One of the more improbable friendships of recent years has been that of British Prime Minister Gordon Brown and the former Treasurer of Australia Peter Costello.
Their friendship developed through their long stints as chief economic managers in their respective countries, with Costello’s period as Treasurer from 1996 to 2007 in the Howard government almost precisely mirroring the 1997 to 2007 stint of Chancellor Brown.
In 2006 Brown offered to host a soiree in Washington to celebrate Costello's tenth year managing the economy, a gesture declined due to prior commitments.
But while the two men personally got on well, the interesting aspect of the relationship between the two men concerns the divergent paths that both ultimately took on managing the economy, and how that difference has dramatically affected the fate of the two countries.
When both men came to power the initial phase for each government consisted of running budget surpluses and paying down government debt. The fork in the road came in 2000 when Gordon Brown and Tony Blair prematurely declared victory on debt reduction and announced a grand new goal of higher spending.
“It is this sustained and sustainable improvement in our public finances that makes possible a sustained and sustainable improvement in our public services,” Brown boldly declared upon releasing the fateful Spending Review of July 2000. Government spending duly rocketed upwards, and notwithstanding a prolonged revenue boom from the City large deficits opened up such that by 2008 government debt was again blowing out past 40 per cent of GDP.
While the deficits were piling up in Britain, the Howard government continued to pursue the rather less sexy goal of running budget surpluses and paying down debt.
After taking on in 1996 a budget in chronic deficit with government debt of nearly 20 per cent of GDP the Howard government paid down the debt every year until after ten years there was none. On April 21 2006 Treasurer Costello announced Debt-Free Day, the point where the Australian government carried zero net liabilities.
By the time the Howard government was voted out in November 2007 the salted-away surpluses had built a substantial net asset position, cash in the bank for the government, of around 4 per cent of GDP. The debt payoff had brought dividends to Australia through ratings upgrades and interest payment savings, but the ultimate test of the two philosophies came with the advent of the global financial crisis.
When Gordon Brown was confronted with the massive external shock he had no room to move. The pre-existing budget deficits coupled with a high debt level meant that any significant fiscal stimulus ran the risk of panicking an already jittery financial community. Confidence plummeted as British consumers realised that their government, their supposed protector, was in financial trouble.
In Australia, by contrast, the zero-debt position provided an enormous reservoir of community confidence that helped prevent panic and bank runs. And the bulging coffers meant that newly-elected Prime Minister Kevin Rudd was able to deploy a massive array of fiscal artillery to bolster growth.
The OECD calculates the Australian spend ‘n’ awe stimulus to be the largest in the developed world – a whopping 2.6 per cent of GDP versus a piddling 0.1 per cent discretionary spend exercised by Gordon Brown. While the wisdom of many of Rudd’s measures has been rightly criticised, there is no argument that some of the spending helped prop up economic activity.
Even with Rudd’s supercharged spend the Australian government’s debt is set to peak at 10 per cent of GDP in 2013, a large amount of money in itself, but a foothill in comparison to the mountain of British Government debt which is forecast by the British Treasury to increase to 77 per cent by the same time.
Such a strong starting position prior to the crisis is a key reason why Australia’s is the only significant developed economy not to have suffered a recession, while Britain is languishing as one of the worst affected countries in the world. Australia’s economy is back growing strongly, with one businessman cheekily dubbing recent events as the “global financial blip”.
Of course, there are other reasons contributing to the vastly different outcomes – the size of the financial services industries, the resilience of commodity prices – but the absence of government debt was critical. Australia’s central bank Governor Glenn Stevens has repeatedly referred to the benefit that this fiscal position conferred, saying that it gave Australia a capacity to respond to events “virtually without peer”.
The long term significance of Australia’s relatively low debt is enormous: for decades Australia is going to enjoy not only lower interest payments than other countries, but it will be better prepared to face any future financial crisis. Better prepared also, it must be said, to face any unexpected national security crisis.
Here in Britain the economy has shrunk dramatically, the OECD and IMF have warned about a possible debt spiral, and the British population faces many years of budget cuts, higher taxes and slower growth. This gutted economy has dramatically shown all of Gordon Brown’s declarations of fiscal responsibility to have been rhetorical thistledown, blown away with the first gusts of wind from the global financial crisis.
It seems hard for many Britons to understand that it might have been different. But consider the possibility that Chancellor Brown had followed Peter Costello’s example, run substantial budget surpluses and paid down debt every year from 2000.
A United Kingdom that faced the global financial crisis with low debt and healthy surpluses would have been seen as a safe haven for investors rather than source of fear. Citizens would have been reassured by the solidity of their government rather than further panicked by its weakness. The British government could have deployed significant stimulus through tax cuts or targeted spending. The British economy would be bouncing out of the global crisis with a head start on its competitors rather than languishing at the back of the pack.
Of course, following the Australian example through the decade would have meant fewer government services, a smaller public sector, and reduced welfare, but would this have been a bad thing? When you weigh it up, I don’t think so.
The lesson from this tale of two countries is a modern take on an ancient truth about the perils of excessive debt, the wisdom of living within your means.
Some years ago the overtly pious Chancellor Brown gave Peter Costello a collection of his father’s Church of Scotland sermons. It is ironic that as events have turned out, it is the former Australian Treasurer, through his deeds, that has given the “son of the manse” the lasting lesson in economic morality.