DAVID ALEXANDER: Federal Government’s spending addiction a drag on the private sector

In recent times in Australia, we have seen an interesting economic pattern of public sector spending booming, private sector struggling badly, and overall growth being very weak.

The Government’s interpretation of this situation is significant: If it wasn’t for public sector spending increases, the economy would be going backwards.

The natural corollary of this interpretation is of course: We’d better keep government spending up to keep our economy afloat.

The Government’s argument is superficially plausible, but a closer examination shows it to be built on a significant logical flaw.

To understand the logical flaw, let’s step away from the economy for a moment and move into the realm of athletic performance, and consider the case of an athlete who starts doping to lift his results.

The doping gives a temporary performance lift, but the drugs have other adverse impacts and his overall health declines. The athlete now has to drug up in higher doses, but his performances start sliding, even when he dopes. The athlete becomes increasingly insistent that doping is necessary, but his drug-taking dependence is making him increasingly structurally uncompetitive.

The athlete, determined to double down on doping is now suffering the “addict’s blindness” — the belief that the artificial stimulant is necessary for success rather than a cause of failure.

“It’s the only thing that keeps me competitive!” says the athlete, oblivious to the deeper level of career failure caused by his addiction.

Now let’s think about the Australian economy.

In recent times there has been a major step up in government spending. Much of this spending is on what the Productivity Commission regards as lower productivity activities.

The Government spending has acted as a stimulant in the narrow sense — it plumps up certain metrics of economic activity and can make it seem that overall growth is doing okay. But parallel with those artificial stimulant impacts, the spending is also acting as a drag on the private sector in a number of important ways.

First, the government spending boom at Federal and State levels has been keeping interest rates high and thus pushing up borrowing costs for businesses.

Second, the blowouts in public sector spending are a drag on the private sector, because it’s the private sector that pays the bills. Whether this is higher taxes now, or higher debt now for higher taxes later, the fact is bloated government weighs down on the private sector and their investment intentions.

Third, the re-weighting of the Australian economy towards a low productivity model is noticed by business and is again pushing down on investment and investment plans.

And finally, the private sector is being left short-staffed by a government sector hoovering up enormous numbers of workers for themselves.

When we take into account these negative impacts you can start to understand an important reason why our economy is performing so poorly with growth per capita so low. The overweight public sector is acting as a drag on the private sector and our broader economic health.

The take-out message for economic policymakers is clear: discard the mentality that says even more public spending is necessary for one where it is recognised that public sector spending blowouts are part of the problem.

The folly of a public-sector driven economy can be masked for a while by the “artificial stimulant” effect, but the impacts will ultimately be revealed, and that is what we have been observing with negative growth per capita and negative productivity levels.

The fact is, to run a sustainably prosperous economy requires a healthy private sector driving growth, making money, investing confidently, and paying taxes that support the public sector.

The only way we will get out of this malaise is to think about how to energise the private sector.

Part of that solution is reining in the out-of-control public sector, and part of it goes to addressing other priorities such as reforming our tax system to make business competitive, liberalising industrial relations laws, addressing high energy costs, and removing the red tape and regulatory constraints that are tying businesses down.

Only a balanced regimen will bring about the sustained peak performance for our country that we need.

David Alexander is chief of policy and advocacy at the Australian Chamber of Commerce and Industry