There’s a weakness in the way we think about the government and its effects on the economy that economists and politicians usually don’t see. We draw macro conclusions from micro data because we forget the need for what accountants call “consolidation”.
The problem arises because we keep forgetting that the responsibility for governing Australia is divided between the federal government and eight state and territory governments – not to mention any amount of local councils.
Yet most of us focus only on the federal government’s budget when we want to know what’s happening at the “macro” (national or economy-wide) level, and on our own state government’s budget when we when want to know what’s happening at the “micro” (individual component) level.
Because we think – correctly – that responsibility for managing the macro economy rests with the federal government, and also that the feds’ budget is one of their main instruments for influencing the economy, we study the federal budget in great detail and forget that the eight state budgets also have big economic effects.
It’s when you remember this that you realise the federal budget is micro (part of the total picture) not macro (the whole picture).
We’re bamboozled by the existence of different legal entities, each producing their own accounting statements, even though the economy – a common market between eight states and territories – recognises no legal barriers between its components.
Sometimes this causes us to mislead ourselves, other times it gives the politicians from each level of government much scope for misleading us.
For instance, a federal treasurer bent on showing that our public debt isn’t high by international standards, shows us a graph which compares our federal public debt with other countries’ total public debt.
Similarly, a premier whose state is growing faster than others will claim all the credit. If it’s growing more slowly than the national average, they’ll find some reason to blame it on the feds.
Although it’s true that each state has a different combination of industries, and some states are a bit better governed than others, because Australia is a common market the greatest influence on the economic performance of any state is usually the performance of all the other states.
And, at any point in time, the government whose policies are having the greatest influence on a particular “state economy” is usually the federal government.
It’s partly because we focus on bits of the national economy rather than the whole that politicians – federal and state – put so much effort into shifting costs to the other level of government. (The bigger reason, of course, is that it saves them money.)
Or appears to. A less-remarked flaw in Tony Abbott’s reviled first budget in 2014 was that much of its cost savings involved shifting unchanged costs to other budgets: massive cuts in grants to the states for public schools and hospitals. Abbott’s successors have been backpedalling on those supposed savings ever since.
By contrast, most big listed companies consist of a group of many (mainly wholly-owned) separate legal entities. This is why company law has long required them to publish their financial statements on a “consolidated” basis.
When you combine the accounts of, say, 20 companies into one, you have to eliminate the overlap between them, ensuring nothing’s counted more than once. Money transferred between subsidiaries “washes out”.
The closest we come to a consolidated financial statement for our nine governments – showing us the full picture - is the federal Parliamentary Budget Office’s recent innovation of an annual “national fiscal outlook” using the nine governments’ latest budgets. The report for 2018-19 was published last week.
It’s not a full consolidation because it doesn’t show us total government spending by function. So it doesn’t correct the misperception that spending is dominated by social security payments.
Combine federal and state spending and you see the big ones are health and education.
Because the states use accrual accounting, whereas the feds keep the focus on cash accounting, a federal budget balance can’t be compared with a state budget balance.
Putting them on the same accrual basis (but taking government projections at face value), the consolidated budget balance (the "net operating balance") reached zero last financial year and over this and the next four years is projected to reach a surplus of $46 billion.
Consolidated annual net capital investment is projected to peak at $32 billion this financial year and fall to $28 billion by 2021-22 (though this misses the feds' creative accounting on new airports and inland railways).
Consolidated net public debt is projected to grow by $51 billion to $414 billion in June 2022.
Even so, by then our consolidated net public debt should be about 20 per cent of gross domestic product, compared with Britain’s 75 per cent and America’s 80 per cent.