth funds – or the peculiar case of Terry McCrann

Plagiarism is the sincerest form of flattery, so no doubt the Melbourne libertarian economist Sinclair Davidson was flattered when he saw Terry McCrann this morning write in the Herald Sun:

“Anyone who understood and believed in the free market system would know that there is no such thing as unsustainable tax cuts; only unsustainable expenditures.”

A line Terry McCrann had taken from Sinclair’s Catallaxy Files post of yesterday where he wrote: “There is no such thing as unsustainable tax cuts, only unsustainable spending.”

McCrann, like Sinclair Davidson the day before, were responding to a blog I had posted on the weekend about arguments for a new sovereign wealth fund.

Without resorting to the slogans Terry now substitutes for reason, let me subject this catchy assertion to some clinical analysis.

How do we define “unsustainable” in the context of revenue or expenditure? Obviously spending is unsustainable if it is unsupported by an acceptable level of taxation, and public borrowings rise over time (ask the Europeans or Americans what that feels like). Equally tax cuts are unsustainable if they reduce revenues to a level where they are insufficient to support necessary government expenditure.

Of course a key question is about the appropriate level of spending. Different governments make different choices. But at a minimum let’s assume we want to keep paying for the PBS and Medicare; the age, single parenting and disability pensions; the Australian Defence Force; spending on law and order…I could go on, but you get the point. There is a fairly high level of public spending that nobody currently in Parliament is arguing should be eliminated.

Let me make this point very clearly. The slogan advanced by Sinclair Davidson and Terry McCrann is “there is no such thing as unsustainable tax cuts” (slogans apparently being the new medium for serious political debate). But if we take it seriously, then we are arguing tax cuts which resulted in the Australian Government being unable to pay wages to soldiers would not be unsustainable.

There is always going to be some minimum level of government spending. Therefore there must be a minimum level of taxation needed to sustain it, unless one believes in perpetual budget deficits. Having determined a responsible and necessary level of spending (the Coalition would naturally land on a lower figure than the Labor Party), tax cuts which result in revenues below the level needed to pay for that spending would be unsustainable – they would mean the spending could not be paid for without resorting to borrowing.

Greece is an extreme case: a country where both the level of spending and the level of taxation (which hardly anyone paid) were unsustainable!

McCrann, who presents himself as a serious finance and economic commentator, goes on to observe that the only place the money for a sovereign wealth fund could come from is a Federal Budget surplus.

Well, thanks, Terry. We did know that. Although it can also come from asset sale proceeds – remember the Telstra sale? But let us leave them aside for the purpose of this discussion.

He then asserts we will be lucky ever to see a surplus again, even under an Abbott Government. That is an unduly gloomy appraisal of both our economic prospects and the financial discipline of Tony and the rest of our colleagues.

I don’t have the wisdom of a Herald Sun columnist. But I did experience and participate in the Howard Government, when the Federal Budget enjoyed larger surpluses (particularly in its last three years, when the commodity boom was underway) than the Government or Treasury expected. We were surprised on the upside.

Martin Parkinson has predicted future surpluses will be razor thin for some years, and there is no reason to doubt this is Treasury’s current view. But the Treasury in our time in Government materially and repeatedly underestimated the surpluses that finally eventuated.

So Terry, you may be right – time will tell. But in case history repeats itself and the commodities cycle does continue to favour Australia (particularly once the high levels of depreciation associated with new resources projects that are currently suppressing tax collections in that sector run off) we should be thinking today about how to handle those surpluses tomorrow.

McCrann’s column becomes rather surreal when he goes on to write: “Say a silent prayer – or if you like, a loud one – that Turnbull wasn’t let anywhere near those Budget surpluses that ran through the second half of the Howard-Costello years; and were given back to us in “unsustainable tax cuts”.

“Why, they could’ve been cycled into a sovereign wealth fund – and a Rudd-Gillard-Swan government could have had three or four building the education-style splurges instead of just the $16 billion wasted in one.”

First, I did not assert that Budget surpluses were given back to us in “unsustainable tax cuts”. Secondly, what does he think the Future Fund is? It is a large sovereign wealth fund and it was not the only savings fund, although the largest, created by the Howard Government.

So far from being at odds with the policy of the Howard Government, saving some of future surpluses in a new savings fund would be entirely consistent with our past practice.

But the big point which McCrann (and Sinclair Davidson) ignore is simply this and I will spell it out so that it is very, very clear.

1. Governments, like businesses, can see spikes in revenues when the business cycle booms.

2. These spikes can be particularly high for economies which are commodities based – as Australia’s is in large part.

3. If that cyclical spike in revenues is used to create ongoing increases in spending (increases in benefits for example) which cannot be met from ongoing revenues when the boom subsides then that increase in spending can be described as unsustainable.

4. Equally if that spike in revenues is used to reduce taxes to a level (i.e. by reducing tax rates) such that when the boom subsides the ordinary revenues of government cannot fund its ordinary and necessary expenditures then those tax cuts can be described as unsustainable.

5. One-off infrastructure investments made with the proceeds of mining boom revenues will not create a structural problem (as long as they are in fact fully funded) but as I pointed out in my original post, if they are not cost effective (i.e. have not passed a rigorous cost benefit analysis) they are a poor use of funds which could have been better saved.

Any serious economic commentator would recognise there is a serious issue to be discussed here. But instead Terry McCrann offers slogans and accuses me of being a “serious collectivist” and a “twit”. Well if that is so then the Business Council of Australia should be included in that description as should the Governor of the Reserve Bank.

As Gareth Hutchens wrote in the SMH on February 14: “Support is growing for the creation of a sovereign wealth fund to invest the proceeds of the mining boom.

“The Herald surveyed Australia’s business leaders before BHP Billiton, the world’s largest mining company, posted a half-year profit of $US10.6 billion on Wednesday.”

“The chief executives of Lend Lease, Tabcorp, Mirvac, CSL, Foster’s, Orica and Coca-Cola Amatil, and the chairman of Mirvac, Gloucester Coal and Pacific Brands all favour such a fund.”

“They join the ranks of the chief executives of Commonwealth Bank and Boral, Ralph Norris and Mark Selway, the Amcor managing director, Ken MacKenzie, the chairman of Fairfax Media, Roger Corbett, and the Reserve Bank governor, Glenn Stevens.”

Not to speak of the Howard Government which, as I noted, did set up a sovereign wealth fund and in taking the burden of unfunded future financial obligations off the shoulders of future generations acted responsibly and with great credit compared to the reckless spending of the current Labor Government.

And joining the ranks of collectivist twits (in Mr McCrann’s view) are presumably Peter Costello, the longest serving and most successful Treasurer in Australian history, who supported renewed deposits to the Future Fund or setting up an additional sovereign wealth fund similar to those in other commodity exporters in his column in The Age and Sydney Morning Herald on 14 September. And you can add to the collectivist rabble none other than Senator Arthur Sinodinos, who helped John Howard run the country for a decade and made a similar call in his first speech to the Senate on 23 November 2011.

Joshua Frydenberg the member for Kooyong has also made the case for a new sovereign wealth fund in both Parliament and in the press.

But what would any of those distinguished contributors to Australian public policy know?

It is remarkable isn’t it, that all of these figures occupying important positions in business, government and our central bank are, according to Mr McCrann, ‘twits”. It is amazing how well so many twits have done in business and public life – and no doubt a source of puzzlement to Mr McCrann who surveys this gallery of his intellectual inferiors at the top of Australian public policy and business.