We’ve been warned. And this excellent article in The Age is by no means the first time:

“The government is only borrowing to consume,” she [TD Securities Asia-Pacific macro strategist Annette Beacher] said.

Ms Beacher pointed to a recent warning by outgoing RBA chief Glenn Stevens who said:  “The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances.”

Its been said before, including on this blog, but it bears repeating: Our relatively good fiscal position is meaningless given our current trajectory. There is now zero political appetite for the kinds of reforms which are needed, so there’s no reason to expect our trajectory to change before things get bad. Potentially very bad.

Think about the fact that when Kevin Rudd became PM in 2007 we had both national savings and budget surpluses. Then PM Rudd told us that he had to throw away our surplus and splash some cash around to combat the GFC. Let’s put aside the question of whether or not that’s actually a good idea, and whether or not it will actually help the economy, and just focus on this simple fact: Spending has never been reined in since those ‘temporary emergency measures’.

I believe it was Milton Friedman who quipped:

There is nothing so permanent as a temporary government program.

The Labor Party were never going to reduce their profligate spending under either Rudd or Gillard… or Rudd MkII. They depend on such spending to buy the support of a voting public too selfish and unaware to understand that their handouts are going to be their ruin. The only chance for reform was with a Liberal Party victory, with a fiscally conservative leader.

And that’s exactly what happened when Tony Abbott came to be PM. Say what you want about him, he was the best possible outcome for the long term financial and economic future of this country… and then he completely blew it. Yes he had a hostile senate, yes it was always going to be a tough sell, but getting the countries finances back on a reasonable trajectory should have been his one and only mission. He and Hockey mangled their management of the budget, failed utterly to convince the public of the need for reforms, then failed to play the political game in the halls of Parliament House to actually get anything done.

The moment was lost. And with the knifing of Abbott by Turnbull, the moment passed. Turnbull has no stomach for a political fight over budget repair or economic reform, no political capital to spend either in his own party or across the aisle to get some compromise reforms through the senate, and is too thin-skinned to suffer the rough and tumble of politics without making it personal between himself and those in his own party, let alone those opposite.

But enough about the politics, this is about the future of our economy, and our national government’s solvency.

We were being warned as far back as 2014 that we are now officially a welfare nation with nearly half of all households being net recipients rather than net taxpayers, so we now face a reality that no politician or party is ever going to win an election whilst promising the kinds of reforms that could save us. To do so would instantly put half of our voters offside, guaranteeing electoral annihilation.

So here’s the rub. I cannot imagine a likely scenario in which spending is reined in sufficiently to get the deficit under control. In other words, I can’t imagine that the current trajectory to fiscal oblivion will change.

So whilst our current position is still ‘good’ by international standards (which is like saying ‘we haven’t drunk much poison compared to a Jim Jones follower’) our future is very clear. We’re going to go ever-further into debt. Our budget deficits will grow ever larger. Our politicians will only ever fiddle at the edges of reform, with the possible exception of big tax hikes in future, which will of course lead to a contracting of the economy and a loss of revenue (google ‘laffer curve’ if you can’t imagine how an increase in tax rates could lead to reduced tax revenues) only making the situation worse.

The solution? I don’t know if there is one. Certainly not one that will save us from this future and is politically likely. I think the best path now is for each of us to look after our own financial affairs in such a way as to best prepare us for this future, and hope like hell that I’m wrong.

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